Khanal Group

Leave encashment calculator

The encashment amount for the leave days you encash, and how much of it is tax-free on retirement or leaving, using the least-of-four rule and the ₹25 lakh limit for non-government employees.

Last checked 25 October 2026
The salary your leave policy uses for encashment
As your leave policy or standing orders say
For the tax limits. Blank = last drawn
Counted at 30 at most
Blank = the calculated encashment

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How it is calculated

The encashment amount follows the employer's leave policy. The tax treatment follows the Income-tax Act and depends on when the leave is encashed and who the employer is.

Encashment = leave days × monthly basic + DA ÷ divisor (30 or 26, as the policy says)

Tax-free part for a non-government employee on retirement or leaving = least of:
(a) the amount actually received
(b) ₹25,00,000, less any exemption already claimed with earlier employers
(c) 10 × average monthly salary of the 10 months before retirement
(d) cash equivalent of leave to credit = (leave entitlement, at most 30 days a year, × completed years − leave availed or encashed) × average monthly salary ÷ 30

Taxable as salary = amount received − tax-free part

Where each rule comes from

  • Exemption and the four limits: s.10(10AA) of the Income-tax Act 1961. Clause (i) exempts leave salary received by a Central or State Government employee in full; clause (ii) gives the least-of-four rule for everyone else, including employees of public sector undertakings. Under the Income-tax Act 2025, in force from 1 April 2026, the same exemption is carried into the s.19 table of deductions from salaries (Sl. 13 for government employees, Sl. 14 for others; Income-tax Act 2025, Gazette of India).
  • ₹25 lakh limit: CBDT Notification 31/2023 of 24 May 2023 raised the limit in limit (b) from ₹3 lakh to ₹25 lakh for retirements on or after 1 April 2023. It is a lifetime limit: exemptions claimed with earlier employers reduce it.
  • Salary: basic pay, plus dearness allowance where the terms of employment count it for retirement benefits, plus commission at a fixed percentage of turnover. It is averaged over the 10 months immediately before retirement.
  • Divisor: no statute fixes 30 or 26 for the payment itself; the leave policy, standing orders or the appointment letter does. Factories and some shops and establishments laws set their own rules for earned leave wages; check the state law that applies.
  • Leave encashed while in service: taxable in full as salary.

Worked example

Round illustrative numbers. An employee of ABC Infra Private Limited retires after 22 completed years. Last drawn basic + DA is ₹60,000; the average of the last 10 months is ₹57,000. The policy credits 30 days of earned leave a year; 380 days were availed or encashed during service; 240 days are encashed on retirement.

  • Encashment: 240 × ₹60,000 ÷ 30 = ₹4,80,000.
  • Limit (a): ₹4,80,000. Limit (b): ₹25,00,000. Limit (c): 10 × ₹57,000 = ₹5,70,000.
  • Limit (d): leave to credit = 30 × 22 − 380 = 280 days; 280 × ₹57,000 ÷ 30 = ₹5,32,000.
  • Tax-free part is the least, ₹4,80,000, so nothing is taxable.

If the same employee had been on ₹3,00,000 a month and encashed 300 days (₹30,00,000), with ₹5,00,000 already exempted at an earlier employer, limit (b) would be ₹20,00,000 and ₹10,00,000 would be taxable.

Points to confirm

Whether a resignation counts as "retirement or otherwise" for the exemption, how leave availed in service is counted, and whether DA forms part of retirement benefits are questions of the employment terms; confirm them with your CA. K-HR keeps each employee's leave credits and balances (monthly or yearly credit, carry-forward caps), and the exit with notice period and clearance. For the full exit calculation, use the full and final settlement calculator.

Common questions

How much leave encashment is tax-free?

For a Central or State Government employee, all of it on retirement. For anyone else, on retirement or leaving, the least of the amount received, ₹25 lakh (less earlier exemptions), 10 months' average salary, and the cash equivalent of leave to credit at no more than 30 days for each completed year.

From when does the ₹25 lakh limit apply?

CBDT Notification 31/2023 raised the limit from ₹3 lakh to ₹25 lakh for non-government employees who retire or leave on or after 1 April 2023.

Is leave encashed every year while in service taxable?

Yes. Leave encashed while still in service is salary and taxable in full. The exemption applies only to encashment on retirement or leaving.

Should the divisor be 26 or 30?

It depends on the leave policy, standing orders or appointment letter; neither the Income-tax Act nor the labour codes fix it for the payment. Dividing by 26 gives a higher amount. For the tax limit on leave to credit, the average monthly salary is divided by 30.

Is the ₹25 lakh limit per employer?

No. It is a lifetime limit. Any exemption claimed on leaving an earlier employer reduces what is left for later employers.

Sources