Leave Encashment Calculation in India (2026): Formula, Tax Exemption and Examples

"How much will I get for my unused leave?" is one of the first questions an employee asks after resigning — and one of the most common reasons a full and final settlement gets disputed. Leave encashment sounds simple: days × daily rate. But which days are encashable, which salary is the daily rate based on, do you divide by 26 or 30, and how much of it is tax-free?

This guide explains leave encashment calculation in India for 2026: what the labour codes say, how to calculate it, worked examples at different salaries, how it's taxed during service and at exit, the ₹25 lakh exemption, and the policy decisions every employer should write down.

General guidance as of 2 October 2026, not legal or tax advice. Leave rules depend on the labour codes, your state's Shops and Establishments rules and your own policy. Check your position with your CA or labour consultant.

The short answer

• Leave encashment = encashable leave days × daily rate.
• Daily rate is usually (basic + DA) ÷ 30 or ÷ 26, depending on your policy. Some employers use gross salary; your policy should say which.
• Which leave: usually only earned / privilege / annual leave. Casual and sick leave are normally not encashable unless your policy says so.
• At exit, unused earned leave is paid in the full and final settlement — within 2 working days of the last working day under the Code on Wages.
• Tax during service: fully taxable.
• Tax at retirement or resignation (non-government employees): exempt up to the least of four limits, with a lifetime cap of ₹25 lakh.
• PF: leave encashment is generally not part of PF wages.

What the law says about earned leave

Under the labour codes

The Occupational Safety, Health and Working Conditions Code (OSH Code) sets out annual leave for workers in establishments it covers:

• A worker becomes eligible for annual leave after working 180 days in a calendar year (down from 240 days under the Factories Act).
• Leave accrues at 1 day for every 20 days worked.
• Unused leave can be carried forward, generally up to 30 days.
• The worker can encash unused leave at the end of the calendar year, and unused leave is paid out on termination, resignation, retirement or death.

Under state Shops and Establishments Acts

Most offices, shops and commercial establishments are also governed by their state's Shops and Establishments Act, which sets its own earned leave entitlement, accumulation limits and encashment rules. These vary — for example, in how many days can be accumulated and whether leave must be encashed at year-end.

Under your policy

For employees not covered by these rules (managers and supervisors, for example), your leave policy and appointment letter decide what's encashable. Our guide to leave policy for private companies covers what a good policy includes.

The practical rule: apply whichever gives the employee more — the statute or your policy.

Step 1: Work out encashable days

Start with the employee's earned leave balance on the encashment date:

Encashable days = opening balance + leave accrued in the year − leave taken − leave lapsed

Things to check:

• Carry-forward cap. If your policy caps accumulation at, say, 45 days, anything above lapses or must be encashed — your policy should say which.
• Accrual to the last working day. For leavers, accrue leave up to the last working day, not just to the last full month.
• Leave adjusted against notice. If the employee used earned leave to shorten the notice period, deduct it first — see our notice period guide.
• Negative balance. If the employee took more leave than they had accrued, the excess is usually recovered in the F&F, if your policy allows.
• Half days count as 0.5.

Step 2: Choose the daily rate

There's no single statutory formula for every employer, so your policy must define the daily rate. Common approaches:

Method	Formula	When it's used
Basic + DA ÷ 30	(Basic + DA) ÷ 30	Most common for leave encashment
Basic + DA ÷ 26	(Basic + DA) ÷ 26	Where working days are treated as 26, as in gratuity
Gross ÷ 30	Gross monthly salary ÷ 30	Some employers, usually as a more generous policy
Gross ÷ working days	Gross ÷ actual working days in the month	Less common; varies month to month

Two points to watch:

• Use the salary on the encashment date (usually the last drawn salary for leavers), unless your policy specifies an average.
• The OSH Code's annual leave wage is generally based on the worker's average daily wages over the days actually worked in the preceding period. If you are covered, check that your policy rate isn't lower.

For the difference between 26 and 30 more generally, see how to calculate salary per day.

Step 3: Calculate

Leave encashment = encashable days × daily rate

That's it — as long as Steps 1 and 2 are right.

Worked examples

Example 1: resignation, basic ÷ 30

Deepak resigns. His last drawn basic is ₹30,000 a month (no DA). His earned leave balance on the last working day is 18 days. Policy: basic ÷ 30.

