Leave Encashment Calculator

What is leave encashment?

Leave encashment is pay for earned leave you built up but never took. Most Indian employers allow it when you resign or retire. Some also allow it once a year against a carry-forward cap. Only earned or privilege leave usually counts, since casual and sick leave tend to lapse at year end.

The amount is simple to work out, but the tax is not. Two questions decide it: whether you are a government employee, and whether the money is paid during service or when you leave.

How leave encashment is calculated

The standard formula values each day of leave at a thirtieth of monthly basic pay plus dearness allowance:

• Per-day salary = (Basic + DA) ÷ 30
• Encashment = Per-day salary × Number of unused leave days

Some employers divide by 26 instead of 30, which lifts the per-day rate. Check your leave policy. The divisor is a matter of contract, not of law.

Tax treatment: the four limits

Money paid while you are still working is taxed in full as salary, with no exemption at all. The exemption only bites when the payment comes at retirement or resignation, and the rules then split by employer type. It now sits in the table under section 19 of the Income-tax Act, 2025, which took over from section 10(10AA) of the 1961 Act on 1 April 2026 without changing any of the limits.

Government employees pay no tax on it. For everyone else, the exemption is the least of four limits. In practice one of them binds well below the headline ceiling:

The fourth limit catches most people out. However generous your employer's leave policy, the exemption rebuilds your leave account at 30 days for each completed year you served, then subtracts every day you took or encashed along the way. Thirty days times years of service, compared with the balance, is a shortcut that overstates the exemption.

Three employees, very different outcomes

An employee retires on a basic salary of ₹60,000 a month, after 20 completed years on a policy of 30 days a year. They earned 600 days, took 540, and have 60 days of unused leave.

The per-day rate is ₹2,000, so the payout is ₹1,20,000. Now test the four limits. The actual amount is ₹1,20,000. The ceiling is ₹25,00,000. Ten months of salary is ₹6,00,000. Leave at credit is 30 × 20 days less the 540 taken, which is 60 days, worth ₹1,20,000. The lowest is the actual amount, so the whole payout is tax free.

Now change one variable: say the same employee had taken only 200 days and banked 400. The payout rises to ₹8,00,000, and leave at credit is also 400 days, but ten months of salary caps the exemption at ₹6,00,000. That leaves ₹2,00,000 taxed as salary.

A policy more generous than 30 days a year is where the fourth limit bites. On 45 days a year for eight years, with 60 days taken and 300 at credit on a basic of ₹50,000, the payout is ₹5,00,000. Leave at credit for the exemption is 30 × 8 days less the 60 taken, which is 180 days, worth ₹3,00,000. That is the least of the four, so ₹2,00,000 is taxed as salary.

The ₹25 lakh ceiling is a lifetime limit

As with gratuity, the ceiling covers your whole career rather than each employer. Claim ₹4,00,000 of exemption when you leave one job, and only ₹21,00,000 is left for any later payout.

Employers cannot see what you claimed elsewhere. Tracking the running total is your job when you file your return.