How much you are paid for unused leave, when that money is tax-free, and how to work it out.
Leave encashment is the money paid for leave you have earned but not taken. It usually covers earned leave (EL / privilege leave) only — casual and sick leave normally lapse. It is paid in two situations: during service, when the policy allows encashing some leave each year, and on leaving, as part of the full and final settlement.
Leave encashment = (Basic + DA) ÷ 30 × leave days
Some companies divide by 26 (working days in a month), which gives a higher figure per day. For example, with Basic + DA of ₹30,000 and 20 days of unused leave: ₹30,000 ÷ 30 × 20 = ₹20,000; divided by 26 instead, it is ₹23,077.
| When it's paid | Tax |
|---|---|
| While still employed | Fully taxable as salary |
| On resignation or retirement — private sector | Tax-free up to the least of four limits (below); the rest is taxable |
| On retirement — Central / State Government | Fully tax-free |
For private-sector employees, the tax-free part is the least of:
The exemption is available in both the old and the new tax regime.
The Occupational Safety, Health and Working Conditions Code lets workers carry forward up to 30 days of unused leave, with leave beyond that encashable at the end of the calendar year, and the balance paid when employment ends. Check your state's rules and your company policy for the details that apply to you.
In SetuWork, every leave type has its own balance and carry-forward rules, and the balance on the last working day is available when preparing the settlement — alongside gratuity and the last salary.
Leave encashment = (Basic + DA) ÷ number of days × days of leave encashed. Most companies divide the monthly Basic + DA by 30; some use 26 working days. Your company's leave policy or appointment letter says which.
Encashment while you are still working is fully taxable as salary. Encashment received on resignation or retirement is tax-free for private-sector employees up to the least of: the amount received, ₹25 lakh, 10 months' average salary, and the cash value of unused leave (at most 30 days for each completed year of service). Government employees' encashment on retirement is fully exempt.
No, it is a lifetime limit across all employers. If you have already claimed the exemption before, only the remainder is available.
Yes. Unused earned leave that the policy allows to be encashed is paid along with the last salary, gratuity and other dues in the full and final settlement.
Yes. The leave-encashment exemption on retirement or resignation applies in both the old and the new regime.
SetuWork tracks every leave balance and carries it into full and final settlement. Free for teams up to 10 people — no card required.