Leave Encashment: How It Is Calculated and Taxed
In short: leave encashment = (basic + DA) ÷ 30 (or 26) × unused leave days. Encashment while in service is fully taxable. On retirement or resignation, private-sector employees are exempt up to the lowest of four amounts, with a lifetime cap of ₹25 lakh.
Hinglish me: Bachi hui leave ka paisa basic + DA ke hisaab se milta hai. Naukri chhodte waqt ₹25 lakh tak tax-free ho sakta hai.
The formula
Most employers use: Leave encashment = (Basic + DA) ÷ 30 × number of unused earned leave days. Some use 26 working days instead of 30, which gives a higher amount, and a few use gross pay. The divisor and the salary base are set by your company's leave policy, so check it before you calculate.
| Basic + DA per month | Leave days | ÷ 30 days | ÷ 26 days |
|---|---|---|---|
| ₹30,000 | 20 | ₹20,000 | ₹23,077 |
| ₹50,000 | 45 | ₹75,000 | ₹86,538 |
| ₹80,000 | 240 | ₹6,40,000 | ₹7,38,462 |
Tax: during service vs when you leave
- Encashed while still working: fully taxable as salary. Relief for arrears may apply if it relates to earlier years.
- Government employees on retirement: fully exempt.
- Private-sector employees on retirement or resignation: exempt up to the lowest of these four amounts. This exemption is available under both the old and the new regime.
- The leave encashment actually received.
- ₹25 lakh, a lifetime limit across all employers (raised from ₹3 lakh from 1 April 2023).
- 10 months' average salary (basic + DA + commission based on turnover, averaged over the 10 months before you leave).
- Cash value of unused leave, counting no more than 30 days of leave for each completed year of service, at the average salary.
Worked example: retirement after 20 years
Rajesh retires after 20 years. His last basic + DA is ₹80,000, his average salary over the last 10 months is ₹78,000, and he has 240 days of earned leave. His company pays ₹80,000 ÷ 30 × 240 = ₹6,40,000.
| Limit | Amount |
|---|---|
| 1. Actually received | ₹6,40,000 |
| 2. Lifetime limit | ₹25,00,000 |
| 3. 10 months average salary (₹78,000 × 10) | ₹7,80,000 |
| 4. Cash value of leave (₹78,000 ÷ 30 × 240 days) | ₹6,24,000 |
The lowest is ₹6,24,000, so that much is tax-free and the remaining ₹16,000 is taxable as salary. If he had already used part of the ₹25 lakh limit with an earlier employer, the limit would be reduced by that amount.
Leave rules under the new labour codes
For workers covered by the Occupational Safety, Health and Working Conditions Code (in force since 21 November 2025):
- You earn one day of leave for every 20 days worked, once you have worked 180 days in a calendar year.
- Up to 30 days can be carried forward. Leave you applied for but were refused carries forward without that limit.
- You can ask for encashment at the end of the year, including leave above the carry-forward limit.
- On resignation, discharge or dismissal, leave wages are due before the second working day; on retirement or death, within two months.
These rules cover "workers". People in managerial or administrative roles, and supervisors above the wage limit, may be governed by company policy and state shops and establishments law instead.
Leaving your job? Check how much gratuity you will also receive.
Gratuity CalculatorSee also: Full and final settlement and what the new labour codes change in your salary.
Sources and where to verify
This guide is for general information and planning only, based on rules as reported up to 9 November 2026. Rules change, so confirm with the official source, your employer or institution, or a qualified adviser before you act on it.
Frequently asked questions
How is leave encashment calculated?
Divide basic plus DA by 30 (or 26 if your company uses working days) and multiply by your unused earned leave days. For example, ₹50,000 ÷ 30 × 45 days = ₹75,000.
Is leave encashment taxable?
Encashment while in service is fully taxable. On retirement or resignation, private-sector employees are exempt up to the lowest of four limits, with a lifetime cap of ₹25 lakh. Government employees are fully exempt on retirement.
What is the leave encashment exemption limit?
The lifetime limit for non-government employees is ₹25 lakh, applicable from 1 April 2023. It was ₹3 lakh before that.
Is leave encashment exempt in the new tax regime?
Yes. The exemption on retirement or resignation is available under both the new and old tax regimes.