Leave Encashment Calculator

How Leave Encashment Calculator Works

When you leave a job with unused paid leave still on the books, many employers pay it out as a lump sum -- and depending on who you work for and how much you receive, part or all of that payout can be exempt from income tax under Section 10(10AA) of the Income Tax Act. This calculator applies the actual rules that determine how much of your leave encashment escapes tax.

Formula & Method

Government employees get full tax exemption on leave encashment at retirement, with no upper limit. Non-government employees' exemption is the smallest of four figures: the actual amount received; the statutory cap of ₹25,00,000 (raised from ₹3,00,000 in Budget 2023); 10 months' average salary (Basic + DA); and the cash equivalent of leave earned at 30 days per year of completed service. Whichever of those four is smallest becomes the exempt amount, and anything received above it is fully taxable as salary income. Daily salary throughout is calculated as (Basic + DA) ÷ 30.

Worked Example

A non-government employee with ₹40,000 Basic + ₹5,000 DA (₹45,000/month, ₹1,500/day), 320 days of unused leave, and 15 years of completed service: actual encashment is ₹4,80,000 (1,500 × 320). The four limits are ₹4,80,000 (actual), ₹25,00,000 (statutory cap), ₹4,50,000 (10 months' average salary), and ₹4,80,000 (cash equivalent, since 320 days is under the 450-day cap from 15 years × 30). The smallest is the 10-months'-average figure, ₹4,50,000 -- so ₹4,50,000 is exempt and the remaining ₹30,000 is taxable.

Frequently Asked Questions

Why is leave encashed while still employed treated differently?

Section 10(10AA)'s exemption specifically applies to leave encashed at retirement, resignation, or termination -- leave encashed while you're still actively employed (e.g., an annual "sell back your unused leave" option some employers offer) is fully taxable as regular salary income, with no exemption available at all.

Why does this calculator use four different limits instead of one simple formula?

Section 10(10AA) was written to cap the tax benefit from several different angles at once -- an absolute rupee ceiling, a salary-multiple ceiling, and a service-based accrual ceiling -- so that the exemption can't be inflated by an unusually high salary or an unusually large leave balance. Taking the smallest of all four is exactly how the law defines the actual exempt amount.

Is the ₹25,00,000 statutory cap shared across multiple employers over a lifetime?

Yes -- this is a lifetime, cumulative limit across all employers a person works for, not a per-employer or per-job allowance. If you've already claimed leave encashment exemption from a previous employer, that amount reduces how much of the ₹25,00,000 ceiling remains available for a later payout.

Why does the calculator use my entered monthly salary instead of an actual 10-month average?

The exemption rule technically uses the average of your actual salary over the 10 months immediately preceding retirement or resignation, which can fluctuate with increments or bonuses -- this tool uses your single entered monthly figure as a practical stand-in for that average, which is accurate if your salary was stable over that period but will differ if it changed significantly.