Last Updated on October 22, 2026 by Abhijit Divekar
Leave encashment is the payment an employer makes for earned leave an employee has not used. Under the Occupational Safety, Health and Working Conditions Code, 2020, workers can encash unused leave at the end of the calendar year, must be paid for leave above the 30-day carry-forward limit, and must be paid for all remaining leave when they leave the job.
Leave encashment = number of leave days × per-day wage. Most employers work out the per-day wage as monthly basic + DA divided by 26 (working days) or 30 (calendar days), as their leave policy says. For example, 20 days of leave on a basic + DA of ₹30,000 a month is ₹23,077 at 26 days, or ₹20,000 at 30 days. Encashment while you are still employed is fully taxable as salary. Encashment when you retire or leave the job is partly tax-free for private-sector employees, up to a lifetime limit of ₹25 lakh, and fully tax-free for government employees.
Leave encashment calculator
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What are the leave encashment rules under the new labour codes?
The OSH Code, 2020 (section 32) sets the rules for annual leave with wages for workers in establishments with 10 or more workers:
| Rule | What the Code says |
|---|---|
| Who earns leave | A worker who has worked 180 days or more in the calendar year |
| How much leave | 1 day for every 20 days worked (1 for every 15 days for adolescent workers) |
| New joiners | Earn leave at the same rate if they work one-fourth of the remaining days of the year |
| Carry forward | Up to 30 days into the next year (leave applied for but refused can be carried forward without limit) |
| Encash on demand | The worker can ask to encash leave at the end of the calendar year |
| Leave above 30 days | The worker is entitled to encash the leave above the 30-day carry-forward limit |
| On leaving the job | Wages for unused leave must be paid if the worker resigns, is discharged or dismissed, retires or dies |
| Payment deadline | Within 2 working days of resignation, discharge or dismissal; within 2 months of retirement or death |
Two points to keep in mind:
- Workers, not everyone. The Code protects “workers”. Managers and supervisors above the wage limit notified under the Code usually follow the company’s leave policy and employment contract.
- Smaller offices and shops. If you have fewer than 10 workers, or for staff the Code does not cover, your state’s Shops and Establishments rules and your written leave policy decide how much leave is earned and encashed.
How do you calculate leave encashment? (formula and example)
Leave encashment = leave days to encash × (monthly basic + DA ÷ 26 or 30)
Whether you divide by 26 or 30 should be written in your leave policy and applied the same way for everyone. Dividing by 26 counts working days and gives a slightly higher amount.
| Item | Divide by 26 | Divide by 30 |
|---|---|---|
| Monthly basic + DA | ₹30,000 | ₹30,000 |
| Per-day wage | ₹1,153.85 | ₹1,000.00 |
| Leave days to encash | 20 | 20 |
| Leave encashment | ₹23,077 | ₹20,000 |
Many companies use basic + DA as the base. Some use gross salary. Whatever you choose, put it in writing, because it decides every full and final settlement.
Is leave encashment taxable?
It depends on when it is paid. The Income Tax Department sets out the rules like this:
| When it is paid | Tax treatment |
|---|---|
| While you are still employed | Fully taxable as salary |
| On the employee’s death (paid to the family) | Fully exempt |
| On retirement or leaving: government employees | Fully exempt |
| On retirement or leaving: other employees | Exempt up to the least of four amounts (below) |
For private-sector employees, the exempt part is the least of:
- The amount actually received
- Unused earned leave (counting at most 30 days for each year of service) × average monthly salary
- 10 months’ average salary
- ₹25 lakh (a lifetime limit across all employers, in force since 1 April 2023)
Here, “salary” means basic + DA (to the extent it counts for retirement benefits) + any turnover-based commission, averaged over the 10 months before leaving. The calculator above works this out for you.
Example: an employee resigns after 5 years with 20 days of leave, on basic + DA of ₹30,000. The employer pays ₹23,077 (26-day basis). The exempt part is the least of ₹23,077, ₹20,000 (20 ÷ 30 × ₹30,000), ₹3,00,000 and ₹25 lakh, so ₹20,000 is tax-free and ₹3,077 is taxable.
Leave encashment in the full and final settlement
- Show leave encashment as a separate line in the full and final statement and payslip.
- Pay it on time: within 2 working days of the last day for resignations and terminations covered by the Code.
- Deduct TDS on the taxable part, and show the exempt part separately so it carries into the employee’s tax certificate (Form 130 from Tax Year 2026-27).
- Keep the leave register: the OSH Code requires employers to record leave and leave wages.
Frequently asked questions
Is leave encashment compulsory in India?
For workers covered by the OSH Code, yes: unused leave must be paid when they leave the job, leave above the 30-day carry-forward limit can be encashed, and workers can ask to encash leave at the end of the calendar year. For staff outside the Code, your leave policy and state rules apply.
How many days of leave can be carried forward?
Up to 30 days into the next calendar year under the OSH Code. Leave that the worker applied for but was refused can be carried forward without a limit.
Can an employer refuse leave encashment on resignation?
Not for workers covered by the OSH Code. The Code says they are entitled to wages for unused leave when they quit, are discharged or dismissed, retire or die.
Is leave encashment paid on basic or gross salary?
The Code does not fix one base for every employer. Most companies use basic + DA; some use gross. Your written leave policy should say which, and you should apply it consistently.
Is the ₹25 lakh tax exemption per employer?
No. It is a lifetime limit across all employers, reduced by any exemption already claimed on earlier encashments.
Want leave and full and final pay handled for you?
HRTailor runs leave tracking, payroll and full and final settlements for small and mid-sized Indian companies, so leave encashment is calculated correctly and paid on time. See our leave and attendance service or talk to an HR expert.
Related: types of employee leave in India · sandwich leave policy.
Sources: Occupational Safety, Health and Working Conditions Code, 2020, sections 2 and 32; Income Tax Department, “Taxability of retirement benefits” (incometaxindia.gov.in). Last reviewed: 16 October 2026. General guidance, not legal or tax advice.
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