It is mostly calculated on last drawn Basic Pay, but can vary from one Organisation to another.
If the employee falls inside the purview of any Act like Factories Act, Shop and Establishment Act, Mines Act, etc. which has Leave Encashment provisions then that rule must be followed.
Whats is your company leave policy on it? It can be either calculated on the monthly gross salary or on your monthly basic salary!
Lets take an example :D
XYZ is earning 10,000p.m S/he is entitled to have 24 days as PL in a year, which is 2 days a month. At the end of year she has 20 days PL left and s/he would like to encash it! Now again what is stated in your policy? What is maximum number of days that a person can encash his/her leave. Lets take it as 15 days a year!
Now the calucations:-
Gross Salary pm - 10,000
PL left in year 2006 - 20
No. of days of encashment - 15
Leave Encashment Amt - 10,000*15/30 = 5000 INR (TDS applicable)
I hope that this has helped you :)
I just want to comment that the calculation of 15 days of paid leave enchashment done above is incorrect. I am in the HR dept. of a reputed University in Abu Dhabi and I check the Pay Roll calculations each month.
15 days paid leave salary should be calculated as follows:
= (10,000 x 12) / 365 = per day salary x 15 days.. therefore,
= (10,000 x 12)/ 365 = 328.77 x 15 days = 4,931.50
We cannot do 30/2 to get 15 days of pay as some months of the year have 31 days. We need to get the earned leave salary per day and then multiply it by the leave balance.
Thanks to both of you for the reply. But my problem is: my company's policy is that we encash Gross salary which comprises of Basic, HRA, Medical, Conveyance and Misc Allowance. As per my knowledge this is not the general trend followed for leave encashment. Also, if we encash full gross salary, the expenditure for company for leave encashment is huge. So I want to change it to encashing only the basic part of the salary. Please tell me what would be the pros and cons of this policy. Is it right to encash leave only on basic part of the gross salary??? And is it the last drawn basic???
The above statement is not correct. It depends from Organisation to Organisation. In statutes, the number of working days is taken as 26, which I feel is correct in view of the weekly off and smaller the denominator greater the benefit. Tell me something as per your logic you should divided by 366 (Three Hundred Sixty Six) days in the Leap Years. Do you do it?
Before looking for the pros and cons you must first realise that changing the leave pay from gross to Basic will result in reduction of Annual Earnings of Employees. Which is something an Organisation cannot do.
The first step would be to compensate the loss in earning either by introducing a new allowance or clubbing it with an existing allowance.
The next step would be to pay all leave due to all employees on gross pay till date thereby bringing the leave balance to zero.
The new policy can be introduced after the above two steps are strictly adhered to and this will ensure that there is no legal complications in future.
Hi SC :) I totally agree with you, and thanks for your support and input.
Hi Palak :) Hope you got it all clarified
All our friends in this forum have given you an optimal solution, though collectively. You were also asking about the pros and cons of regularising it.
The pros are all there, but the only con in legalising (or regularising) the leave encashment(by cheque) in your company is that according to a judgement passed as of 1st May 2005, LEAVE ECASHMENT will attract PF DEDUCTION from both sides i.e. 12% from employee's as well as employer's side.
As a HR Manager, I would suggest you to make this very clear to your employers. Look at it this way, the employees are anyways going to get the leave benefit, whether the employer pays by cash or cheque, but due to regularisation of this HEAD, the employer attracts an additional liability which turns out to be a recurring liability FROM THE DAY YOU ENFORE IT till time.
Best of luck.
Bhavesh B. Agrawal