What is Leave encashment?

Definition

Leave encashment is payment for accrued leave that was never taken, most commonly earned leave paid out in the full and final settlement when somebody leaves.

How it works

The amount depends on how many days are encashable, which leave types qualify, and which salary components the daily rate is computed on. All three are policy decisions constrained by the applicable act, and all three should be written down before anybody asks.

What it means in India

Encashment on exit for earned leave is provided for in several state Shops and Establishments Acts and in section 79 of the Factories Act 1948 for the workers it covers. Tax treatment differs between encashment during service and encashment on retirement or resignation, and exemption limits apply to the latter under section 10(10AA) of the Income Tax Act 1961.

What people get wrong

• Computing the daily rate on basic when the policy says gross, or the reverse, and not having written down which.
• Encashing casual leave, which most policies deliberately exclude, then being unable to explain the inconsistency to the next person who leaves.
• Forgetting encashment entirely in the full and final settlement, which is one of the most common settlement disputes.

Work out your own number

The arithmetic on this page is easier to check against a real salary than to follow in prose, so there is a free page that does it for you. No sign-up.

Terms this one depends on

More on leave

Where this shows up in practice

Almost everything on this page ends up as a line on a payslip or a figure in a register. Shiftelio keeps attendance, leave, salary structure and the statutory deductions in one place, so the number in the letter and the number in the payslip come from the same record.