Is Our Leave Encashment Policy Fair and Legal? Seeking Your Insights

Hi All,

Is there any law for leave encashments? In my organization, we have 16 ELs credited every year which can be accumulated (maximum 45) and can be encashed at any given point of time. All ELs over and above 45 are encashed immediately. Encashments are done on Basic+DA.

I want to know if we are following a healthy leave encashment policy.

Looking forward to your suggestions.

Regards,
Shubhra

Hi,

The number of leaves you are encashing will be too high. Normally, an average of 15 leaves should be encashed and that too only at year-end or while resigning. Also, instead of having a bifurcation of leaves, it's better to have a flat structure of leave. Let the employee take his leave for any reason. Leaves are a benefit to an employee. This is to reduce the confusion in calculations and thus to reduce the complexity!

Regards, Sapana Pune

Hello Shubhra,

As per the Income Tax Laws, the following is the procedure for "Leave Encashment". I am sure this will help.

"Leave Encashment is taxed differently for the following types of employees:

Government employees: Leave encashed during the continuation of service is taxable. Leave encashed at the time of retirement or superannuation (leaving the job) is exempt from tax.

Non-Government employees: Leave encashed during the continuation of service is taxable. In case of leave encashed at the time of retirement or superannuation (leaving the job), the exemption is limited to the least of the following:

- 10 months' average salary
- Rs. 2,40,000
- Amount actually received
- Cash equivalent of leave salary standing to his credit not exceeding 30 days for each year of actual service.

The limit on exemption is applied to the total payment received towards leave encashment from two or more employers, in the same year or in different years.

Salary means the last drawn salary and includes basic salary and dearness allowance if terms of employment so provide, and also includes commission based on a fixed percentage of turnover.

Average Salary is calculated on the basis of average salary for the 10 months immediately preceding the retirement or superannuation."

I am sure this will help.

Regards,

Sanjeev Sharma

Blog: http://sanjeevhimachali.blogspot.com/