Leave Encashment Confusion: Is It Based on Salary or Gross Amount? How Do You Handle It?

Dear All,

We have this leave encashment policy with us. This is the first time that we have taken up this policy to reduce absenteeism. I wanted to know whether the leave encashment is calculated based on the salary or on the gross amount.

Thanks & regards,
Suhrita

Hi,

We also have encashment of leaves for which we use the following formula:

W = Average number of working days = 22
N = Number of leaves to be encashed
Y = (Yearly CTC) / 12
E = Encashment (Rs)
E = (N * Y) / 22;

Hope this will help you.

Thanks,
Meghana

Dear Team,

Below is a sample calculation as per Meghana's formula:

Assuming the total yearly CTC of a person is Rs. 600,000/-. So as per the formula Y = Rs. 600,000/12 = Rs. 50,000/-

Assuming the number of leaves to be encashed is 22 (referred to as N). So as per the formula, the Encashment (E) is equal to (22 * 50,000)/22, which is Rs. 50,000 (but here we end up with the gross monthly salary).

But Rajeev Verma's statement says that it is not based on the gross salary. According to the given formula, we have calculated on the gross salary basis, so we are confused. Can any of you in the team clarify which is correct? Please provide examples.

Thanks,
Venkat

Venkat,

Leave encashment is usually done on the basic component only, but a few organizations follow the gross salary for encashment. There are no set rules on whether it should be based on the basic salary or the gross salary. It is done based on the policy of the organization. Therefore, both methods are considered correct.

Leave encashment for Annual Leave/PL or Earned Leave is based on Basic as per the Factory Act, 1948, compulsory.

Hi Friends,

For leave encashment, we have to consider only the basic salary.

Regards,

Lokesh Acharya
Sr. HR Executive
Bangalore

Hi,

Generally, leave encashment is made by various organizations based on the basic salary only.

Regards,
Sivadasan

Hi,

Generally, leave encashment is done by various organizations based on the basic salary only.

Regards,
Sivadasan

Privilege leave salary is calculated based on the basic salary using the formula: (Basic * Number of leave encash / 26 days).

Rakesh Dave

Hi Friends,

As per the Factory Act, leave encashment is computed based on Basic Salary + Dearness Allowances. However, most companies do not have the Salary Head of Dearness Allowances, so it is calculated only on Basic Salary.

Regards,
Bhanu Pratap Singh

Hi,

Leave encashment is based truly on the basic salary plus DA. However, the calculation of the same can also be done on the basis of gross salary, provided that it is mentioned in the organizational policies in writing and approved by the competent authority.

Rahul Joshi

Dear All,

As per the rule, leave should be encashed based on the basic salary, which is the minimum limit. The rest depends on the company policy.

Every employee who has been confirmed or completed the probation period is entitled to 1 earned leave (EL) for every 20 working days. Therefore, the minimum EL entitlement should be 14 in a year. The remaining entitlement depends on the company's policy.

Calculation: (Basic Salary/26) * Number of EL - ESI
Example: (3500/26) * 14 - 1.75% = 1852

Regards,
Jitender

Suppose the basic salary of a person is $10,000 per month. Now, if 15 leaves are to be encashed, the calculation would be $10,000 * 12 / 365 * 15. Can you please provide some examples showing how to calculate this?

It is calculated as (10,000/26) * 15. When you divide the basic component by 26, you get the basic equivalent for one day. So, 385 is one day's basic pay. Now multiply it by the number of days to be encashed, i.e., 385 * 15 = 5,775.

As an HR professional, I would like to share my views. Please let me know if I am correct or mistaken.

Leave encashment is the conversion of paid leaves or earned leaves, i.e., PL or EL. When I take a one-day leave, I am paid for that day from my gross salary. Therefore, it is calculated from the gross amount.

For example: If X's gross salary is 7500/-, then one day's salary would be 7500/30 = 250/-. The number of leaves remaining at the end of the year is 12. The leave encashment amount would be 12 * 250 = 3000/-.

I hope this clarifies the process a bit.

Regards,
Anand

The formula would be:

Basic Salary/26 days (number of working days per month, it may vary between 22 days or 26 days) multiplied by the number of days to be encashed.

For example:
Basic = 7,000
Number of days to be encashed = 24

Therefore, leave encashment would be: 7,000/26 x 24 = 6,462.00

Hi,

I do agree with Pratima. Leave encashment can be done in both ways, whichever suits the company, either on (Basic+DA) or on gross. In our organization, we follow leave encashment on (Basic+DA), so that employees can enjoy their leaves and be more productive. After all, they are not machines. Suggestions are appreciated.

