Leave Encashment - Rules, Tax Exemption, & Calculation With Formula

Learn the meaning, formula, rules, and tax exemption on leave encashment in India. Calculate leave encashment with examples.

Quick Summary

In India, leave encashment is a valuable employee benefit that allows individuals to convert their unused paid leave into monetary compensation. But what is leave encashment, and how can you calculate leave encashment accurately?  Know the leave encashment rules for private companies and their tax exemption. Find out how to calculate the leave encashment amount using the leave encashment formula. This blog will guide you through the leave encashment meaning, formulas, rules, and tax implications especially the calculation of leave encashment on retirement.

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Frequently Asked Questions

What does leave encashment mean?

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Leave encashment is the process of exchanging employees' accumulated unused paid leaves for monetary compensation. Usually, the employees can carry over these unused paid leave to the next financial year or encash it based on the HR policy of the company.

How is final leave encashment calculated?

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Leave encashment amount = (Daily wage rate x Number of unutilized leave days)

For instance, if the daily wage rate is ₹2,000 and the employee has 25 unutilized leave days:

Leave encashment amount = (₹2,000 x 25) = ₹50,000.

Thus, in this scenario, the leave encashment amount for the employee would be ₹50,000.

What are the new rules for leave encashment?

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Some of the new rules for leave encashment are:

1. Companies have the authority to set a cap on the maximum number of paid leaves that can be encashed per employee per year.

2. Employees with unused paid leaves may negotiate with the company to adjust them against their notice period. However, this is subject to the company's discretion.

3. Companies can design their leave carry forward policy and set a cap on the number of leaves that can be carried forward.

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