How Do You Calculate Leave Encashment: Last Earned Basic or During Leave Period?

Hi,

Please tell me how do we calculate leave encashment. For example: Monthly gross salary is Rs. 10,000/- Out of which, Basic=5000, HRA=2500, Medical=1250, Conv=800, Misc Allow=450. Then, how much would be the leave encashment for 5 days? Is the leave encashment calculated based on the last earned basic or is it calculated on the basic for the period during which the leave was earned?

Dear Palak,

It is mostly calculated based on the last drawn Basic Pay, but can vary from one organization to another. If the employee falls under the purview of any Act, such as the Factories Act, Shop and Establishment Act, Mines Act, etc., which includes Leave Encashment provisions, then that rule must be followed.

Regards,
SC

Dear Palak,

What is your company's leave policy? Is it calculated based on the monthly gross salary or the monthly basic salary?

Let's consider an example: XYZ earns 10,000 per month. They are entitled to 24 days of Paid Leave (PL) in a year, which equals 2 days per month. At the end of the year, they have 20 days of PL remaining and would like to encash it. What does your policy state about this? What is the maximum number of days a person can encash their leave? Let's assume it's 15 days per year.

Now, for the calculations:
- Gross Salary per month: 10,000
- PL days left in the year 2006: 20
- Number of days for encashment: 15
- Leave Encashment Amount: 10,000 * 15 / 30 = 5,000 INR (TDS applicable)

I hope this explanation helps you. Take care.

Hi All,

I just want to comment that the calculation of 15 days of paid leave encashment done above is incorrect. I am in the HR department of a reputed University in Abu Dhabi, and I check the Payroll calculations each month.

15 days' paid leave salary should be calculated as follows:
= (10,000 x 12) / 365 = per day salary x 15 days. Therefore,
= (10,000 x 12) / 365 = 328.77 x 15 days = 4,931.50

We cannot do 30/2 to get 15 days of pay as some months of the year have 31 days. We need to get the earned leave salary per day and then multiply it by the leave balance.

Regards,
Amrita

Hi,

Thanks to both of you for the reply. My issue is that my company's policy is to encash Gross salary, which comprises Basic, HRA, Medical, Conveyance, and Misc Allowance. As per my understanding, this is not the common practice for leave encashment. Additionally, if we encash the full gross salary, the company's expenditure for leave encashment becomes substantial. Therefore, I would like to propose changing the policy to encash only the basic part of the salary. Could you please advise on the pros and cons of this approach? Is it appropriate to encash leave based only on the basic part of the gross salary? Also, should it be calculated on the last drawn basic salary?

Thank you,
Palak

Dear Palak,

Usually, leave encashment for both government and non-government sectors is done on GROSS SALARY (that includes the last Basic + HRA + Transport Allowance + VDA/DA).

Regards,
Amrita

Dear Amrita,

I just want to comment that the calculation of 15 days of paid leave encashment done above is incorrect.

The above statement is not correct. It depends from Organisation to Organisation. In statutes, the number of working days is taken as 26, which I feel is correct in view of the weekly off, and the smaller the denominator, the greater the benefit. Tell me something, as per your logic, should you divide by 366 (Three Hundred Sixty-Six) days in Leap Years? Do you do it?

Dear Palak,

Before looking at the pros and cons, you must first realize that changing the leave pay from gross to Basic will result in a reduction of Annual Earnings of Employees, which is something an Organization cannot do.

The first step would be to compensate for the loss in earnings either by introducing a new allowance or clubbing it with an existing allowance.

The next step would be to pay all leave due to all employees on gross pay till date, thereby bringing the leave balance to zero.

The new policy can be introduced after the above two steps are strictly adhered to, and this will ensure that there are no legal complications in the future.

Regards,

SC

Hi Palak,

All our friends in this forum have given you an optimal solution, albeit collectively. You were also asking about the pros and cons of regularizing it. The pros are all there, but the only con in legalizing (or regularizing) the leave encashment (by cheque) in your company is that according to a judgment passed as of 1st May 2005, leave encashment will attract PF deduction from both sides, i.e., 12% from employees' as well as employers' side.