Regards,
Ashfaque

Dear Team,

An employee has applied for a leave of absence for two days. In the event that a public holiday falls within these two days, does the employee need to submit a separate leave application for that day, or is the public holiday automatically included in the leave period?

Regards,
Manju

Hear as per my knowledge only the PL Leaves will be encashed not Sick & Casual Leave. Leave enachment is calculated is as follows
1. Total Basic Salary + DA (pm)
2. Multiply the same * 12 (for year)
3. Divide the amoun amount x 365 days (you will get one day salary)
4. One salary x no of PL Balance
Example
1. Basic+DA is = Rs. 10000
2. Basic+Da * 12 months = Rs. 1,20,000/-
3. One Year Basic Salary / 365 days = 328.77
4. One Day Salary * No of Leave Balance (PL) = Rs. 7,232.88
For calculation is have taken 22 as Leave Balance is there and the same has to be payable
Thanks & regards
Ravi

Based on my knowledge, only the PL (Privilege Leave) will be encashed, not Sick and Casual Leave. Leave encashment is calculated as follows:

1. Total Basic Salary + DA (per month)
2. Multiply the same by 12 (for the year)
3. Divide the amount by 365 days (to get one day's salary)
4. One day's salary multiplied by the number of PL Balance

Example:
1. Basic + DA = Rs. 10,000
2. Basic + DA * 12 months = Rs. 1,20,000/-
3. One year's Basic Salary / 365 days = 328.77
4. One Day's Salary * Number of Leave Balance (PL) = Rs. 7,232.88

For calculations, I have considered 22 as the Leave Balance, which is payable.

Thanks and regards,
Ravi

Dear Friends,

As per the Factories Act, the leave encashment has to be on Basic+D.A., which is the minimum as per the statutory requirement. However, if any employer is paying more than the statutory requirement, then there is no limitation. An employer can always provide benefits greater than the minimum prescribed under the Act.

Dear Manju,

It again depends on the organization's policy. If the policy states that intermediate Saturdays/Sundays/declared holidays are excluded from the leave taken, then you do not have to deduct them from the account. If it is not mentioned anywhere in the policy, then yes, you have to deduct those leaves from the employee's leave account.

Regards

Dear all,

As per the Factories Act of 1948, leave calculation should be based on Basic + DA. Here, I will calculate an example for your clarification:

Basic + DA = 10,000

Encashment leave days = 15 days

10,000 / 26 * 15 days = 5,769 Rs.

I hope this will help you all.

Thanks & Regards,
Yogeesh

Dear All,

Help me out in settling leave encashment, it's a new concept for me. Kindly let me know the formula.

Hi,

We have to follow company rules. Some companies calculate based on Gross, but most companies calculate based on Basic+DA. In my company, we encash once every 2 years. Encashment and calculations vary from company to company.

With regards,
Ramesh.V

Hi all,

I recently joined an IT company with a strength of around 150 employees. We do not follow any leave policy here. In a year, only 15 days of leave are given to the employees, and they are encashed at the end of the FY (April to March). If an employee takes any leave in a month, his/her salary is deducted in that particular month.

As an HR professional, I feel this practice should be discontinued, and we should implement a proper leave policy. However, other HODs argue that there is no need for a leave policy or granting leave pro rata as it requires too many man-hours to maintain the records. Currently, we encash the eligible leave for all at the end of the year.

I would appreciate guidance on whether the current leave policy is acceptable. I have decided to implement changes in the new fiscal year. Also, the organization is growing.

I request all of you to provide your comments.

Thanks in advance.

Kirti

Hi Lalit,

Could you please let me know the section/notification that allows us to pay it based on Basic+DA?

Regards,
Lalit

Dear all,

Here, I am giving my opinion. If I am wrong, please correct me. According to the Factories Act Rules 84 to 88 (I am not clear on the section, please check it out), EL encashment needs to be calculated by basic DA and all other allowances, including food allowance. However, in order to control costs, all companies are calculating it based on basic pay + DA. Since employee work is crucial, we do not usually grant leave easily. Therefore, the balance of leaves will definitely be higher (perhaps 36 days; accumulations can be done up to 36 days).

This is the reason why all companies are calculating it based on basic pay + DA.

NB: This was discussed in my company's HR meeting, and the management agreed to calculate it based on the gross salary. For any clarifications, please post your query.

Regards,
S. Marimuthu

Hello,

It varies between organizations, depending on the company policy. Leave encashment can be on the basic salary or on the monthly gross. Neither of them is wrong.

Hi,

In our organization, leave encashment is calculated based on the basic salary, and PF is also applicable on the same. Additionally, it is considered as taxable income for the employee.

Hi,

We can deduct the P.F. from the employee against leave encashment.

