Anuraadhaa Started The Discussion:
Hi Folks,

I'm in process on making Leave Policy of our Company, I have few queries..

1. Is it mandatory to Leave encashment to employees during their full and final settlement ? or Is that balance leave adjusted towards the notice period?

2. What happens to leaves balance which remain after adjustment of notice period?

3. Is it mandatory to give 5% of basic pay during full and final settlement even if the company is IT service provider?

Will appreciate advice and help from Rajat and Ajmal too in this matter.


Posted 21st September 2005 From India, Pune
Hi Anu,

Leave encashment can be done for only the Earned / Previlege / Annual leave that the company provides to the employee and not on the Sick or casual leave. During full and final settlement it is mandatory that the leave be encashed.

Balance leave can also be adjusted towards the notice period the balance leave needs to be give by way of encashment to the employee.

If u r preparing the leave policy u can state in that the upper limit of the days that can be carried over. That is in the cas of our company we give employees 18 days of Earned/Previlege/Annual leave every calender year and this leave can be accummulated upto 36days that is for 2yrs and if it is not encashed before completion then the 1st yr leave is lapsed. At the time of encashment also we donot encash 100% of the leave balance only upto 70%of 36days are taken and the working is done on the basic salary of the employee.

It is not mandatory to give 5% of the basic pay at the time of full and final settlement, U can incorporate the terms in the appointment letter that u issue to the employees as such that in case the stipulated notice period is not being served by the employee then there could be deductions done on the basic salary.

Hope the above servers ur purpose.

Posted 21st September 2005 From India, Madras
Hi Vani, Thanks for giving me this info. Hope to interact often with you in this forum. :) Regards Anu
Posted 22nd September 2005 From India, Pune
Dear Anuradha

Encashment of Earned Leave / Privileged leave is mandatory under Factory act and rules framed there under. If your organisation falls out of the preview of Factories Act, then this becomes discretionary to encash the earned leave balance at the time of termination of contract of service by either side.
Currently almost every organisation is following theory of making payment against the balance of leave at the time of termination of service contract between employer and employee.

To promote this practice even Indian Income Tax Act has provide exemption on the amount thus received by an employee at the time of resignation or retirement from the employer. The limit for exemption is 3 lacs of rupees and an employee can accumulate the earned leave upto 300 days. Even all the government servants are entitled to leave encashment against the earned or privilege leave.

While making leave policy for your organisation you can take this aspect into consideration.

Earned leave can be adjusted against the short notice. But from the ITax point you have to calculate both values i.e value of leave to be encashed and amount to be recovered against the short fall in notice period. So in overall this leave can not be adjusted against the short notice.

Casual leave by its nature can not be adjusted against the short notice , same is the case of Sick leave.

There is no fix criteria for encashment. Some organisations pay on basic wages/pay , some on gross monthly salary. Even some of the organisations pay encashment on gross salary while considering month for 26 days. Again it is philosophy of the organisation to encash.

Under factories act , a worker is required to be paid on the gross salary basis.

I hope this answers some of your queries.


Anil Anand
Posted 28th September 2005 From India, New Delhi
Hi Anil, Thanks a lot for your inputs, this would help in making leave policy in my company. Regards Anu
Posted 30th September 2005 From India, Pune
I want to know calculation of leave encashment And process involved in leaving the company. Please mail all the details on my email id: i;e
Posted 24th July 2007

1. It is mandatory to encash leave balance standing to employee's credit as on the date of his/her last working day. Leave balance cannot be adjusted towards notice period.

2. Leave encashment is calculated as below

basic divided by 30 x no of leave balance.

Note : If you adjust leave against notice period, then the employee will get all monthly salary components. For e.g. if an employee has 90 days leave to his credit and if he gives one month's notice then the company would end up paying him 2 full month's salary (loss to the compnay)


Posted 24th July 2007 From India, Bangalore
As per Factories Act Annual Leave Encashment Calculation ought to be done on the basis of Monthly Pay Drawn by the employee during the Preeceding Month and should be divided by 26 not 30. The rule is very clear about EL but CL is very confusing as if the employee who has not availed his CL during the preeceding year and neither has encashed it what should be done.
Posted 15th October 2007
Dear All Please note that the Leave encashment must be on gross salary not on basic. It is wrong to calculate the Leave encashment on basic salary. Always Nirmal Kumar Sahu
Posted 16th October 2007 From India, Bangalore
Hi Vani,

I read the quote below given by you to Anu. I request you to help me out in the similar issue.