Item	Calculation	Amount
Daily rate	₹30,000 ÷ 30	₹1,000
Encashment	18 × ₹1,000	₹18,000

Example 2: same employee, basic ÷ 26

Item	Calculation	Amount
Daily rate	₹30,000 ÷ 26	₹1,153.85
Encashment	18 × ₹1,153.85	₹20,769

The ÷ 26 method pays about 15% more for the same days. Neither is wrong — but you must apply one consistently.

Example 3: gross-based policy

Shalini's gross salary is ₹55,000 a month (basic ₹25,000, HRA ₹12,500, special allowance ₹17,500). Her policy encashes on gross ÷ 30. Balance: 22 days.

Item	Calculation	Amount
Daily rate	₹55,000 ÷ 30	₹1,833.33
Encashment	22 × ₹1,833.33	₹40,333

On basic ÷ 30, the same encashment would have been ₹18,333. The policy choice matters more than anything else in the calculation.

Example 4: year-end encashment with a carry-forward cap

Manoj's policy allows up to 30 days of earned leave to be carried forward; anything above is encashed at year-end on basic ÷ 30. On 31 December he has 38 days. Basic ₹24,000.

Item	Calculation	Amount
Days above cap	38 − 30	8 days
Daily rate	₹24,000 ÷ 30	₹800
Year-end encashment	8 × ₹800	₹6,400

He carries 30 days into the new year. This ₹6,400 is paid during service, so it's fully taxable — no exemption.

Example 5: accrual to the last working day

Leena's policy gives 18 days of earned leave a year, accruing at 1.5 days a month. She had 6 days on 1 April and resigns with a last working day of 20 July, having taken 2 days of earned leave since April.

Item	Days
Opening balance	6
Accrued April–June (3 × 1.5)	4.5
Accrued 1–20 July (1.5 × 20 ÷ 31, rounded per policy)	1
Taken	−2
Encashable	9.5

Many F&F disputes come down to the last few days of accrual. Decide your rounding rule and write it down.

How leave encashment is taxed

During service

Leave encashed while the employee is still in service — for example, year-end encashment — is fully taxable as salary. Add it to the month's salary and recompute TDS.

At retirement or resignation (non-government employees)

When leave is encashed at retirement or on leaving the job (resignation or termination), part of it can be exempt. The exemption is the least of:

1. Leave encashment actually received.
2. ₹25 lakh — a lifetime limit across all employers (raised from ₹3 lakh with effect from 1 April 2023).
3. 10 months' average salary.
4. Cash equivalent of unavailed leave, calculated at a maximum of 30 days for every completed year of service, on average salary.

Here, "average salary" means the average of basic + DA (if DA forms part of retirement benefits) and turnover-based commission over the 10 months immediately before retirement or resignation.

Government employees get a full exemption at retirement.

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026; the leave encashment exemption carries over, but check the current section reference and any changes with your CA.

Tax example

Vijay resigns after 8 years and 4 months of service. Leave encashment received: ₹2,40,000 for 80 days. Average basic over the last 10 months: ₹90,000.

Limit	Calculation	Amount
1. Actually received		₹2,40,000
2. Lifetime cap		₹25,00,000
3. 10 months' average salary	10 × ₹90,000	₹9,00,000
4. Cash equivalent of leave	Leave credit capped at 30 days × 8 completed years = 240 days; he has 80 days unavailed → 80 × (₹90,000 ÷ 30)	₹2,40,000
Exempt	Least	₹2,40,000

All of Vijay's leave encashment is exempt.

The exemption is generally available under both tax regimes for retirement and resignation encashment — another reason to treat exit encashment separately from year-end encashment in payroll. Confirm the treatment for your employees' regime with your CA.

PF, ESI and gratuity on leave encashment

• PF: leave encashment is generally excluded from PF wages.
• ESI: encashment at exit is generally not ESI wages. Regular year-end encashment can be treated differently — check with your consultant.
• Gratuity: leave encashment isn't added to the salary used for gratuity.
• Bonus: leave encashment isn't part of bonus wages. See our bonus calculation guide.

