For a non-government employee, leave encashment received on retirement or leaving is exempt up to the least of: (1) the amount actually received, (2) 10 × average monthly salary of the last 10 months, (3) unutilised earned leave × average monthly salary, counting not more than 30 days for each year of service, and (4) ₹25,00,000. "Salary" is basic plus DA (where part of retirement benefits), and turnover-based commission. Government employees are fully exempt. Encashment during service is fully taxable. The exemption applies in both regimes.
Worked example
Lata resigns after 10 years. Average basic + DA over the last 10 months: ₹80,000 a month. Earned leave to her credit: 120 days. She receives ₹3,20,000.
| Limit | Working | Amount |
|---|---|---|
| 1. Actual | ₹3,20,000 | |
| 2. 10 months' average salary | 10 × ₹80,000 | ₹8,00,000 |
| 3. Leave credit × average salary | 120 days ÷ 30 × ₹80,000 (credit within 30 days × 10 years) | ₹3,20,000 |
| 4. Ceiling | ₹25,00,000 | |
| Exempt | Least | ₹3,20,000 |
Fully exempt. If she had 400 days of credit, only 300 days (30 × 10 years) would count for limit 3.
Labour Codes and year-end encashment
Under the OSH Code, leave carried forward is capped at 30 days, and the Labour Ministry's FAQs say leave beyond that is encashed at the end of the calendar year. That year-end encashment is during service, so it is fully taxable as salary; only encashment on leaving gets the section 19 exemption.
Edge cases
- More than one employer: the ₹25,00,000 limit applies in aggregate to all such exemptions over the employee's career.
- Resignation counts: the department's guidance applies the exemption on retirement "whether on superannuation or otherwise".
- TDS: compute the exempt part on exit and deduct TDS on the rest in the final settlement.
FundRaksha HR computes leave encashment from leave balances on exit and splits the exempt and taxable parts. See the leave register format.
Sources
Last reviewed: 2026-10-21. Information for Indian businesses; not legal advice.