If you ever wished, unused leaves could be converted to hard cash, then leave encashment comes into the picture. Whether you are changing jobs, retiring or finishing the financial year, every salaried employee in India needs to understand the meaning of leave encashment, its rules, and tax implications.
Table of Content
What Is Leave Encashment?
Leave encashments are not very difficult to understand. Every organization gives each employee a particular set of paid leaves, and it’s up to them when to utilize them. But sometimes, an employee doesn’t utilize them all, and later, those leaves can be converted into hard cash.
When Can You Get Leave Encashment?
Here are the common situations when leave encashment is provided:
- During employment: Some organizations allow partial leave encashment every year.
- On resignation: You are entitled to reimbursement for accrued but unutilized leave upon resignation.
- At retirement: Leave encashment on retirement is common, especially in government jobs.
- On termination: Based on company policy, you may still be eligible.
- As per policy benefits, some firms offer leave encashment during Diwali bonuses or financial closure periods.
Leave Encashment Rules You Should Know
These rules are shaped by both your company’s internal policies and Indian tax laws. Here are the key points to keep in mind:
- Maximum Leave Carry Forward: Most companies allow 30 to 45 days of leave to be carried forward. Anything beyond that may lapse.
- Taxability: The taxation differs between government and non-government employees.
- Leave Type: Only earned or privileged leaves are usually eligible for encashment.
- Timing Matters: If availed during employment, it’s fully taxable. If at retirement, exemptions apply.
- Limit on Exemption: For non-government employees, the maximum exemption is ₹ 25 lakh under the current law.
Leave Encashment Tax Exemption: What’s Covered?
Now comes the part that most people are curious about: the tax exemption for leave encashment. So, is leave encashment taxable?
- For government employees: The Entire leave encashment is tax-free.
- For non-government employees: Leave encashment is exempt up to a certain limit, calculated using specific formulas.
- During employment: Fully taxable; no exemption.
- On retirement or resignation: Partial exemption available for private-sector employees.
This is where knowing the leave encashment exemption calculation becomes helpful in reducing your tax liability smartly.
Leave Encashment Calculation Example
Let’s say, Mr. A is retiring after 15 years of service. Mr. A was entitled to 35 days of paid leave per annum from his employer, i.e., overall, 525 days of leave during his entire service (35*15).
Out of the same, Mr. A has already utilized 200 days of paid leave and is left with 325 days of unutilized leave.
Mr. A was drawing basic salary + DA of Rs 33,000 per month at the time of retirement and received Rs 3,57,500 as leave encashment calculated based on 325 days * Rs. 1,100 (salary per day = Rs.33,000/30 days).
Conclusion
Financial planning depends on having a clear understanding of leave encashment’s, applicable leave encashment rules, and the appropriate leave encashment calculation formula. Employees can legally claim leave encashment tax exemption, particularly for retirement leave, if they use the correct leave encashment exemption calculation.
FAQS
1. Is leave encashment taxable?
Leave encashment is taxable during service, but it qualifies for leave encashment tax exemption on retirement under specific rules.
2. How to calculate leave encashment?
Leave encashment calculation is done using the standard leave encashment formula: (Basic + DA ÷ 30) × earned leave days.
3. What is leave encashment?
Leave encashment refers to the payment received for unused earned leave as per the company leave encashment rules.
4. Is leave encashment taxable in the new regime?
Leave encashment in the new regime remains taxable during employment but leave encashment exemption may still apply on retirement.
5. How to calculate earned leave encashment?
Earned leave encashment calculation formula is: (Basic Salary + DA ÷ 30) × number of unutilized earned leave days.
6. Is leave encashment taxable on resignation?
Leave encashment on resignation is taxable for private employees, with a limited leave encashment exemption based on conditions.
7. Is leave encashment taxable on retirement?
Leaving encashment on retirement allows for leave encashment tax exemption up to ₹25 lakhs for non-government employees.
8. What is leave encashment exemption?
Leave encashment exemption is the tax-free portion of the encashed leave calculated as per the leave encashment exemption rules.
9. How do you calculate the leave encashment amount?
The leave encashment amount is derived using the leave encashment calculation formula and is subject to leave encashment exemption calculation.