Leave Encashment - Exemption, Tax Benefits with Calculation

Leave encashment is one of the monetary benefits provided by employers to their employees. Generally, every company allows some leave to its staff member during the period of service. Employees may avail such leaves or in case leave is not availed,  then the leaves may lapse or be accumulated for the future or allowed to be encashed every year or at the time of resignation/retirement.

In this article, we will learn about Leave Encashment, Leave Encashment Formula, and Calculation. Also, we will tell you how to calculate leave encashment exemption for non-government employees. Employee??

Leave Encashment Meaning?

Leave Encashment

According to labor law, all employees are entitled to a minimum number of paid holidays per year. However, he does not have to use all the leave available to the individual worker in one year. In fact, most employers allow employees to carry forward such unused paid leave.

Every company has its own leave policy. However, in common parlance following are the three types of leaves allowed to the employees:

1. Sick leaves and casual leaves: These leaves generally, are neither carried forward nor encashed. So it's beneficial to utilize these leaves in that year itself.

2. Annual leaves: These leaves: These leaves are allowed to be used in the current year itself and also, allowed to be carried forward but to a certain extent depending upon the company’s policy.

Now comes the taxability of leave encashment received during the period of service or encashed at the time of resignation/retirement.

 1. Leave encashment during the period of service: Taxable

 2. Leave encashment received at resignation/retirement:

          a.  State/Central Government employee: Exempt

          b. Non-Govt. employee: Party exempt and partly taxable

How to calculate leave encashment exemption for non-govt. employees?

Limit: Lower of the following will be exempted from tax;

a. Actual Leave encashment received(No. of earned leaves*per day salary)

b. Amount equal to (No. of earned leaves*10 months average basic salary)

c. INR 25,00,000

d. 10 months average basic salary i.e. the  basic salary for 300 days

Note: In point: a salary depends upon the company’s policy. It can be a basic salary or a total salary. Also, it can either be the last drawn salary or any other depending upon that company’s policy.

In point: b, salary is basic salary plus DA

In point: c, INR 25 lakhs are the maximum limit

In point d, This needs to be calculated when an employee has unveiled leave for more than 10 months(i.e., 300 days).

Thus, tax exemption is restricted to 300 days of basic salary which is further restricted to INR 25,00,000

With budget 2023, this maximum exemption limit has been enhanced from INR 3 lakhs to INR 25 lakhs which will give tax benefits to the assessee while claiming tax exemption.

Leave Encashment Formula?

Here is the formula for leave encashment: 

(Basic Salary + Dearness Allowance) / 30] * Number of EL or earned leaves

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All Credit goes to for this informational blog - CA Sonia Chaba.

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