How leave encashment is calculated
Leave encashment converts unused earned leave into cash. Government employees are paid on the basis of the pay and dearness allowance last drawn, while private employees follow their company leave policy within the limits of Section 10(10AA) of the Income Tax Act.
Step 1 — Determine emoluments
Add last drawn basic pay and the dearness allowance payable on it. Other allowances such as HRA and transport allowance are not counted for encashment.
Step 2 — Convert to a daily rate
Emoluments are divided by 30 regardless of the number of days in the month, giving a uniform per-day rate for encashment.
Step 3 — Multiply by eligible leave days
Earned leave up to a maximum of 300 days is encashable at retirement or superannuation. Half-pay leave can be added to make up the 300-day limit where earned leave alone is short.
Step 4 — Apply tax treatment
For government employees the entire amount is exempt from tax. For private employees the exemption is the least of actual encashment, ₹25 lakh, ten months' average salary, or the cash value of leave at 30 days per year of service.