Earned Leave and Privilege Leave
Last updated: 13 July 2026. General explainer, not legal or tax advice.
How earned leave works
Earned leave, also called privilege leave, is paid leave an employee builds up with service, often a set number of days for each period worked. Because it is earned, it is the leave that typically carries forward from year to year, up to a cap, and its balance can be encashed. It is meant for planned time off, so notice is usually expected.
Carry forward and the cap
Unlike casual leave, earned leave does not simply lapse each year. It accumulates up to a limit set by the state Shops and Establishments Act or the Factories Act and the company policy. Above that cap, many employers either lapse or encash the excess, which is why a yearly review of balances is common.
Encashment and exit
Unused earned leave becomes a payout when an employee leaves, valued on their pay inside the full and final settlement, and some employers also encash it annually. The tax on that encashment is governed by Section 10(10AA), which exempts part of it on retirement for non government staff.
Earned, casual and sick leave
The three differ by purpose. Earned leave builds with service, carries forward and can be encashed. Casual leave is for short personal needs and usually lapses. Sick leave is for illness. Getting the labels right in policy avoids arguments at exit.
Earned leave at exit and encashment
Earned leave is the leave that follows an employee out the door. Whatever balance is unused at exit is encashed in the full and final settlement, valued on their pay, so the accrual and the balance need to have been tracked correctly all along. A balance that was guessed at, or never updated, becomes a dispute at the worst moment.
The tax on the encashment runs through Section 10(10AA), with part exempt on retirement for non government staff. Keeping the leave ledger current through the year is what makes the exit calculation a lookup rather than an argument.
Worked example
An employee accrues earned leave through the year and uses only part of it. The remaining days carry forward to the cap, and anything above the cap is encashed. When the employee eventually leaves, whatever earned leave is still unused is paid out in the settlement.
Related terms
Frequently asked questions
What is earned leave or privilege leave?
Paid leave an employee accrues with service. It usually carries forward up to a cap and can be encashed when unused, unlike casual leave.
Can earned leave be encashed?
Yes, commonly at exit as part of the full and final settlement, and sometimes annually for the balance above the carry forward limit.
What is the difference between earned leave and casual leave?
Earned leave builds with service, carries forward and can be encashed. Casual leave is for short personal needs and usually lapses each year.
Is there a limit on carrying forward earned leave?
Yes. A cap is set by the applicable Act and the company policy, and leave above the cap is usually lapsed or encashed.
Is earned leave encashment taxable?
Encashment in service is taxable. On retirement, non government employees get an exemption up to a notified ceiling under Section 10(10AA).
What happens to unused earned leave when I leave?
It is encashed in the full and final settlement, valued on your pay, so the balance must have been tracked correctly through your service.
Is earned leave encashment at exit taxable?
Encashment in service is taxable. On retirement, non government employees get an exemption up to a notified ceiling under Section 10(10AA).
Sources and official references
The rules and figures on this page trace to the official sources below. Statutory amounts and dates change, so confirm the current number on the source before you act on it.
How Offrd helps
Offrd tracks earned leave accrual and balance, then carries it into the full and final settlement for encashment.