Glossary
Leave Encashment
Also known as: EL encashment, PL encashment
Leave encashment is the conversion of unused earned leave into money, computed in India almost universally as monthly basic pay plus dearness allowance divided by 30, multiplied by the days encashed. It arises annually when balances above the carry-forward cap would lapse, and at exit when the accumulated balance is settled in the full and final.
The base matters more than the formula: encashment is paid on basic plus DA, not gross, and the divisor convention (30, occasionally 26) should match the one the policy uses elsewhere. An employee with ₹40,000 basic+DA encashing 12 days receives ₹16,000 — the arithmetic is trivial once the policy defines its terms.
Accrual is the statutory layer underneath: state Shops and Establishments Acts and the Factories Act set minimum earned-leave accrual (commonly around one day per 20 worked) and carry-forward floors. Encashment beyond exit settlement is a policy benefit, not an entitlement, so the annual cap and eligibility are the employer's design choices.
Tax treatment shapes when encashment is worth taking. For private-sector employees, encashment at retirement or resignation is exempt up to a ₹25 lakh lifetime limit (raised from ₹3 lakh in 2023) under section 10(10AA) of the Income-tax Act, subject to its averaging rules; encashment while in service is fully taxable as salary.
India context
Earned-leave balances must be settled at exit as part of the full and final, and disputes almost always trace to disagreement over the balance itself rather than the formula. A day-level attendance and leave record that both sides trusted all year is what makes the settlement number undisputed.
How Workclave handles this
Workclave accrues, debits and carries forward leave from the same approved attendance record payroll uses, so the encashable balance is a number both HR and the employee have watched all year — not a spreadsheet reconciliation at exit. leave encashment calculator.
Related terms
Compensatory off (comp off) is a paid day of leave an employee earns by working on a designated weekly off, national holiday, or festival holiday. Instead of overtime pay, the employee banks an equivalent day off to take later. It is a common way Indian IT firms and agencies balance project deadlines with rest entitlements.
Read definition →Loss of Pay (LOP) is a deduction from an employee's salary for days they were absent from work without any available paid leave to cover the absence. The day is treated as unpaid, and the per-day salary is subtracted from that month's earnings. LOP is calculated from attendance data at the end of each pay cycle.
Read definition →Sandwich leave is a policy rule under which non-working days that fall between two leave days are themselves counted as leave. An employee taking Friday and Monday off under a sandwich rule is debited four days — the weekend is 'sandwiched' into the leave count — instead of two.
Read definition →Leave Without Pay (LWP) is approved leave that the employee takes when they have no paid leave balance, so the day is unpaid but authorised. Loss of Pay (LOP) is the resulting salary deduction for any unpaid day, whether authorised or not. In practice LWP is the leave type and LOP is the payroll effect, and many organisations use the terms loosely.
Read definition →