As an HR Manager, I would suggest you make this very clear to your employers. Look at it this way, the employees are anyways going to get the leave benefit, whether the employer pays by cash or cheque, but due to the regularization of this head, the employer attracts an additional liability which turns out to be a recurring liability from the day you enforce it till time.

Best of luck.

Bhavesh B. Agrawal
getbhavesh@gmail.com

The enhancement is calculated on the last earned basic. How you will receive it depends on your organization's policy. Some organizations may pay the full gross amount less medical reimbursement.

Regards,
Rakesh

Dear All,

I am a very new member of this forum (just joined this morning) and I became a member because I would like to learn how to calculate leave encashment. Thanks to all of you, I now have an idea of how to calculate it.

Best regards,
MoeKyaw

Is it mandatory to calculate the leave encashment on the basic salary? If not, then what legal action could be taken against a company that calculates the leave encashment on basic salary + DA?

Thanks,

Braj Bhushan

Is there any Supreme Court judgment on the subject of whether earned leave will be encashed based on gross salary, or calculated on the basis of working days or paid days?

Anil Sharma

When will the encashment of EL be done? Is there a last date for this?

Thank you.

Leave Encashment Policy

Regarding Leave Encashment, yes, the existing company policy with respect to Earned, Medical, or Casual Leave, which is written and/or practiced, will be the determining factor regarding the maximum number of days as well as the salary components applicable thereon.

Method of Calculation

As for the method of calculation, I hope there is a consensus that the amount pertaining to applicable monthly salary components should be divided by a standard figure of 26, as applicable in the case of gratuity or other statutory benefits calculations, to arrive at the per day earning, which should be common to all organizations.

Is this the right way and the only way to calculate the daily earnings of the employee? Does this stand the test of any laws governing employment in both private and government organizations?

Request your clarification.

Regards,
Shridhar

I understand the review you all have given in the conversation. But I just wanted to know if the above calculations are applicable for the Radio Cab Company. As I am working as an HR Executive, please tell me how to calculate the paid leaves of an employee who has a gross salary of $16,800, a net salary of $16,600, and has taken 34 paid leaves to date. What will be the final amount payable to that employee?

Please reply to me quickly as I need to work on this promptly.

Dear Palak,

Leave encashment is calculated on the basic, which means 5000. The formula is (Basic + DA)/26 * Privilege leave.

Hi, I am working as an HR professional in a Telecom firm. I wanted to know the legal implications if we restrict PL encashment or carry forward to only 2 leaves in a year. Since we have a lot of work-from-home (WFH) options, can we go ahead with such changes in the leave policy?

Can we adjust the notice period with the balance of leaves (EL) at the time of F & F of an employee?

Thank you.

I have an urgent question. An employee has a maximum cap of leaves at 90 days. The Earned Leave (EL) balance at the time of resigning is 31 days, which is 91 leave balance minus notice period recovery days (60 days). Can we not pay the employee for leave encashment on this basis, which will be 31 * Basic salary / 30? Is it necessary to show leave encashment separately and notice period recovery separately?

Encashment of leave

1.0 Objective

Scope

The rules for encashment of leave shall cover all regular employees of the company, excluding those on deputation from Government/other organizations and company employees on deputation to others.

3.0 Sanctioning authority

The authorities who are competent to sanction leave shall be the sanctioning authority for approving encashment of leave under these rules.

Encashment benefits

The encashment of leave shall be regulated on the basis of the last pay drawn, which includes basic pay, dearness allowance, personal pay, if any, non-practicing allowance for doctors, deputation allowance in respect of employees of the company on deputation, allowance admissible to EDP and other staff working in the Finance & Accounts department.

4.2 The encashment benefit shall not be reckoned as wage/salary while working out overtime, gratuity, provident fund, bonus under the Bonus Act, etc.

Clarification

The leave to be encashed under these rules would be Earned Leave only and not any other kind of leave. The encashment benefit will be regulated based on the last pay drawn, which should be the monthly rate of pay of the employee immediately before proceeding on leave. A month will generally be a calendar month of 30 days. Illustration: Last pay drawn X no. of days for which encashment allowed. Illustration: Last pay drawn X no. of days for which encashment allowed/30.

Regards,
Amit Gaur