What is the Leave Encashment?
Leave encashment pays you for accumulated unused leave. Taxation depends entirely on when you take it: encashment during employment is fully taxable, while encashment on retirement or resignation enjoys a substantial exemption.
For non-government employees the exemption is the least of four limits, capped at ₹25 lakh (raised from ₹3 lakh in 2023). Government employees receive full exemption.
Formula & worked example
The exemption is the least of:
2. ₹25,00,000 statutory cap
3. 10 months' average salary
4. Cash equivalent of leave earned (30 days per year of service)
Worked example: ₹70,000 monthly basic, 120 unused days, 15 years of service. Per-day salary is ₹2,333, so gross encashment is ₹2,80,000. Ten months' salary is ₹7 lakh and earned leave allows 450 days — so the least is the actual ₹2.8 lakh, making it entirely tax-free on retirement.
How to use this leave encashment calculator
- Enter monthly basic plus DA; the per-day rate uses a 30-day month.
- Enter accumulated unused leave days.
- Enter total years of service — this caps the leave that qualifies.
- Select whether encashment is on exit or during employment.
Smart tips
- Encashing leave during employment is fully taxable — timing it with retirement can save lakhs.
- The ₹25 lakh exemption is a lifetime limit across all employers, not per job.
- Most companies allow accumulation of only 30 days a year; check your policy before assuming a large balance.
- Government employees receive complete exemption on leave encashment at retirement.
Frequently asked questions
Is leave encashment taxable?
During employment, fully taxable. On retirement or resignation, non-government employees get an exemption up to ₹25 lakh subject to four limits; government employees are fully exempt.
How is leave encashment calculated?
Monthly basic plus DA divided by 30 gives the per-day rate, multiplied by unused leave days.
What is the maximum leave encashment exemption?
₹25 lakh as a lifetime limit for non-government employees, raised from ₹3 lakh with effect from April 2023.
Can I encash leave while still working?
Many employers allow it, but the entire amount is taxable at your slab rate with no exemption.
Want the theory behind the numbers? Browse the Money Blog for worked guides.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 30 Sep 2026. How we check these numbers.