Leave encashment converts unused earned leave days into cash — common when resigning or retiring. Use our free Leave Encashment Calculator India to calculate amount and tax impact. Part of our Complete Salary & Tax Guide for India.
What Is Leave Encashment?
When you have unused earned leave (EL) or privilege leave (PL) at resignation or retirement, your employer may pay you cash equivalent instead of carrying forward the days. IT sector employees often have 30-45 days of EL to encash.
Types of Leave
Earned Leave / Privilege Leave: Usually encashable. Casual Leave: Typically lapses. Sick Leave: Usually not encashable. Check your company policy.
Tax Treatment
During service: Fully taxable at your income slab rate. At retirement/resignation: Partially exempt — minimum of actual amount, 10 months' salary, cash equivalent, or ₹25 lakhs.
The ₹25 Lakh Exemption — Budget 2023
Budget 2023 raised the exemption from ₹3 lakhs to ₹25 lakhs — an 8× increase benefiting both government and private sector employees. Most mid-level IT resignations now fall fully within the exempt limit.
How Leave Encashment Is Calculated
Private sector: (Monthly Basic ÷ 26) × Leave Days. Government: (Monthly Basic × 12 ÷ 300) × Leave Days. Example: ₹50,000 basic, 30 days = ₹1,92,308 (private formula).
Can I Encash CL or SL?
Usually only EL/PL is encashable. CL and SL typically lapse. Some companies allow encashment of a portion of EL only at exit — verify with HR.
Frequently Asked Questions
Is leave encashment taxable in India?
Leave encashment during service is fully taxable as income. Leave encashment at retirement or resignation is partially exempt — the exemption is the minimum of the actual amount received, 10 months' salary, cash equivalent of leave, or ₹25 lakhs (the limit was raised from ₹3 lakhs to ₹25 lakhs in Budget 2023).
How is leave encashment calculated for private sector employees?
For private sector employees, leave encashment is typically calculated as: (Monthly Basic Salary ÷ 26 working days) × Number of leave days to be encashed. Some companies use 30 days per month; check your employment agreement or company HR policy.
What is the ₹25 lakh leave encashment exemption?
Budget 2023 raised the tax exemption limit for leave encashment at retirement or resignation from ₹3 lakhs to ₹25 lakhs for non-government employees. This exemption applies to the minimum of actual encashment received, 10 months' average salary, or ₹25 lakhs — whichever is lowest.
Are casual leaves and sick leaves encashable?
Generally, only Earned Leave (EL) or Privilege Leave (PL) is eligible for encashment. Casual Leave (CL) and Sick Leave (SL) typically lapse unused and cannot be encashed, though specific rules depend on your employer's leave policy and applicable state labour laws.