Leave Encashment: Definition, Meaning & Guide for Indian Businesses

Leave encashment is the payment for unused earned leave at the time of resignation, retirement or end of financial year. Up to ₹25 lakh is tax-free for non-government employees.

What is Leave Encashment?

Leave encashment is converting unused privilege/earned leave into cash. Encashment formula varies by company: typical = (basic + DA) × unused leave days ÷ 30. Tax treatment: government employees get 100% tax exemption. Non-government employees get exemption up to ₹25 lakh lifetime (raised from ₹3 lakh in 2023). Companies typically cap encashable balance at 240-300 days. Annual encashment (during service) is fully taxable; encashment at retirement is partially exempt.