How leave encashment is calculated
Most employers pay for each day of unused earned leave at your daily rate of basic pay plus DA:
Leave encashment = (last monthly basic + DA) ÷ 30 × leave days
With ₹80,000 basic + DA and 240 days of leave: 80,000 ÷ 30 × 240 = ₹6,40,000. Your company's leave policy may use 26 working days instead of 30, or cap the days that can be encashed; check your HR policy.
Central government employees can encash up to 300 days of earned leave (plus half-pay leave in some cases) at retirement, at basic pay + DA.
How much is tax-free
Government employees (central and state): leave encashment at retirement is fully exempt.
Everyone else — at retirement or resignation — the exempt amount is the lowest of:
- The amount actually received,
- ₹25 lakh (a lifetime limit, raised from ₹3 lakh in 2023),
- 10 months' average salary,
- Average salary × unavailed leave, counting at most 30 days of leave for each year of service.
"Average salary" means the average basic + DA (and commission based on turnover, if any) of the 10 months before leaving.
In the worked example (average salary ₹78,000, 25 years' service), the lowest limit is ₹78,000 ÷ 30 × 240 = ₹6,24,000, so ₹6,24,000 is tax-free and ₹16,000 is taxable.
Encashment while still in service
Leave encashed while you are still working — for example, yearly encashment — is fully taxable as salary for all employees. The exemption applies only when you retire or leave.
Planning tips
- If your employer lets you carry forward leave, accumulating it can be worth more at retirement because it is paid at your final, higher salary and is largely tax-free.
- Leave encashment, gratuity and PF together form your retirement lump sum — see the gratuity calculator and EPF calculator, and plan the total with the retirement calculator.