Hr Professional
Kritarth Consulting
Spl Educators Posh Programs
Arun Kumar Maitra
Presently Working As Company Secy. In Old
Employee Relationship, Grievance Handling,
Anurag Jain
Hr Manager
Human Resources
Nirmal Kumar Sahu
Operations, Process, Projects
Middle Management
Manager Hr & Admn
Executive Hr
Incharge Hr
Senior Executive - Admin
Hr Professional
Recruitment + Documentation + Sap Hr Professional
+6 Others

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.
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.

21st September 2005 From India, Madras
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
28th September 2005 From India, New Delhi
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)

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.
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
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

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
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
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
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?
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,
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.

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.
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.
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 ?
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....
20th December 2008 From India, Madras
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
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
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.
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.
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
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..
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
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
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.
27th October 2010 From India, Mumbai
Can anyone refer leading case laws on Leave encashment and notice pay in case of pre-mature termination of contract?
16th August 2012 From India, Delhi

our company is construction - bangalore based company. here one employee has taken extra 1.5 days leave that extra leave we have deducted from her full and final settlement because she is not having any pl balance. but out accounts department is telling if any leave deduction is there pls change last month salary statement accordingly her settlement amt ie., less 1.5 days extra. then it will be matching. as per our directors instruction we have not deducted any amount for her notice period, apart from that she has worked 8 days for aug'12, that 8 days we had shown in salary statement. our finance dept is saying their record payable amt has shown agus 8 days salary (that was on hold) that amt we have released along with her settlement time in that 1.5 extra deducted. That is why they are telling any additions we can do deletion not possible so kindly the change the salary statement for aug'12 (instead of 8 make it 6.5) . as per hr records no. of present how we will show less 1.5 days. kindly advice me regarding this.
29th September 2012 From India, Bangalore
Hi All,
Good Morning!!
I work for manufacturing industry. I need suggestion on CL & SL encashment at the time of separation or resignation from the services.
We use to encash EL, CL & SL unutilized balance at the time of full and final settlement, recently our Company has changed leave policy and decided to encash only EL or PL through full and final settlement, CL and SL balance will be lapsed at the time of leaving. We have informed this change to all existing employees by circular.
My question is -
This change will be applicable to all employees from circular date? Or only to those employees who has joined after 01/08/2016. E.g circular date is 01/08/2016 and employee joined on 01/01/2015 leaves organization 25/08/2016, his leaves will be enchased as per new policy or old policy?
14th September 2016 From India, Pune
In my opinion if the policy has been circulated to all employees, i will be effective for all employees. If a policy gets implemented for certain employees joining after a particular date, the policy will keep hitting back the HR again and again.
14th September 2016 From India, Madras
Dear Clarification Seeker,

Encashment of Leave namely Casual Leave is wrongdoing as Casual Leave is not earned by anyone Employed Person yet considered to offset exigencies occurring / faced by the One who avails it and thus is never a legitimate claim. C L as the title suggests/ connotes is unforseen, unplanned occurrence to meet with the event.

Likewise, Sick Leave is to be considered to cover thee period of sickness supported by an appropriate Medical Certificate issued by a Registered Medical Practioner and as such not to be accumulated to be availed in a planned manner.

The precedence / past practice was a result of some Arbitrary Decision taken in a hurry giving rise to unhelpful / restrictive Work Practice.

It is Employer's (Management's) prerogative to take corrective action as soon as possible and be ready and willing to deal with dissension. Repeating Mistakes is no Management nor Healthy Employee Relations nor sustainable. Let us know if your Establishment / Organization has certain other drags for we are ready to HELP.

For further clarity,you may contact

Kritarth Team,
Pune Mobile Advisory, Bengaluru Service Center /
91 9560 453 756

14th Sept 2016
14th September 2016 From India, Delhi
Hello all
Me and employee on the same situation as just resigned from manager role as administrative staff in factories act company. My service is 15 yrs and 8 months and my gross salary is 54070 and last unused leave of pl is 32 and as of Jan is 92. The thing my hr says that once resigned that all unused leave becomes zero as neither considered for waive off or encash and either serve or pay full gross.I served 36 days for which they hold salary and asked me to pay for 18 days having owing me close 80000 apart from leave. What I am supposed to do. For everything they say hr policy in oral.
11th December 2017 From India, undefined
I joined in private company on 16.05.2017 and left on 08.01.2018. I avail the leave encashment benifit as per rules.
10th January 2018 From India, Delhi
Hi Arun,
Your Co is a factory or Shops & Commercial Estt. Though you haven't completed one yr of service you will be eligible for proportionate EL/PL as per applicable law. And if you'll have unutilised leave in your leave a/c when you left after serving the notice period, you are entitled for leave encashment.
17th January 2019 From India, Bangalore
Get End to End Support Services for Formation of Gratuity Trust
We offer end to end online/offline paid support services for the formation of gratuity trust. Our Services includes:-
1. Specialized Support Services for preparation of Inputs for Actuarial Certificate for Value of Obligation under the Gratuity Plan to be taken from an Actuary. This Certificate forms the basis for Initial contribution to be made by the organization into the Gratuity Fund.
2. Support Services in preparation of a board resolution to be passed by the Management of the company for formation of Gratuity Trust.
3. Analytic Support for Management of the Company to take the decision about Investment of the Self Managed Gratuity Trust Investment to be Self Managed by the Trustees or It will be any Investment Service Provider.
4. Advisory Services for Investment of Gratuity Fund into Group Gratuity Schemes.
5. Legal Support Services for Drafting Trust Deed and Trust Rules as per Income Tax Rules 1962.
6. Support Services for filing an application in IT Department for Approval for the purpose of tax exemptions upon the funding as well as the interest portion.
For more detail contact us at 9211637063 or send your queries/ requirement at my email ID -
7th June 2019 From India, Delhi
Add Reply Start A New Discussion

Cite.Co - is a repository of information created by your industry peers and experienced seniors. Register Here and help by adding your inputs to this topic/query page.
Prime Sponsor: TALENTEDGE - Certification Courses for career growth from top institutes like IIM / XLRI direct to device (online digital learning)

About Us Advertise Contact Us
Privacy Policy Disclaimer Terms Of Service

All rights reserved @ 2019 Cite.Co