Calculate your leave encashment payout and the tax-exempt portion under Section 10(10AA). Covers both private sector and government employees.
How Leave Encashment Works in India
Leave encashment is the payment an employee receives for unused earned leaves. The rules for taxability differ based on whether you are receiving encashment during service or at retirement/separation.
Tax Exemption (Private) = Least of:
1. Actual encashment received
2. 10 months' average salary (Basic + DA)
3. Cash equivalent of earned leave at 30 days/year of service
4. ₹25,00,000 (maximum exemption limit)
Government vs Private Sector
Central/State Government employees — Full exemption at retirement on leave encashment. No tax.
Private sector employees — Exemption is the least of the four conditions above. Any excess is taxable as salary income.
During service (all employees) — Leave encashment received without retirement or resignation is fully taxable. No exemption applies.
Important Notes
The ₹25 lakh cap (revised in Budget 2023 from earlier ₹3 lakh) is a lifetime limit — if you receive leave encashment from multiple employers, the total exempt amount cannot exceed ₹25 lakh.
DA (Dearness Allowance) is included in the base for calculating encashment but not all DA components qualify. Check with your HR department for the exact DA that forms part of the retirement benefit calculation.
Frequently Asked Questions
Leave encashment during service is fully taxable for all employees. At retirement or resignation, the exemption under Section 10(10AA) applies. Government employees get full exemption. Private sector employees get exemption up to ₹25 lakh (revised in Budget 2023) or the calculated amount, whichever is less.
Leave Encashment = (Basic Salary + DA) ÷ 26 × Number of Earned Leaves. The number of working days in a month is taken as 26 as per practice.
Government employees can accumulate and encash up to 300 days of earned leave at retirement. For private sector employees, it depends on company policy, typically 30 days per year of service with a maximum of 240–300 days total.
Yes, many companies allow encashment of a portion of earned leaves each year. However, any such encashment during service is fully taxable as part of salary income — no exemption is available.