Leave Encashment on Resignation: What You Get and What Is Taxed

When you resign or retire, most Indian employers pay out your unused earned leave. The arithmetic is simple, with one difference from gratuity that catches people out.

The formula

Payout = (last drawn basic + DA ÷ 30) × unused leave days

Worked example. Basic plus DA of ₹60,000 a month, 45 unused days:

(60,000 ÷ 30) × 45 = ₹2,000 × 45 = ₹90,000

The divisor is 30, not 26

Gratuity divides by 26 because the Payment of Gratuity Act assumes Sundays are unpaid. Leave encashment is conventionally computed on a calendar month — 30.

Assuming both use 26 overstates a leave payout by about 15%. On the example above that is the difference between ₹90,000 and ₹1,03,846, which is a disappointing gap to discover on your final settlement.

Not all leave is encashable

Only earned leave or privilege leave is normally paid out. Casual leave and sick leave usually lapse at the end of each year.

More importantly, most employers cap accumulation — commonly 30, 45 or 60 days — and anything above the cap simply disappears annually rather than banking. If you have been carrying a large balance for years assuming it accrues indefinitely, check the policy. The cap is often lower than people believe, and years of "saved" leave may already have evaporated.

It is calculated on basic, almost always

Like gratuity, leave encashment normally uses basic plus DA, not gross. On a ₹1,50,000 gross with ₹60,000 basic, a 45-day payout is ₹90,000, not ₹2,25,000.

A minority of employers do use gross. The difference is large enough to be worth reading the policy document rather than assuming.

Tax treatment

On resignation or retirement from a non-government employer, encashment is exempt up to ₹25,00,000, a ceiling raised substantially in 2023. The exempt amount is the least of several figures — the actual amount received, ten months of average salary, the statutory ceiling, and the cash equivalent of unavailed leave capped at 30 days per completed year of service.

That last one catches people. Even with a 60-day balance, the exempt calculation may only recognise 30 days for each year you served.

Government employees receive leave encashment fully exempt on retirement.

While still employed, leave encashment is fully taxable as salary. There is no exemption for encashing mid-career, only on exit. Worth knowing before you choose cash over a break.

Using leave instead of a notice buyout

Many employers permit unserved notice to be adjusted against your leave balance rather than paid in cash. Since encashment is usually on basic and the buyout may be on gross, this is often substantially cheaper.

It is commonly allowed and rarely volunteered. Ask HR explicitly and get the answer in writing. Compare the two on the leave encashment calculator and the notice period buyout calculator before you decide.

Three things to confirm the week you resign

1. Your encashable balance, not your total leave balance — HR can confirm which categories count.
2. Whether the payout uses basic+DA or gross.
3. Whether leave can offset notice, and at what rate.

All three are one email. The answers routinely differ by a month's salary.