How Leave Encashment works
The amount is your daily wage (usually basic plus DA divided by a fixed number of days) multiplied by the number of unused earned-leave days. Encashment during service is fully taxable; on retirement, part of it can be exempt from tax, subject to limits.
Why Leave Encashment matters
Leave encashment turns unused leave into cash and forms part of your full-and-final settlement, so understanding the calculation helps you check your exit dues.
Leave encashment in a full-and-final settlement
Leave encashment most often appears when you resign or retire, as part of the full-and-final settlement. The employer counts your unused earned-leave balance, values each day at your basic-plus-dearness-allowance rate, and adds the total to your final dues alongside any pending salary and bonus. Companies usually cap how much leave can be carried forward and encashed, so the balance is not unlimited. The tax treatment is the key thing to watch: money encashed while you are still employed is fully taxable, but on retirement a portion is exempt up to a government limit, with the balance taxed at your slab.
Frequently asked questions
Is leave encashment taxable?
Encashment while in service is fully taxable. On retirement, a portion is exempt up to a prescribed limit, and the balance is taxable.
Which leave can be encashed?
Usually only earned or privilege leave. Casual and sick leave typically lapse and cannot be encashed.