How leave encashment is calculated
When you do not use all your paid earned leave, your employer may pay cash for the unused balance. This is a standard line in a full-and-final settlement at resignation or retirement. The payout is straightforward, but the tax treatment depends on who you are and when you receive it.
The payout formula
The employer pays for each unused earned-leave day, using Basic plus DA (not gross):
The divisor of 30 is the common convention. Some employers use 26 or actual days, so pick what your company uses. HRA and other allowances are excluded.
Who pays tax, and when
- Government employee: fully exempt under Section 19 of the Income-tax Act, 2025 (earlier Section 10(10AA)(i)). No cap.
- Private, at exit: exempt up to the least of four amounts (see below). The excess is taxed at slab.
- Private, during service: fully taxable as salary in the year received. The exemption does not apply in service. You may claim relief under Section 157 of the Income-tax Act, 2025 (earlier Section 89(1)).
- Death in service: leave encashment paid to the legal heir has long been treated as not taxable in the heir's hands (CBDT Circular No. 309 of 1981).
The four-way exemption test (private employee, at exit)
The exempt amount is the least of these four limbs. Whatever is left over is added to your salary and taxed at your slab rate.
| Limb | What it is |
|---|---|
| (a) Actual received | The leave encashment your employer actually pays. |
| (b) Statutory cap | Rs 25,00,000, a lifetime ceiling across all employers. Reduced by exemption claimed in earlier jobs. |
| (c) Ten months average salary | 10 × average monthly (Basic + DA) over the last 10 months before exit. |
| (d) Cash value of leave credit | Leave credit capped at 30 days per completed year of service, reduced by leave already availed, valued at average monthly salary ÷ 30. |
Applies under both the old and the new tax regime, so it is not gated on your regime choice.
Worked example (the sample values)
Mr A retires after 15 years. He was entitled to 35 days of leave a year (525 total) and used 200, so 325 days are unused. Final Basic plus DA is Rs 33,000 a month, so per-day salary is 33,000 ÷ 30 = Rs 1,100.
- (a) Actual received: 325 × 1,100 = Rs 3,57,500
- (b) Statutory cap: Rs 25,00,000
- (c) Ten months average salary: 10 × 33,000 = Rs 3,30,000
- (d) Leave credit: (30 × 15) minus 200 availed = 250 days; 250 × 1,100 = Rs 2,75,000
Least of the four is Rs 2,75,000 (exempt). Taxable leave encashment is 3,57,500 minus 2,75,000 = Rs 82,500, added to salary and taxed at slab. Notice that limb (d), the 30-day-per-year credit, is what binds here, not the actual 325 unused days.
The Rs 25 lakh lifetime cap, explained
The Rs 25,00,000 is not per job. It is a single lifetime ceiling that applies cumulatively across every employer. If you already claimed, say, Rs 5 lakh of exemption at an earlier exit, only Rs 20 lakh of headroom remains for any future leave encashment. If you receive leave encashment from two employers in the same year, the total exemption is still capped at Rs 25 lakh. This cap was raised from Rs 3,00,000 to Rs 25,00,000 by CBDT Notification No. 31/2023 dated 24 May 2023, effective for amounts received on or after 1 April 2023, and it remains Rs 25 lakh for FY 2026-27.
What the labour codes changed (from 21 November 2025)
The tax rules above did not change, but the right to encash leave did, for workers covered by the OSH Code, 2020:
- Annual leave accrues at 1 day for every 20 days worked, once you have worked 180 days in a calendar year (down from 240).
- Up to 30 days can be carried forward. Leave above that can be encashed at the end of the calendar year.
- Unused leave is paid out when employment ends by resignation, retirement, retrenchment or termination.
- Leave encashment is paid on wages as defined in the labour codes, so a structure with a very low basic may see a higher rate once allowances above 50% of pay are added back.
Use the earned leave calculator to work out your balance first.
Is leave encashment taxable on resignation?
For private employees, leave encashment at resignation or retirement is exempt up to the least of four amounts: the amount received, 25 lakh rupees (lifetime), ten months of average salary, and the cash value of leave credit at 30 days per completed year of service. The rest is taxed as salary. From 1 April 2026 this is in Section 19 of the Income-tax Act, 2025 (earlier Section 10(10AA) of the 1961 Act).
Is leave encashment tax-free for government employees?
Yes. Leave encashment received by Central or State Government employees on retirement or resignation is fully exempt, with no upper limit. This carried over into Section 19 of the Income-tax Act, 2025.
What is the leave encashment exemption limit in 2026-27?
25 lakh rupees for non-government employees. It was raised from 3 lakh rupees by CBDT Notification No. 31/2023 for amounts received on or after 1 April 2023, and the same limit applies under the Income-tax Act, 2025 for tax year 2026-27.
Does the 25 lakh rupee limit reset for each job?
No. It is a lifetime ceiling shared across all employers. Exemption claimed at an earlier exit reduces what remains, and payments from two employers in the same year still share one 25 lakh rupee limit.
Does the exemption apply under the new tax regime?
Yes. The leave encashment exemption on retirement or resignation is available under both the old and the new tax regime.
Is leave encashment taxable while I am still in service?
Yes. Encashment during service is fully taxable as salary in the year you receive it. If it pushes you into a higher slab, you can claim relief under Section 157 of the Income-tax Act, 2025 (earlier Section 89(1) of the 1961 Act).
What salary is used, gross or basic?
Basic pay plus DA (to the extent it counts for retirement benefits), plus commission fixed as a percentage of turnover. HRA and other allowances are excluded. For the tax test, average salary means the average of the 10 months before you leave.
Do the new labour codes change leave encashment?
For workers covered by the OSH Code, 2020 (in force 21 November 2025), leave above the 30-day carry-forward limit can be encashed at the end of the calendar year, and unused leave is paid out on resignation, retirement or termination. The income-tax exemption rules are unchanged.
Sources
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Disclaimer: This calculator provides an estimate for general guidance only and is not legal or financial advice. Your actual leave encashment and tax depend on your employment terms, company policy, and total income. Confirm whether your DA forms part of retirement benefits with your employer.