New to HR: How Do You Calculate Leave Encashment—Daily or Based on Basic Pay?

I am very new in the HR field. Can anyone help me out with leave encashment calculation? I mean, is it a day's pay or is it calculated based on Basic pay?

Dear Aditi,

Generally, leave encashment is done based on the day's salary, i.e., basic + HRA + other allowances, but some companies calculate it based on the basic salary. In that case, it should be mentioned in their office rules or employment contract.

Regards,
Abhishek

Dear Aditi,

You have to deduct PF on the leave encashment provided to your employee.

With regards,
Anita K.

Dear,

Leave encashment is applied as per the policy of the company and calculated based on the basic salary of the employee at the time of application. If DA is applicable, then the leave encashment amount is calculated on Basic + DA divided by 30 x number of leaves applied for encashment. The number of leaves applied for encashment and the number of applications in a year are governed by the policy of individual companies.

The 12% PF is to be calculated and deposited in the PF account, with company contribution on the encashment amount, depending on the rules regarding the minimum and maximum ceilings of PF. This is mandatory at all times of leave encashment, whether through voluntary application for encashment or at the time of resignation/retiring (F&F).

Regards,
Vinmind

Dear All,

I am working with a Ltd company as Sr. HR Executive. Today, I am facing a new problem. The issue is that an employee of our company went on holiday on May 25, 2007, which was a Saturday, and returned to work on June 11, 2007, a Monday. This employee is not eligible for Earned Leave (EL) because our company policy stipulates that an employee becomes eligible for EL after 240 days of joining. Consequently, I have deducted his salary for 10 days, meaning that 10 days of the month of June have been without pay.

However, the employee argues that June 10 is a Sunday and should not be considered as part of the unpaid period since he officially rejoined the company on Monday, June 11.

I seek assistance in determining whether June 10 should be considered as a paid or unpaid day.

Regards,
R/P/Dixit

Hi Dixit,

I guess this depends on company to company. Like few IT companies which do not work on weekends (Saturday & Sunday) do not deduct pay for Saturday and Sunday. For example, if he has taken leave from Saturday and returned back to work on the following Monday, he will not be paid only for weekdays; his salary will get deducted for Monday to Friday. He will be paid for Saturdays and Sundays as they are considered public holidays.

I think you can discuss this with your company's management as well.

Hi Aditi,

Leave encashment is generally calculated in government/PSUs and in a good number of private organizations as per the formula given below: Basic Pay + DA /26 multiplied by the number of days being encashed. You may also be aware that this amount is treated as wages in the hands of the employee, and PF contribution is to be made from the amount while disbursing the same.

Bye,
Karath AK

Hi,

10th June will be with pay. In my opinion, based on long working experience in many organizations, 10th June is not without pay. You can say his leave application was until 9th June (Saturday).

Had he not joined back on Monday, then Sunday would have been a leave without pay in this case.

I hope this clarifies.

Akriti

Dear Karath,

You are absolutely right. EL encashment is considered as wages under the E.P.F. Act, and contribution is payable if the concerned person is a member of the P.F. Scheme. The calculation is based on 26 days (average wages) rather than on the number of days in a month. This can also be verified based on the Income Tax Act.

EL Encashment = (WAGES / 26) * NO. OF EL ENCASHABLE.

Encashment during the service is subject to income tax deduction and exempted at the time of retirement.

Thank you,
Mohd. Arif Khan

Dear Mr. Dixit,

I think it all depends on company to company. Normally, in a limited company, to avail any kind of paid holiday or weekly off, an employee has to work one day before or after such a public holiday or weekly off. For example, if he is present on 11 June, then he is eligible for the weekly off on 10th June.

Suppose an employee has been absent or on leave from 10th to 20th August, then he is not eligible for the paid holiday on 15th August.

With regards,
Anita K.

Hi,

Since the leave encashment is on a yearly basis, we calculate leave encashment as (Basic + DA + Personal Pay) x 12 months / 365 days = per day basic salary. If a person has taken continuous leave from Friday to Tuesday, you shall consider Sundays also as leave and calculate for 5 days. In this case, Saturday/Sunday is a holiday, and you have to consider leave till Friday/Saturday as the case may be.

Regards, Bharathi

Dear Aditi,

Leave encashment is calculated on the total salary, i.e., Basic, DA, HRA, etc. The formula is as follows: Total Salary/26 * Number of days. However, if you have a separate agreement with workers excluding some components, those may be excluded from the calculation. The leave encashment amount attracts PF.

Thank you.

