Quick answer: Leave encashment is cash you pay an employee for unused earned leave instead of time off. Under the OSH Code, 2020, workers can demand it at year-end, and any balance is paid when they leave. On exit, non-government employees get a tax exemption of up to ₹25 lakh. Encashment while still in service is fully taxable.
- The OSH Code lets a worker encash leave on demand at the end of each calendar year.
- On discharge, dismissal or resignation, leave wages are due within two working days.
- The ₹25 lakh exemption was notified under the 1961 Act and continues under the Income-tax Act, 2025.
- The exemption applies under both the old and new tax regimes.
When must you pay leave encashment in India?
At two points: year-end, if the worker asks, and on exit, always.
Section 32 of the OSH Code caps carry-forward at 30 days. Anything a worker wants converted at year-end is paid on demand. On leaving, the full balance of earned leave goes into the full and final settlement, and the Code sets a two-working-day deadline for it.
Retirement and death in service run on a longer clock. Two months.
Casual leave is different. In Maharashtra it lapses at year-end and isn’t encashable.
How is leave encashment taxed?
Fully taxable while in service. Partly exempt on exit.
Section 19 of the Income-tax Act, 2025 on salary deductions gives non-government employees the least of four amounts on retirement, “whether on superannuation or otherwise”:
| Limit | Rule |
|---|---|
| (a) Leave value | Cash equivalent of earned leave, at most 30 days per year of service |
| (b) Salary multiple | 10 × average monthly salary of the last ten months |
| (c) Notified cap | ₹25 lakh |
| (d) Actual | The amount received |
Since s.202 doesn’t switch this entry off, the exemption works under the old and new tax regimes alike.
What does a leave encashment calculation look like?
Let’s say a Pune product manager resigns after six years. Salary (basic) is ₹78,000 a month and she has 40 days of earned leave left. Your policy uses a 26-day month.
| Step | Figure |
|---|---|
| Daily rate (₹78,000 ÷ 26) | ₹3,000 |
| Leave encashment calculation (40 × ₹3,000) | ₹1,20,000 |
| Limit (a): 40 days, within 6 × 30 = 180 | ₹1,20,000 |
| Limit (b): 10 × ₹78,000 | ₹7,80,000 |
| Limit (c) | ₹25,00,000 |
| Exempt (least of the four) | ₹1,20,000 |
The whole payout is tax-free. Had she encashed 10 days while still employed instead, all ₹30,000 would have been taxed as salary in that month’s payroll, with TDS at her slab rate.
A common mistake is paying on basic when the policy says “gross”. Write the base into the contract. Our overview of employee benefits in India covers how leave sits in the CTC.
How does Remunance process leave encashment?
As your employer of record, Remunance tracks every balance, pays year-end encashment when an employee asks and settles the rest inside the exit deadline. We apply the s.19 exemption correctly and deduct TDS on the taxable part. Exits run within our full and final settlement service, with the relieving letter issued after payment. If you want exits costed in advance, get a full and final settlement estimate.
What else do people ask about leave encashment?
Is leave encashment on resignation taxable?
Partly. On resignation, the s.19 exemption applies up to the least of the four limits, including ₹25 lakh. The excess is taxed as salary.
Is leave encashment mandatory in India?
For earned leave, yes. The OSH Code requires payment for unused balances on exit and on demand at year-end.
Is leave encashment calculated on basic or gross salary?
Your policy and contract decide. For the tax exemption, “salary” generally means basic plus dearness allowance.