We worked in dealership, wherein the management had a practice of encashing the leaves at the time of full & final Settlement. However, the management was changed(the Jt. Managing director's sister took over as Director). She suddenly stopped the prctive without issuing the notice to Labour court for non-encashment of leaves to the left employees.

We are around 25-30 employees whose leaves has to be encashed which falls around 30-120 days of Earned leaves.

I want to know as you mentioned that it is mandatory that leaves has to be encashed during final settlement accordin to Factories Act & shop & establishments act.

1. What action can we take against this management. we are in process of shooting letter for non-payment of the earned leaves as its been a years time that we have resigned from the organisation.

2. How many leaves can be encashed? Many employees have a balance of 120-150 earned leaves also as they had been associated with the organisation for 10 years & more.

I would appreciate if you can help us in this matter.

My mail id is

Posted 23rd June 2008 From India, Mumbai
Can some one help me . Recently I received final settlement from my X-employer. There is Leave enachment of Rs 18000/- (approx) and also notice period adjustment of 13000/- (approx) hence my received amount is only 5000. But my x-employer has computed a tax sheet & in that he has mentioned a amount of 18000 towards leave encashment And he told that they can't mention notice period adjustments of 13000/- in computation sheet( Form 16). Now i endup in paying extra tax for 18000 since its decalred as income (though i received only 5k). Can someone help me about where & how to declare notice period adjustment of 13K while filing returns
Posted 10th July 2008 From India
Dear Anuradha
Leave encashment is applicable only on PL/EL.
It can be adjusted against the notice period of the employee, who has resigned
Balance leave (after adjusting against the notice period) can be encashed
Posted 10th July 2008 From India, Madras
hi all, Sorry to say that I am really confused on going through ths discussion. I am new to Hr and donno much.. Can anybody just suggest me the correct answer. Neha
Posted 11th July 2008 From India, Calcutta
I would seek reply from Babulalma

As per Factories Act Annual Leave Encashment Calculation ought to be done on the basis of Monthly Pay Drawn by the employee during the Preeceding Month and should be divided by 26 not 30. The rule is very clear about EL but CL is very confusing as if the employee who has not availed his CL during the preeceding year and neither has encashed it what should be done.

Can you please let me know where it has been mentioned in Factories Act?
Posted 14th July 2008 From India, Bangalore
hello Anil,

I was just going through your was very informative.but I am still confused regarding two points:

Can EL(S) be adjusted while serving the notice period?

What is this theory of 5% of basic pay? is it that instead of encashing the remaining leaves, 5% of the basic amount is paid?

It would be good if you could throw light on these issues.

Thanks and regards,

Posted 14th July 2008 From India, Delhi
May I Ask You :
1. Does The Educational Institute Falls Under The Factory Act.
2. Where Is This Mentioned That The Balance Leave Should Be Encashed On Last Working Day And Cannot Be Adjusted Towards The Notice Period.


Posted 20th October 2008 From India, Jaipur


Leave encashment to be done as per the rules Basic + DA wheather this is under EPF or under IT Act. In the case of establishment covered under the Factories Act, basis will be the Gross Wages and accordingly the calculations may vary.

Some points to be remembered:

1. Leave encashment is exempted to an extent on resignation from the services as per below:
a. Actual amount of leave encashment (Based on last months Basic + DA/30*Actual Leaves in balance)
b. Rs 300000.00
c. 10 Months average (just preceeding to date of leaving) salary
d. Cash equivalent of the leave salary in respect of the period of earned leave to the credit of the employee at the time of retirement (This has to be taken for the full year basis not part of the year of service will be considered)

2. If Mr. A has left the job after a service of 2 years and 6 month; the encashment will be as below:
A. Mr. As Basic Salary : Rs 15000.00 at the time of leaving (Basic 15000.00 HRA 7500 Conveyance 800.00 total Gross Salary 23300.00)
B. Mr. As service with the current employer: 2 Years 6 Months
C. Leaves in Credit 45 Days
D. Leaves benefit available: 20 Leaves per year

Encashable amount:

Rs 15000.00/30*45 Days = Rs 22500.00

Tax Benefit (on leaving the service)will be least of below:

1. 22500.00
2. 300000.00
3. 10 Months average Salary (15000*10 Months/10 Months = Rs 15000.00) 15000.00*10 = Rs 150000.00
4. 2 Years (no part of the year considered; in our case 6 months service ignored)*20 Days/30 Days30*23300 = Rs 31067.00

Therefore the amount paid Rs 22500.00 is
A. Fully exempt from tax and
B. Hence shall be considered in tax computation u/s 10(10)(A) and
C. This encashment do not attract the deduction of PF.

