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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.
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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.

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
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)

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.
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
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

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
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
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

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