How leave encashment is calculated in India
The formula, a worked example, and how much of it is tax-free when you resign or retire. Then run your own numbers in the calculator.
Leave encashment, step by step
The quick answer
Most employers pay unused earned leave at Basic + DA for each day. Your leave policy sets the divisor and any cap on how many days you can carry or encash. Leave encashed while you’re still employed is taxed as salary in full; leave encashed when you resign or retire is partly tax-free.
To run your own numbers, use the leave encashment calculator.
A worked example
You have 300 days of leave, Basic + DA of ₹50,000 a month, your policy divides by 30, and you’re leaving after 5 years of service.
Encashment = 300 × ₹50,000 ÷ 30 = ₹5,00,000.
The four limbs of the tax test are:
- actual amount: ₹5,00,000;
- the limit: ₹25,00,000;
- 10 months’ average salary: 10 × ₹50,000 = ₹5,00,000;
- leave credit: 150 days (30 × 5 years) × ₹1,666.67 = ₹2,50,000.
The lowest is ₹2,50,000, so that much is tax-free and the other ₹2,50,000 is taxed as salary. The leave-credit limb is the one that bites here: 5 years of service count at most 150 days, even though you are paid for 300.
Divisor 30 vs 26, and Basic + DA vs gross
Your leave policy says which divisor applies; 30 is most common. Dividing by 26 gives a higher daily rate, so a bigger payout. On the same example, ÷ 26 gives 300 × ₹50,000 ÷ 26 = ₹5,76,923.
The tax-free part doesn’t move with it. The leave-credit limb always uses your average daily salary as monthly ÷ 30, so it stays at ₹2,50,000: ₹2,50,000 is tax-free and ₹3,26,923 is taxed.
Most policies pay on Basic + DA; a few pay on gross. For the tax test, “salary” means Basic + DA (where DA counts for retirement benefits), plus any commission that is a fixed percentage of turnover, whatever your employer paid on.
Is leave encashment taxable?
While you’re employed: yes, in full. Leave encashed during service is taxed as salary.
When you leave the job (resignation or retirement): private-sector employees get part of it tax-free under section 10(10AA) of the Income-tax Act 1961. The tax-free part is the lowest of:
- the amount you actually receive;
- ₹25,00,000 (CBDT Notification 31/2023, from 1 April 2023), for your whole career;
- 10 × your average monthly salary over the last 10 months;
- your leave credit, counted at no more than 30 days for each completed year of service, × your average daily salary (monthly ÷ 30).
The leave credit in the fourth limb is the leave you earned and didn’t take. If you took leave in past years, it can be lower than your balance at 30 days a year. The calculator counts your whole balance as unused leave, up to 30 days a year.
The ₹25 lakh exemption limit
The second limb is a fixed cap: ₹25,00,000 for private-sector employees, raised from ₹3,00,000 by CBDT Notification 31/2023 with effect from 1 April 2023. It is a lifetime limit across all your employers, not a limit per job, so an exemption you claimed on leaving an earlier job counts against it.
Government vs private-sector employees
Central and state government employees’ leave encashment on retirement is fully exempt. The four-limb test and the ₹25,00,000 limit on this page are for everyone else.
Leave encashment in your full and final settlement
When you resign, leave encashment is usually one line of your full and final settlement, alongside your last month’s pay, any notice-period recovery and gratuity if you qualify. Some companies let you adjust leave against your notice period instead of paying it out, and some deduct a notice buyout from the final settlement, so read your leave and notice policy before you agree a last day.
- Notice period and buyout: exit dates, early release and buyouts.
- Notice period buyout calculator: what it costs to leave before your notice ends.
- Gratuity calculator: what you’re owed when you leave, and whether you qualify.
- Resignation letter generator: a clear letter with your last working day.
Income-tax Act 2025: what changes
The Income-tax Act, 2025 applies from tax year 2026-27 and renumbers these sections. It replaces the 1961 Act from April 2026; the leave encashment exemption carries over, but forms and Form 16 may cite a new section number in place of 10(10AA).
Sources: Income-tax Act 1961, section 10(10AA); CBDT Notification 31/2023 (Income Tax Department).
Check your own leave balance, divisor and years of service with the leave encashment calculator.
How to calculate it
- 01
Find your leave balance
Take the earned or privilege leave you can encash, in days, from your payslip, HR portal or leave policy. Check whether the policy caps how many days can be carried forward or encashed.
- 02
Take your monthly Basic + DA
Most employers pay leave encashment on Basic + DA. A few use gross pay; your leave policy says which.
- 03
Divide by 30 (or 26) and multiply by the days
Leave encashment = leave balance (days) × monthly (Basic + DA) ÷ 30. Some policies divide by 26 instead.
- 04
Work out the tax-free part, if you’re leaving
On resignation or retirement, private-sector employees take the lowest of four amounts as tax-free: the amount received, ₹25,00,000, 10 × average monthly salary over the last 10 months, and the leave credit (at most 30 days a year of service) × average daily salary.
- 05
The rest is taxed as salary
Whatever is above the tax-free part, and all of any leave encashed while you’re still employed, is taxed as salary.
Questions people ask
How is leave encashment calculated?
Leave balance in days × monthly Basic + DA ÷ 30. Some employers divide by 26. For example, 300 days on ₹50,000 Basic + DA, divided by 30, is ₹5,00,000.
Is leave encashment taxable on resignation?
Partly. Leave encashed when you leave the job, by resignation or retirement, is tax-free for private-sector employees up to the lowest of: the amount you receive, ₹25,00,000, 10 months’ average salary and the leave-credit limit. Anything above that is taxed as salary. Leave encashed while you’re still employed is taxed in full.
What is the leave encashment exemption limit?
₹25,00,000 for private-sector employees, raised from ₹3,00,000 by CBDT Notification 31/2023 with effect from 1 April 2023. It is a lifetime limit across all your employers.
Is leave encashment calculated on Basic or gross?
Most leave policies use Basic + DA. A few use gross pay; check your company’s leave policy. For the tax exemption, “salary” means Basic + DA (where DA counts for retirement benefits), plus any commission that is a fixed percentage of turnover.
Is leave encashment divided by 26 or 30?
Your leave policy decides. 30 is the most common divisor; some employers use 26, which gives a higher daily rate. The tax exemption’s leave-credit limb always uses your average monthly salary ÷ 30.
Is leave encashment tax-free for government employees?
Central and state government employees’ leave encashment on retirement is fully exempt. The limits on this page are for everyone else.
Does the Income-tax Act 2025 change this?
The Income-tax Act 2025 replaces the 1961 Act from April 2026 and renumbers its sections. The leave encashment exemption carries over, but forms and Form 16 may cite a new section number.
Leaving your job? Let’s get your dates straight.
Tell me your notice period and leave balance. I’ll work through your last day and any buyout with you, and help you list what to check in your full and final. Chat, WhatsApp or a call.