Leave Encashment in India
Last updated: 13 July 2026. General explainer, not legal or tax advice.
At a glance
How leave encashment works
Leave encashment is payment for earned leave an employee has accrued but not used. Employers commonly pay it at exit as part of the full and final settlement, valuing each unused day against the employee's pay. Some also allow a yearly encashment of the balance above a set carry forward limit, so leave does not simply pile up.
Tax treatment under Section 10(10AA)
Leave encashed while still in service is fully taxable. On retirement or exit, encashment for a non government employee is exempt up to a ceiling the government notifies under Section 10(10AA), with anything above it taxable. Government employees have their leave encashment fully exempt. The exempt ceiling for non government staff has been raised in recent years, so the current figure should be checked.
Which leave qualifies
Encashment usually applies to earned or privilege leave, the kind that accrues and carries forward. Casual and sick leave are generally not encashable, though the final say sits with the company's leave policy, which should state clearly what can be cashed out and what lapses.
Encashment at exit
At exit, unused earned leave becomes a payout inside the full and final settlement, valued on the employee's pay. That makes an accurate leave balance part of a clean exit, since a wrong balance means a wrong payout and a dispute.
Encashment in the full and final settlement
At exit, leave encashment is one line inside the full and final settlement, sitting alongside the last salary, any bonus due and the notice adjustment. The unused earned leave is valued on the employee's pay and added in, so an accurate leave balance is what makes the closing figure right.
The tax on that line follows Section 10(10AA), with part exempt on retirement for non government staff and the rest taxed. Because the settlement pulls the leave balance and the pay heads from the same records, an employer that has kept those clean can produce the number without a back and forth.
Worked example
An employee leaves with 30 days of unused earned leave. Each day is valued on their pay, and the total is added to the full and final settlement. If the encashment is on retirement, part of it is exempt under Section 10(10AA) up to the notified ceiling, and the rest is taxed.
Related terms
Frequently asked questions
What is leave encashment?
Cash paid for earned leave an employee did not use, usually at exit and sometimes yearly for the balance above a carry forward cap.
Is leave encashment taxable?
Encashment during service is fully taxable. On retirement or exit, non government employees get an exemption up to a notified ceiling under Section 10(10AA), with the rest taxable.
Which leave can be encashed?
Usually earned or privilege leave. Casual and sick leave are generally not encashable, though it depends on the company leave policy.
Under which section is leave encashment exempt?
Section 10(10AA) of the Income Tax Act governs the exemption, which is full for government employees and capped at a notified ceiling for others.
When is leave encashment usually paid?
Most often at exit, as part of the full and final settlement, and sometimes annually for leave above the carry forward limit.
How is leave encashment handled at exit?
As a line in the full and final settlement, valuing unused earned leave on the employee's pay, with tax under Section 10(10AA).
Why does the leave balance matter at exit?
Because encashment is valued on the unused balance. A wrong balance means a wrong payout and a likely dispute.
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 pulls leave balances and pay heads into the full and final settlement, so encashment is calculated from the same records as the payslip.