What is leave encashment?
Leave encashment is payment in money for earned leave you accrued but never took. Earned leave (also called privilege leave) accumulates as you work (typically around a day for every twenty worked) and carries forward year to year up to a policy cap. When employment ends, the balance converts to cash in the full and final settlement: balance days × a daily wage basis the policy defines, commonly basic plus DA divided by 26 or 30. Some employers also allow encashment during service, within limits. On exit, the payment enjoys a tax exemption up to limits that differ for government and private employees; in-service encashment is fully taxable.
How the computation works
Three inputs decide the amount: the balance (accrued minus taken, per system records), the wage basis (the policy's divisor and components — basic+DA/26 pays more per day than gross/30 structures suggest), and any cap on encashable days. A policy that states all three plainly turns exit encashment into arithmetic; one that doesn't turns it into negotiation.
The liability nobody watches
Every carried-forward day is a debt the employer will settle at a future (higher) wage, which is why finance provisions leave liability annually and why policies cap accumulation. For employees the flip side is simple: unused EL is real money, visible in self-service, and worth checking before resigning: the balance is part of your exit value.
Quick example: 18 days of EL at a ₹26,000 basic+DA on a /26 basis: 18 × (26,000 ÷ 26) = ₹18,000 in the settlement, with its exempt portion computed per current limits.
Is leave encashment taxable on resignation?
On exit it is exempt up to the currently notified limits (fully exempt for government employees; capped for others), with the excess taxed as salary; verify the current cap at the time, as it is notification-driven. The settlement statement should itemise the exempt and taxable portions so your Form 16 reconciles.
Go deeper: Leave policy guide · FnF settlement · Attendance & leave
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