Every salaried person as per labour law of that particular state in India is entitled to a minimum number of paid leave every year; there are organizations that provide more earned leave than the capped.

However, it is not necessary that an individual employee utilises all the leave he is entitled for a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves.

Some Organizations cap the Carry forward and remaining leaves are encashed during the service, whereas some organizations do not put any capping, which leaves the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.

Leave Encashment during service

Leave encashed during service is fully taxable and forms part of ‘income from Salary’.  Hence, basis the tax slab you are into, Encashment will be taxed. However, it depends on the organization, whether they tax it and deduct in the same month or it is distributed equally in remaining months.

Leave Encashment during retirement or leaving the organization

Leave encashment received at the time of retirement or leaving the organization is either fully or partially taxable depending upon the category that an employee falls under.

Leave encashment received by Central or State Government employee at the time of retirement or resignation is not taxable.

Leave encashment received by legal heirs of deceased employee is not taxable.

Least of the following is exempt for Non-Government employee based on Section 10(10AA)(ii) and balance amount if any is taxable as ‘income from salary’.

  1. Leave Encashment Amount Received
  2. Average Salary of Last 10 Months
  3. Salary Per Day * Unutilised Leave of Maximum 30 Days for every completed years of Service
  4. Amount notified by the Government (Rs. 3,00,000)