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

Understand leave encashment meaning in an organization. Know leave encashment rules for private companies, their tax exemption & calculation.

FAQs on Leave Encashment

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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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