Leave Encashment Calculator India 2026
Calculate your exact leave encashment amount and tax exemption under Section 10(10AA). Covers private sector ₹25 lakh limit and government employees' full exemption at retirement.
Encashment Parameters
Section 10(10AA)Based on 60 unused days × ₹1,667 daily wage
Computation Breakdown
Leave Encashment in India 2026: Full Guide on Calculation, Tax Exemption & Rules
A comprehensive guide covering the formula, Section 10(10AA) tax rules, the ₹25 lakh lifetime exemption, eligibility, and worked examples for both private and government employees.
What is Leave Encashment?
Leave encashment (also called leave salary or earned leave encashment) is the monetary compensation an employee receives for unused or accumulated paid leaves. Instead of taking those days off, the employee is paid an equivalent cash amount, calculated based on their salary.
In India, most companies provide employees with a set number of Earned Leaves (EL) per year — typically 18 to 30 days. When you do not consume all your entitled leaves during a year, the balance is either lapsed, carried forward, or converted into a cash payout. Leave encashment can happen at two distinct stages: during active service (usually subject to a company cap) or at the time of retirement, resignation, or superannuation, where the tax rules differ significantly.
Leave Encashment Formula in India
The standard formula to calculate leave encashment amount in India is:
Leave Encashment = (Basic Salary + DA) ÷ 30 × Number of Unused Leave Days
| Variable | Definition |
|---|---|
| Basic Salary + DA | Average of the last 10 months' Basic Salary + Dearness Allowance |
| ÷ 30 | Divides monthly salary into daily wage rate (standard: 30 working days/month) |
| Number of Unused Leave Days | Accumulated earned leaves at the time of encashment |
Worked Example
Suppose Rajesh has a Basic Salary of ₹60,000/month and DA of ₹0. He has accumulated 75 unused earned leaves over 15 years of service.
- Daily Wage = ₹60,000 ÷ 30 = ₹2,000 / day
- Leave Encashment = ₹2,000 × 75 = ₹1,50,000
Tax Exemption on Leave Encashment: Section 10(10AA)
The tax treatment of leave encashment is governed by Section 10(10AA) of the Income Tax Act, 1961. The tax rules differ based on whether you are a government employee or a private-sector employee, and whether the encashment happens at retirement or during service.
Government Employees
Fully tax-exempt under Section 10(10AA)(i). No upper limit. Any amount received at retirement or superannuation is completely free from income tax.
Private Sector (At Retirement)
Partly exempt under Section 10(10AA)(ii). Exemption is the least of four values. Lifetime aggregate limit is ₹25 lakh (revised from ₹3L in April 2023).
During Service
Fully taxable for both private and government employees if received while still employed. Added directly to salary income and taxed at the applicable slab rate.
The 4-Value Test for Private Employees (Sec 10(10AA)(ii))
For non-government employees, the tax-exempt portion is the least of the following four amounts:
| # | Limit / Parameter | How Calculated |
|---|---|---|
| 1 | Actual Leave Encashment | Amount actually received from employer |
| 2 | ₹25 Lakh Statutory Ceiling | Lifetime aggregate limit across all employers (effective Apr 1, 2023) |
| 3 | Cash Equivalent of Unused Leave | (Avg Daily Salary) × Encashable leave days [capped at 30 days × years of service] |
| 4 | 10-Month Average Salary | (Basic + DA) × 10 months immediately before retirement/resignation |
Leave Encashment Rules for Government Employees
Central Government employees accumulate Earned Leave (EL) at the rate of 2.5 days per month, i.e., 30 days per year. The maximum EL that can be accumulated is 300 days. At superannuation or voluntary retirement, the entire EL balance (up to 300 days) is encashed tax-free.
Accumulation Rules
- Earned at 2.5 days/month = 30 days/year
- Maximum accumulation: 300 days
- Half Pay Leave (HPL) can be combined subject to conditions
- Leave beyond 300 days lapses automatically
Encashment Rules
- Fully exempt from income tax on retirement
- No ₹25L ceiling (unlike private sector)
- Calculated on Last Pay Drawn (Basic + DA)
- Also available during LTC (Leave Travel Concession)
New ₹25 Lakh Exemption Limit – Effective April 1, 2023
A major update was introduced via Finance Act, 2023 (Budget 2023). The maximum tax-exempt leave encashment for non-government employees was increased from ₹3,00,000 (set in 2002) to ₹25,00,000, applicable from FY 2023-24 onwards.
Frequently Asked Questions (FAQ)
What is the formula for calculating leave encashment in India?
The standard formula is: Leave Encashment = (Basic Salary + DA) ÷ 30 × Number of Unused Earned Leave Days. The average of Basic + DA for the last 10 months is used to compute the daily rate for private employees at retirement.
What is the maximum tax exemption on leave encashment for private employees?
Private sector employees can claim up to ₹25,00,000 (₹25 lakh) as a lifetime tax exemption under Section 10(10AA) of the Income Tax Act. This limit was revised from ₹3 lakh to ₹25 lakh effective April 1, 2023.
Is leave encashment fully tax-free for government employees?
Yes. Central Government and most State Government employees receive full tax exemption on leave encashment at superannuation or retirement under Section 10(10AA)(i). There is no monetary ceiling applicable to them.
Is leave encashment during service taxable?
Yes, completely. Leave encashment received while still in employment (i.e., not at retirement) is fully taxable as salary income for both private and government employees. The Section 10(10AA) exemption applies only at retirement, resignation, or superannuation.
What is the 30-day per year cap in the 4-value test?
Under Section 10(10AA)(ii), the cash equivalent of leave is calculated based on a maximum of 30 earned leave days for every completed year of service. If an employee has 15 years of service, the maximum encashable days for tax computation is 450 days (15 × 30), regardless of the actual unused leave balance.
Is the ₹25 lakh exemption applicable under both Old and New Tax Regimes?
Yes. The leave encashment exemption under Section 10(10AA) is available under both the Old Tax Regime and the New Tax Regime (Section 115BAC). It is one of the few exemptions that are allowed in the New Regime.
What happens to leave encashment if an employee dies in service?
If an employee dies while in service, the leave encashment amount paid to their legal heirs or nominees is fully tax-exempt under Section 10(10AA). This applies to both private and government employees and is not subject to any monetary limit.
How is the "10-month average salary" calculated for the 4-value test?
The 10-month average salary is computed as: (Average Monthly Basic Salary + DA) × 10. The average is based on the Basic + DA received in the 10 calendar months immediately preceding the date of retirement or resignation. Commissions based on turnover percentage are also included if applicable.
Conclusion
Leave encashment is a valuable financial benefit that, when properly planned, can result in a substantial tax-free payout upon retirement. For private sector employees, understanding the 4-value test under Section 10(10AA) and the lifetime ₹25 lakh limit is critical to maximizing your tax savings. For government employees, the benefit is even more straightforward — the entire amount is fully exempt. Use our Leave Encashment Calculator above to instantly compute your exact encashment value and determine the tax-exempt and taxable portions based on your actual salary and leave balance.
Rohit Kushwaha
Software Engineer & Creator of mysalarycalculator.in
I'm Rohit Kushwaha, a Software Engineer with 3+ years of experience in developing web applications and digital solutions. By combining technology with practical financial tools, I built mysalarycalculator.in to help Indian professionals easily understand their salary, taxes, EPF, gratuity, and take-home income.
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