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Leave Encashment Rules For Private Company

Leave Encashment Rules For Private Company (2023)

The country’s labor laws maintain leave encashment rules for private company to ensure a certain amount of paid leaves for every salaried employee. The amount of money an employee receives in return for the unused leaves provided by their employer each year is known as the “leave encashment.”

Every salaried employee in India is entitled to a certain amount of paid leaves from their employer under the country’s labor rules. The number of paid leaves varies from business to business. Several organizations can roll over paid leaves if they are not used all at once. When an employee retires, leaves the company, or stays on the job, they may use the remaining paid leave.

What is the policy for leave encashment?

The idea of leave encashment is applicable if an employee quits with unused vacation time; in this case, they might get compensation for that time. Although it is constant for government employees, each organization determines the amount independently. The leave encashment rule covers all regular employees of a certain company.

If there are any government contingent employees, they will be paid per the government’s leave encashment formula. When employees are ready to retire or leave their job, they can take or claim their leave encashment. According to certain plans, the employees may roll over unused vacation days to the following calendar year.

Both earned (EL), and half-pay (HPL) leaves are combined in the calculation.

The number of days that may be redeemed for leave is capped at 300, and only the first 30 days of each month are counted. So, when 300 days are divided by 30, the result is 10 months. The leave is encashed on the most recent basic salary and dearness allowance (DA).

Encashment of earned leave that employees get upon retirement from employment: If any leave is left for an employee to spend, he may encash the uncovered portion of the earned leave.

If there are still vacation days to spend or unpaid leave credits when an employee quits from their position, they will be awarded a leave encashment adjusted compensation.

When they are fired from their job: Workers who are fired or expelled from the company will not be allowed to use their vacation time. The employee will be allowed to use earned leave by the regulations in the event of a termination. If a nominee is not named, their legal kin will be compensated with the earned leave income stated for these funds.

While they’re in operation: Earned leave may be used only once each calendar year, at the employee’s discretion. In any given circumstance, the amount of leave taken out cannot exceed half of the accrued leave or 30 days of the accrued leave, whichever is less.

Several kinds of leaves

You must be aware of the many sorts of leaves, and which of them may be encashed to cash in your leaves. The following are many leaf varieties:

1. Temporary Leave

Employees most often take this kind of leave. The length varies from business to business, but a range of 7 to 10 days is often permitted. The organisation has a particular policy accessible, and the employee must tell the employer about their casual leave, including the length of time and the date they plan to return. Your leave will be qualified for monetary encashment if this is approved.

2. Leave of Privilege

A privileged leave can be taken by an employee if advance notice is given and it is approved. While the rules for cashing in privileged leave vary from organisation to organisation, it becomes redeemable after a certain time.

3. Medical leave

Medical leave is something that employees can use if they are too sick to work. To do this, they must let the employer know about any upcoming time off. Once these are approved, they can be paid out in left. The number of leaves that can be taken depends on the company. But long-term medical leaves don’t fit the window for cashing in leaves.

4. Sabbaticals

Employers also grant their staff members time off to further their education and get new skills. They are available via a variety of courses. These are paid leaves reimbursed by the organisation and are taken into account for leave encashment.

5. Vacation Ends

Vacation leaves are also compensated leaves; nothing is taken out of an employee’s paycheck because of them. These can also be paid for with time off.

6. Pregnancy Leave

Pregnant women can take maternity leave at any time during their employment. It could happen between 12 and 26 weeks of pregnancy. This can be made longer, but you don’t get paid for the extra time. Companies also have different rules about maternity leave. These are not good for cashing in.

How is leave encashment calculated in private companies in India?

Let’s use an example to move through the leave encashment computation.

Mr John works as a Grade I officer for a government bank. His leave balance (available for encashment) at the time of his retirement from the bank was 250 leaves.

1. Details of leaves 

Earned Leaves (EL): 250

Maximum Earned Leaves (EL) Balance: 300 (leaves are the most that may be encashed)

No leave was cashed while in service.

250 EL are authorized for redemption.

2. Recent Pay Information

Final basic salary (BP): 80,000 Indian rupees

DA rate as of January 2023: Dearness Allowance @38.92%: INR 31,136

1,11,136 Indian rupees total payments/basic salary (BP and DA)

3. Earned Leave Calculation (PL) Encashment 

PL or authorised encashment of earned leaves: 250

1,11,136 in total emoluments (BP and DA).

Encashment of EL equals (Basic Salary / 30) times the quantity of earned leaves.

= (1,11,136 / 30) x 250

= INR 9,26,133

Can a company deny leave encashment?

On April 24, 2020, India’s Supreme Court said employers could only deduct leave encashment when it is paid, not due. This decision upheld the constitutionality of section 43B(f) of the Income Tax Act, 1961. (ITA).

According to the rules for casual leave, any that aren’t used by the end of the year are automatically lost. Casual leaves that aren’t used can’t be cashed like earned or privileged leaves. They stop working at the end of the year. Casual leaves can’t be taken at the same time as earned leaves or sick days.

FAQ : leave encashment rules for private company

1. What is the maximum limit of leave encashment?

The most time off an employee can take over the course of their employment is 300 days, and that’s also the most time off they can cash in.

2. Is it mandatory to give leave encashment in India?

It is not mandatory. However, it does have tax benefits for encashed leaves.

3. Is annual leave encashment mandatory?

Not everyone has to cash in their leave. Some people want people to use their leave, while others would rather cash it in. Under the Factories Act and most Shop and Establishment Acts, it is only necessary and required to cash in your leave when you leave your job (whether resigned or terminated).

4. How many holidays are allowed in PVT LTD company?

The federal and state governments have passed legislation mandating the declaration of public holidays for workers. Employers must give their workers a certain number of paid days off each year. A state government may announce 25 holidays for the year, but you need to choose 8, 10, or 14 holidays for your business.

5. How many paid leaves are allowed in a month?

Workers have the right to two paid days off per month, which must be paid for by their employer. One month of good work is the same as four weeks or twenty-four days of work. Every worker also has the right to three paid holidays. The annual leave lasts for 15 working days.


Each company has a unique leave encashment policy. Some may have a cap on the number of years you may carry forward your remaining leave days, while others may enable you to carry over your leave balance indefinitely. You must estimate the tax you’ll have to pay during the period of encashment if your employer allows you to carry forward a lot of leaves.

The exempt amount will not be less than the true leave encashment amount if the firm has a policy that prohibits taking more than 30 days of leave per year. You’ll receive a bigger exemption as a result.

Leave Encashment Rules for private company vary according to their policies and local regulations. It is essential for employees to understand the rules and conditions for availing leave encashment benefits before they opt for it.

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