Some Points are very important:
1. Basic Salary + DA
2. Averaging of Basic Salary + DA
3. Encashment to staff and implication of income tax

In case of difference of opinion;
Llet us know the sectionwise reference and treatment of the above.
Posted 24th November 2008 From India, Jaipur
Hi Sandeeptol,

In your case, the treatment done by your employer is seems to be correct. Rs 18000.00 is the encashment of leaves which is your income and hence to be included in your income from salary. Whereas the sattlement for the notice pay will not be considered as far as the computation is considered.
Posted 24th November 2008 From India, Jaipur
In which clause of Factories Act it is metnioed that encashed should be done on gross salary salary ? Should we devide the Basic/Gross whatever with 26 or 30 days ?
Posted 19th December 2008 From India, Delhi
Hi... I have a doubt here, it is mandatory to deduct 4 days of PL for unclaimed LTA during FFS. Pls revert....
Posted 20th December 2008 From India, Madras
Hi, Leave encashment should be in Gross salary only. Not in the BASIC. Regards Senthil Kumar M
Posted 9th June 2009 From India, Bangalore
Hi All,

If one employee resigns in between the month(15th), we gave him full and final settlement.

After that, next month when doing payroll process , can we have to process for the resigned employee or not.

if we are not process for the particular employee, in reports the employee information wont come.

pl. sugggest your opinion.

I will be very thankful to you all.

Thanks & Regards

Senthil Kumar M
Posted 1st July 2009 From India, Bangalore
Kindly note that leave encashment should be count on Basic + DA if applicable, please refer The Factories Act, 1948 chapter VIII, page 40 for more details. Thanks Ashok
Posted 1st July 2009
Dear Senthil,

Once employee resigns in any month on any date and full and final have been made there is no requirement to process payroll but you must have HR package then you can see that person in MIS as and when required.
Posted 1st July 2009

It depend on daily working or fixed basis if you have workmen and there is an agreement then as per terms decided, but as per process most of the cases will be 30 days count because you get sundays paid even though you have not work.

Posted 1st July 2009
Dear Haripriya, Please d’nt misguide the people when we do not know about the subject or matter there is no such rule been seen, if yes kindly provide supportive. Thanks Ashok
Posted 1st July 2009
Dear Nirmal,

if v ll calculate the leave encashment on G.Salary then it would become a huge amount of F&F, which will increase the attrition rate also. So, i think as per the standard form of calculating the F&F is better which is based on Basic Salary..

Posted 21st February 2010 From India, Kota

I would like to know the calculation for this.
an employee left service on 31.07.2010 and he is also having 18 Earned leaves at his credit and he has given one month notice.

Please enlighten me the shall i consider Earned Leave of this employee from 01.01.2010 to 31.07.2010 or 31.08.2010 (i.e: 10 leaves)

its urgent kindly reply

Posted 5th August 2010 From India, Mumbai
I want an help regarding encashment/
Can a company make a policy "that leave balance will not be encashed if, there is short notice". I had paid for short notice period but did not received balance leave encashment to my credit at the time of leaving the organisation. My organisation is based out of Mumbai.
Please provide me legal guidance.
Viral Shah
Posted 2nd September 2010 From India
If person joined on .1-4-2008. In our co. 21 days PL can take. person is resiging from 1-11-2010. I have to calculate d balance PL as on resign date. How do i calculate d balance pl. I want to d full n final settlement. (6 days leave taken in 2009.

Please assist.


Posted 27th October 2010 From India, Mumbai


Found This Useful? +Vote Up This Via Google.  

Why Vote? User validation is extremely important for good content to prosper.
Disclaimer: This network and the advice provided in good faith by our members only facilitates as a direction towards the actions necessary. The advice should be validated by proper consultation with a certified professional. The network or the members providing advice cannot be held liable for any consequences, under any circumstances.

About Us - Advertise - Contact Us - RSS   On Google+  
Copyright 2016 Cite.Communities (CiteHR.Com) User contributions are owned by the contributor.
Privacy Policy | Disclaimer | Terms Of Service
Facebook Page | Follow Us On Twitter | Linkedin Network