The policy decisions you must write down

Most leave encashment disputes aren't about arithmetic. They're about things the policy didn't say. Make sure yours answers:

1. Which leave types are encashable — earned/privilege only, or casual and sick too?
2. Daily rate — basic, basic + DA or gross; ÷ 26 or ÷ 30.
3. Accumulation cap and what happens above it — lapse or encash.
4. Year-end encashment — allowed, mandatory or not allowed.
5. Exit encashment — on resignation, termination, retirement and death; any exceptions for employees on probation or dismissed for misconduct (check the law before excluding anyone).
6. Accrual rules — monthly, quarterly or yearly; pro-rata for joiners and leavers; rounding.
7. Notice period adjustment — can earned leave be used to shorten notice, or is it encashed instead?
8. Recovery of negative balance in the F&F.

Common mistakes

1. No written daily-rate rule, so each F&F is calculated differently.
2. Encashing casual or sick leave by mistake — or refusing to when the policy says otherwise.
3. Stopping accrual at the last full month instead of the last working day.
4. Taxing exit encashment fully, ignoring the exemption — or exempting year-end encashment, which is fully taxable.
5. Missing the 2-working-day F&F timeline.
6. Ignoring the statutory minimum for workers covered by the OSH Code or the state Act.
7. Leave balances in Excel that don't match approved leave records.

How PeopleVio helps

What PeopleVio does:

• Leave management with casual, sick and paid leave types, company-configured annual quotas and half-day leave.
• Live leave balances — quota, used and remaining — for every employee, calculated from approved and pending leave, so the number you encash matches the records employees see.
• Approval workflows, so every leave day in the balance has an approver behind it.
• Attendance and payroll in the same system, with loss of pay applied automatically.
• Resignation workflow with last working day and approval, plus an offboarding checklist that includes the full and final settlement step.
• One-off pay adjustments to add leave encashment to the final payroll, shown as its own line on the payslip.

What PeopleVio doesn't do (yet): it doesn't calculate leave encashment automatically, carry forward balances from one year to the next, or apply accrual rules month by month — quotas are annual. Calculate encashment using the balance PeopleVio shows and your policy's daily rate, and check the tax treatment of exit encashment with your CA.

Active employees	Monthly billing	Yearly billing (per month)
20	₹1,180	₹980
50	₹2,450	₹2,050
100	₹4,900	₹4,100

Prices exclude GST. See the pricing page.

Leave encashment checklist for an exit

• Confirm the last working day and any notice-period leave adjustment.
• Pull the earned leave balance from approved leave records.
• Add accrual up to the last working day; apply your rounding rule.
• Apply the policy daily rate (basic or gross, ÷ 26 or ÷ 30) on last drawn salary.
• Check the statutory minimum for workers covered by the OSH Code or state Act.
• Work out the tax exemption (least of four limits) and TDS.
• Add encashment to the F&F as a separate line.
• Pay within 2 working days of the last working day.

Frequently asked questions

How is leave encashment calculated? Encashable leave days × daily rate. The daily rate is usually (basic + DA) ÷ 30 or ÷ 26, as defined in your leave policy.

Is leave encashment calculated on basic or gross salary? Most employers use basic + DA, but some policies use gross. There's no single rule for every employer — your policy decides, subject to any statutory minimum.

Is leave encashment taxable? Encashment during service is fully taxable. Encashment at retirement or resignation is exempt up to the least of four limits, including a lifetime cap of ₹25 lakh, for non-government employees.

Can casual and sick leave be encashed? Usually not. Most policies allow encashment of earned or privilege leave only.

Is leave encashment mandatory on resignation? For workers covered by the OSH Code or a state Shops and Establishments Act, unused earned leave must generally be paid on exit. For others, your policy and appointment letter decide.

When must leave encashment be paid after resignation? As part of the full and final settlement — within 2 working days of the last working day under the Code on Wages.

Is PF deducted on leave encashment? Generally no. Leave encashment is excluded from PF wages.

Does PeopleVio calculate leave encashment? Not automatically yet. PeopleVio tracks leave balances from approved leave, so you have an accurate number to encash, and lets you add the encashment to the final payroll.

The bottom line

Leave encashment is days × rate — but the days must come from accurate leave records, and the rate must come from a written policy. Get those two right, add the tax exemption at exit, and pay within two working days, and leave encashment stops being an F&F argument.

Still tracking leave balances in a spreadsheet? PeopleVio keeps leave, approvals, attendance and payroll in one place, so the balance you encash is the balance everyone agreed to. See PeopleVio's pricing or book a demo.

Related reading: Full and final settlement in India · Leave policy for private companies · How to calculate salary per day · Best leave management software