Leave encashment policy template
Copy the text below and replace everything in square brackets with your company details.
1. Purpose
This policy sets out when and how unused leave is encashed at [Company Name], and how the encashment amount is calculated and paid.
2. Scope
It applies to all employees. Only earned leave is encashable. Casual leave, sick leave, comp off and other special leave are not encashed.
3. When leave is encashed
- Year end: days of earned leave above the carry-forward limit of [30] days are encashed with the [January] salary.
- On request: at the end of the leave year, an employee may ask to encash unused earned leave while keeping at least [Number] days. A request from a worker covered by the OSH Code to encash unused leave at the end of the year is always accepted.
- At exit: the full earned leave balance on the last working day is encashed in the full and final settlement, whatever the reason for leaving.
- Earned leave is not encashed in the middle of a leave year except at exit.
4. Calculation
- Encashment per day = monthly [basic pay plus dearness allowance] divided by [30].
- The rate uses the salary on the encashment date: the last day of the leave year for year-end encashment, or the last working day for exit encashment.
- Example: basic pay plus DA of ₹24,000 a month gives a daily rate of ₹24,000 / 30 = ₹800, so encashing 10 days pays 10 x ₹800 = ₹8,000.
- Where basic pay plus DA is less than half of total remuneration, payroll checks whether allowances must be added back to wages under the Code on Wages before fixing the rate.
5. Payment
- Year-end encashment is paid with the [January] salary and shown as a separate earning on the payslip.
- Exit encashment is paid with the full and final settlement, within the time limits that apply to dues on exit.
- Tax on encashment is deducted as per income tax rules.
6. Excess leave at exit
If an employee has taken more earned leave than has accrued by the last working day, the excess days are recovered in the full and final settlement at the same daily rate.
7. Responsibilities
- HR: confirm balances before year end and at exit, and share the calculation with the employee.
- Payroll: apply the formula and pay the amount on time.
- Employees: check their balance statements and raise errors before the year closes.
8. Review
Finance and HR review the encashment formula and the year-end cost every [12] months, and whenever the salary structure or the leave provisions of the Labour Codes change.
What to include
Which leave is encashable
Name the leave types that can be encashed, usually earned leave only. Casual and sick leave exist for short needs and illness, and encashing them turns protection into a cash benefit.
Year-end rights of workers
Carry forward of annual leave is capped at 30 days, and a worker may ask for encashment of unused leave at the end of the year. Check the leave entitlement rules and make sure your year-end process honours both.
A fixed formula
State the pay components and the divisor, for example basic pay plus DA divided by 30. Add a worked example so employees and payroll arrive at the same number.
Encashment at exit
Encash the full earned leave balance at exit, whatever the reason for leaving. Wages are due within two working days when an employee leaves, so build encashment into a prompt full and final settlement.
The salary used
Say which salary is used, normally the rate on the encashment date. Using an average or an out-of-date rate at exit is a common cause of settlement disputes.
Common mistakes to avoid
- Encashing casual or sick leave at exit when the policy says only earned leave is encashable.
- Lapsing earned leave above the carry-forward limit instead of encashing it.
- Using gross salary for one employee and basic pay for another.
- Pushing exit encashment to a later payroll cycle instead of the full and final settlement.
- Not showing encashment as a separate line on the payslip.
Run it in ZeniaHR
In ZeniaHR, leave encashment is posted through the Leave Ledger, which records an encashment entry and adds a payroll earning in Direct Payroll, so the balance and the payment always match. The year-end run previews carry forward before it executes, which is the moment to encash days above the cap. For exits, the leave tab on the employee profile shows the balance, and the gratuity and settlement reports help HR prepare the full and final settlement.
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Book a free demoSee pricingFrequently asked questions
What is leave encashment?
Leave encashment is payment in place of unused leave, usually earned leave. It happens at the end of the leave year, when balances cross the carry-forward limit or the employee asks for it, and at exit, when the remaining balance is paid in the full and final settlement. The leave encashment glossary entry explains the term.
How is leave encashment calculated?
Multiply the days encashed by the daily rate your policy sets, often basic pay plus DA divided by 30 or 26. For example, with basic pay plus DA of ₹26,000 and a 26-day divisor, the daily rate is ₹1,000, so encashing 12 days pays ₹12,000.
Is earned leave encashed on resignation?
It should be. A clear policy encashes the full earned leave balance at exit, whether the employee resigns, retires or is terminated, and pays it with the full and final settlement. Lapsing earned leave on resignation invites disputes, especially for workers who could have asked for encashment at the end of the year.
Can casual leave be encashed?
Usually not. Casual and sick leave are meant for short needs and illness, so policies commonly let them lapse rather than pay them out. If you do encash them, state the rate and a cap clearly, and remember that it turns a protective benefit into a cash one.