Leave encashment policies are an integral part of employee compensation. They allow employees to monetize unused leave under specific conditions, ensuring financial benefits for employees and compliance with labor laws for employers.
Leave encashment refers to the payment made to employees for their unused leave. This is typically applicable during:
Formula:
Leave Encashment Amount=Basic Salary+AllowancesTotal Working Days in a Month×Un
used Leave Days\text{Leave Encashment Amount} = \frac{\text{Basic Salary} +
\text{Allowances}}{\text{Total Working Days in a Month}} \times \text{Unused Leave
Days}Leave Encashment Amount=Total Working Days in a MonthBasic Salary+Allowanc
es×Unused Leave Days
Example:
If the basic salary is ₹30,000, the employee has 10 unused leave days, and there are 30
working days in the month:
Leave Encashment Amount=30,00030×10=₹10,000\text{Leave Encashment Amount} =
\frac{30,000}{30} \times 10 = ₹10,000Leave Encashment Amount=3030,000
×10=₹10,000
1. Generally applicable to earned leave (EL) or privileged leave (PL).
2. Sick leave and casual leave are excluded unless explicitly included in company
policies.
1. Government Employees: Fully exempt from tax
2. Non-Government Employees: Exempt up to ₹3 lakhs under Section 10(10AA) of the
Income Tax Act.
Policies must align with state labor laws, such as the Factories Act, 1948, and Shops and Establishments Acts.
Penalties for Non-Compliance
Employees are entitled to encash earned or privileged leave as per company policy or statutory requirements.
Employees can request a breakdown of encashment calculations for clarity.
Grievances can be escalated internally or through labor tribunals.
Provides monetary relief during retirement or resignation.
Promotes better work-life balance.
Enhances organizational reputation through transparent policies.
Yes, encashment of earned leave is mandatory as per state labor laws but typically excludes casual or sick leave.
No, employers cannot deny encashment if mandated by labor laws or company policies.
Yes, for non-government employees, it is taxable, with exemptions up to ₹3 lakhs under Section 10(10AA) of the Income Tax Act.
Encashment generally applies to earned leave; casual and sick leave are typically excluded.
Yes, startups must adhere to statutory requirements applicable under labor laws.
Track leave balances and calculate encashment accurately.
Create clear, compliant leave encashment policies.
Ensure alignment with state and central labor laws.
Provide clarity on tax implications for both employers and employees.
