India Leave Encashment: Complete 2026 Guide & Formula
How unused leave is turned into cash in India — the formula, why accrual varies by state, and the ₹25 lakh tax exemption on exit.
Unused paid leave in India is not lost when you leave a job — it can be encashed, converted into a cash payment based on your salary. This guide explains how leave encashment works, the formula our India Leave Encashment Calculator uses, why we deliberately do not guess your leave entitlement for you, and the important ₹25 lakh tax exemption under Section 10(10AA).
What is leave encashment?
Most employers let staff carry forward unused earned (annual) leave, up to a limit. When you retire or resign, that accumulated balance is paid out in cash. The calculation itself is simple and consistent nationwide; what varies is how many days you accrue in the first place.
The encashment formula
Encashment = (Basic + DA) ÷ 30 × unused earned-leave days
Your monthly basic + dearness allowance is divided by 30 to get a daily wage, then multiplied by the number of unused days. Some employers use a divisor of 26 instead of 30 — check your company policy or payslip, because it changes the daily rate.
Why we don't compute your entitlement for you
Unlike gratuity — a single central Act — the number of leave days you earn per year is not uniform across India:
- Factory workers under the Factories Act, 1948 earn roughly one day of leave for every 20 days worked (after working 240 days in a year).
- Other sectors follow their state's Shops & Establishments Act, and those rules differ from state to state.
Rather than guess a number that could be wrong for your state and sector, our calculator encashes the balance you already know from your payslip or HR record. The encashment formula is the part that is consistent nationwide, so that is what we compute.
The tax angle — Section 10(10AA)
For non-government employees, leave encashment received on retirement or resignation is tax-exempt up to ₹25,00,000 (₹25 lakh) — a lifetime aggregate limit across all employers — under Section 10(10AA). Government employees receive it fully tax-free. Importantly, leave encashed while still employed is fully taxable as salary; the exemption applies only on exit.
Worked example
| Input | Value |
|---|---|
| Basic + DA | ₹40,000/month |
| Unused earned-leave days | 20 days |
| Daily wage (÷30) | ₹1,333 |
| Encashment | ₹26,667 |
Adjust the salary, divisor and days on the calculator, and read the same rules on our India leave-encashment guide.
Leave encashment vs gratuity — don't confuse them
They are separate benefits. Gratuity rewards length of service (see the India Gratuity Calculator); leave encashment pays out unused vacation days. On a full-and-final settlement you may receive both.
For the statutory background, see the Ministry of Labour & Employment (Factories Act & leave rules) and the Income Tax Department (Section 10(10AA)).
Earned leave vs casual and sick leave
India's leave landscape has several types, but only earned (annual) leave — sometimes called privilege leave — is the type that typically accumulates and can be encashed. Casual leave and sick leave usually operate on a use-it-or-lose-it basis within the year and are not paid out. When you read your payslip's leave balance, the figure that matters for encashment is the earned/privilege-leave balance, not your total of all leave types.
How carry-forward caps shape your balance
Most employers cap how much earned leave you can carry forward — a common design is to allow accumulation up to a set ceiling, with anything above it either lapsing or being auto-encashed each year. This is why two employees with identical tenure can have very different encashable balances: one used leave through their career, another banked it up to the cap. You can only ever encash the days actually credited to you, so understanding your employer's carry-forward policy is part of planning your exit.
Encashment during service vs on exit — the tax difference
The timing of encashment changes its tax treatment completely. Encashment taken while you are still employed is fully taxable as salary in that year. Encashment on retirement or resignation is where the Section 10(10AA) exemption applies — up to a lifetime aggregate of ₹25 lakh for non-government employees, and fully tax-free for government employees. Employees who cash out leave mid-career for liquidity sometimes forget this and are surprised by the tax deduction.
Leave encashment in the full and final settlement
On exit, leave encashment sits alongside your gratuity, final salary, and any bonus in your FnF statement. Because gratuity and leave encashment have different formulas, salary bases and tax rules, it is worth calculating each separately rather than accepting one combined figure. The leave-encashment calculator handles this one component; the India hub links the rest.
Frequently asked questions
What is the leave encashment formula in India?
(Basic + DA) ÷ 30 × unused earned-leave days. Some employers divide by 26 instead of 30, so check your payslip or HR policy for the divisor they use.
Is leave encashment taxable in India?
On retirement or resignation, for non-government employees it is exempt up to ₹25,00,000 (a lifetime aggregate across employers) under Section 10(10AA); for government employees it is fully tax-free. Leave encashed while still employed is fully taxable.
How many earned-leave days do I accrue per year?
It varies by sector and state. Factory workers under the Factories Act, 1948 earn roughly one day per 20 days worked (after 240 days in a year); other sectors follow their state's Shops & Establishments Act, which differs across states. Use the balance shown on your payslip.
Is leave encashment the same as gratuity?
No. Gratuity is a service-length-based lump sum under the Payment of Gratuity Act; leave encashment pays out unused earned leave. They are separate and you may receive both on exit.
Why doesn't the calculator tell me how many leave days I have?
Because leave accrual is not uniform nationally — it depends on the Factories Act or your state's Shops & Establishments Act. Rather than guess and risk being wrong, the tool encashes the balance you already know from your payslip.