As per our previous practice, we are deducting the Employee Contribution from Leave Encashment.

Regards,

Rakesh Dubey

Hi all, I think it is better to calculate on gross because if we give LOP to an employee, we deduct their salary based on gross. So, in encashment cases, we calculate the amount on gross. If we calculate based on gross, the employee will benefit. If we calculate based on basic, the employer will benefit (paying a lower amount to the employee). A good employer always looks for employee benefits, so we calculate based on gross. The formula for this is gross salary * number of days encashed / number of days (26 or 30) based on the number of days we run the payroll.

Hi,

Having gone through the views of many, it tempts me to bring to you one more dimension. We are talking about earned leave, which means after putting in service during a calendar year, provided one is confirmed, he/she earns leave to be enjoyed in terms of rules governing the Leave Policy. Normally, the Leave policy does state about leave enjoyment as well as encashment. Different statutes, namely the Factories Act, Standing Orders of each state, Shop and Establishment Act, etc., get attracted depending upon the class of employees - such as worker, staff, and others. I shall definitely provide more insight into these provisions after I return from my tour.

I wish to now attract your attention to a fact that when earned leave is enjoyed, one receives full payment on monthly gross, but when encashing it, everyone mentions about Basic in some cases, in others, Basic + DA, and while many speak about Gross Monthly. Please review this position and then proceed further about whether it is right or wrong. I shall extend vital points, say in another 15 days after my return.

Wishing you all the best of spirits and warm regards to all members.

Rajpal

PF is not attracted on the Leave encashment as per the latest Supreme Court ruling; a copy of the same is enclosed herewith.

Hi Rakesh,

We can deduct the P.F. from the employee against leave encashment. As per our previous practice, we are deducting the Employee Contribution from Leave Encashment.

Regards,
Rakesh Dubey

As per the order of the Supreme Court, it is not required to deduct P.F. contribution on the Leave Encashment amount right now. The amount that was already deposited will not be refunded. You can ask the P.F. department for further settlement in your future P.F. deposit.

Deepak Raj
New Delhi
9868941534

Dear Deepak,

But as per the Factory Act, it should be calculated on Basic+DA including all other allowances except Bonus & Pension. If you have any notification/judgement copy, please send.

Regards, Lalit

Dear All,

Just clarify for me on the above topic. As per my experience and knowledge, leave encashment is calculated based on Basic Salary and the leaves to be taken are CL (Casual Leave) and PL (Privilege Leave), not SL (Sick Leave). Is this correct? Please help me out on the same.

Thank you and regards,
Khursheed

PS: Reply to my email ID: shaikhky@gmail.com

There are many ways it is decided. In my first employment, it was calculated on Basic + DA, and a 15% premium was given. At the same time, one cannot encash more than 2 weeks; this is to ensure that people go on leave for some days. Only at the time of resignation or retirement is the entire leave balance considered for encashment.

Hi Surhita,

Hope this helps you. We calculate leave encashment by: Basic x Number of days PL balance / 26. Here we do not encash SL and CL. Only PL can be encashed, accumulated up to 90 days.

Thanks,
Smita

Funny discussion.

Everybody knows that EL will be encashed only on the basic salary, so why do we all try to complicate this matter?

Regards,
Jitender

Leave Encashment Calculation According to the Factories Act

Please be informed that leave encashment, as per the Factories Act 1948 and the Shops and Commercial Act, should be calculated based on gross earnings. Most companies are following the Basic + VDA calculation method.

Actually, Basic + VDA should only be considered when calculating gratuity. For example, when an employee goes on leave, we are not deducting from their gross earnings but deducting their full earnings. Therefore, if you refer to the act, you will understand that leave encashment is calculated based on gross wages. Kindly inform this to your respective industry.

Thank you,

Yogeesh

Leave Encashment Based on Gross Salary

Please note, leave encashment is done on the basis of Gross salary, not the Basic + DA. Kindly go through the new notification of the Factories Act 1947 and Companies Act 1956.

Generally, we practice calculating on the basis of Basic salary; however, some companies consider Basic + DA. This is incorrect. If we read the leave encashment procedure as per the acts, it is stated that it should be based on Gross components. This amount is encashed when an employee is leaving the organization due to resignation, etc.

I request everyone to refer to the basic act once so that you will understand more clarity on this.

Thank you,

Regards,
Yogeesh S. T

In our company, we calculate EL based on the basic salary. However, according to the factory policy, EL is calculated based on the basic salary plus DA. It's important to note that DA is not considered a component of the salary in our factory. Therefore, we calculate EL using the formula: basic salary (e.g., 7000) divided by 30, multiplied by the remaining EL balance.

Thank you.