Dear friends,

I want some clarification regarding the statement given by Ms. K. Anita. The holidays are classified into two categories: national holidays and festival holidays. We have to pay for the four national holidays whether the employee worked before or after. For example, we must pay on August 15th even if the employee is not attending duty from the 10th to the 20th. However, the employee has to work before or after to receive payment for the festival holiday.

I require senior's opinion regarding this matter.

Regards,
Alphonse

Hi Friend,

It is only based on Basic. PF and Tax will also be deducted from that encashed amount.

Hi,

The basic purpose of a LEAVE policy is to encourage staff to avail their leaves so that they can get rest from work and come back to the office with a new zeal and enthusiasm. This results in higher productivity. Please note that it's a non-financial benefit rather than a financial benefit.

In view of the above, leave encashment should not be encouraged. Hence, in case of any encashment, it should be based on the base pay. Gross salary will lead to differentiation in payments. For example, those who have been provided accommodation without any housing allowances will receive less than those staff (junior) who are withdrawing a housing allowance.

Anyhow, it finally depends upon the company's policy, and any policy may be adopted by the company. The above rule is standard.

Regards,
Khalid HR Consultant Mobile: 00971 50 790 8221

Dear Aditi,

The leave encashment is computed based on the Basic Salary.

1. In the case of workmen, compute at a rate of 26 days.
2. For monthly-rated employees, compute at a rate of 30 days.

Additionally, PF contributions must be deducted from the leave encashment.

Regards,
Bhushan Dahanukar

Dear Aditi,

Leave encashment is one of the benefits provided to employees by most companies. In the service rules, you need to mention the details of leave entitlement and leave encashment. Suppose the leave entitlement is 37 days, and you can encash 30 days. If the employee avails 10 days of leave that year, then they can encash 27 days.

The calculation is done only on the Basic + DA component. If one month's Basic + DA is Rs 10,000, then the leave salary would be 10,000/30 * 27 = Rs 9,000.

I hope the concept is clear.

Regards,
Vasudev

Hi Aditi,

The Leave encashment is calculated differently in different organisations:

- for Central Govt. employees, the formula is:

Basic Pay + DA x Number of days unavailed earned leave
______________________________________________
30

- in the case of industrial employees, the formula is:

Basic Pay + DA / 26 x Number of leave to be encashed.
PF to be deducted from the amount. Income Tax is also to be paid since this constitutes wages and hence is treated as income in the hands of the employee.

In the case of Central Govt. employees, such encashment is allowed only at the time of retirement, whereas in industrial concerns, it is allowed in between also, depending upon the Service Rules applicable.

Therefore, it can be noted that the difference is whether the salary is divided by 26 or 30. In certain cases, along with basic pay and DA, other allowances received by all employees are also taken into reckoning. For example, City Compensatory Allowance.

Hope this gives you an idea on the matter.

Regards,

Karath AK

It is calculated based on basic pay. The amount for a single day can be determined by dividing the basic amount by 30 days. Provident Fund (PF) is also deducted from the encashment amount, which is later deposited with the PF Challan.

Regards,

H R Singh

Hi dear Aditi,

As I read your query and a number of replies, I found that some of the replies are correct, but some might be wrong. So, be informed about it.

Basic DA is taken for Leave Encashment and is divided by 26 days, then multiplied by EL. PF is deducted on the Leave encashment amount.

Regards,

Leelu Rajput

Dear Sir,

Please clarify the leave encashment calculation as per the various Industrial Acts (i.e. Factory Act, EPF Act, etc.).

Regards,
Deepak

Hi All,

As per the recent ruling by the Madras bench of Madurai High Court, there cannot be PF on EL encashment as the earnings of earned leave cannot be considered part of basic wages.

Thanks,
Saravana Rajan. S

Dear All,

If you can deduct the whole salary (Basic + HRA + Conveyance + CCA, etc.) for 1 LWP, why take only basic for paying 1 day's salary in the case of leave encashment? It must be paid on the fixed structured components of the salary. As per a recent EPFO circular, no PF should be deducted from the leave salary.

Hope the rest of my friends in this community agree with me.

Best Wishes & Regards,
Debashis

Dear All,

I have a query here. You all are talking about leave encashment should be allowed on Basic + DA, but my opinion is it should be on all the components because if a person availed such leaves during the course of employment, he was paid fully rather than being paid on Basic + DA. So, the same formula should be adopted while calculating leaves.

Do you agree with me or not?

Ravi Gupta

Leave encashment is based on Basic + DA, where the calculation is as follows:

(Basic + DA) / 30 days * number of leave days

Thank you.

Hi,

Please confirm if there is no policy in the company against encashment. What would happen if this is a legal offense or not.