Leaving Your Job: Are You Eligible for Leave Encashment and Is It Taxable?

Hi, I want to know whether an employee leaving the job is eligible for Leave Encashment or not. If yes, is that amount taxable?

Yes, the employee is eligible for leave encashment on a pro-rata basis if the leave is credited at the start of the financial year. Yes, it is taxable.

If you have any further questions or need clarification, feel free to ask.

Our company provides an encashment of 50% for 10 days of medical leave per year. If an employee or worker retires at the beginning of the calendar year, are they eligible to avail the entire 10 days of leave or encashment? If not, kindly direct me to the Act amendment and the section/rule where this is specified. Please assist me with this.

Regards,
Masterguna

Whatever the policy of the company regarding leave encashment, it cannot be contrary to the provisions of the labor law applicable. The applicable law depends on the settings in which you are employed, whether it is a factory or an establishment, etc. Moreover, it has to be seen whether the act is applicable to you, depending on your position in the organization. Without these details, it will be difficult to take a view on the issues raised by you.

Regards

Thank you very much for the updates on leave encashment.

Regards,
AK Sharma
Manager - Compliance

Leave Encashment Tax Update

Good news for all of you. Leave encashment at the time of resignation is not taxable. Please go through the attached file for the High Court decision in this regard.

Thanks

Thank you very much for your reply. We are a manufacturing (factory) company, and I am designated there as Dy. Manager (P&A). Earlier, our company used to provide encashment of 50% for 10 days of medical leave for the year up to the current date. Recently, some of our workmen retired in January 2012 and availed full encashment for the entire year of 2012. My question is, can we adjust this encashment proportionately on a monthly basis and calculate it accordingly for the retired workman? If yes, kindly guide me to the relevant Act amendment and the section/rule where this is specified.

Please assist me with this matter.

Regards,
Master Guna.

The employee leaving the job is eligible for leave encashment amount. Leave encashment amount is a taxable amount.

Regards,
D. Gurumurthy HR/IR Consultant

Leave Encashment Eligibility

Total number of month days from January to the last month * 2/3 = Number of days he/she must have worked; otherwise, leave encashment will not be given.

Number of Leaves to be Encashed Formula

Number of days actually worked / 20 = Number of leaves to be encashed.

Leave Encashment Formula

Basic/26 * total leaves pending.

Regards,
Bhagyashree

Dear Sir, Medical leave falls under which central act? In Maharashtra, sick leave falls under Standing Orders. Is there any other act that comprises medical leave and its encashment? Sir, please advise on this.

Regards, Mangesh Wakodkar Aurangabad.

One of our existing employees approached us because they did not receive a salary last month. We compensated them with a salary against their 10 Earned Leaves (EL). Can anyone advise on how we should calculate their salary for this month?

Regards,
Ali

As yours is a factory, the encashment of earned leave by "workmen" as defined in the Factories Act is governed by the provisions of Chapter VII of the Factories Act and specifically according to the provisions of section 79(3). You have raised the issue of encashment of medical leave. This stands on a different footing. The issue could be addressed depending on:

(i) Whether you have an agreement with the workmen regarding encashment of medical leave? If so, the encashment has to be allowed according to the terms of the agreement, and the terms of the agreement cannot be changed by the management on its own without the concurrence of the Union.

(ii) If there is no agreement, the question is whether you have certified standing orders applicable to the workmen, and in the certified standing orders, whether there are any provisions regarding encashment of medical leave. If so, the provisions of the certified standing orders regarding encashment of medical leave have to be followed.

(iii) If there are no certified standing orders, then you have to see whether the appointment order issued to the workmen contains a clause relating to encashment of medical leave. If so, that clause has to be followed. (Model Standing orders do not contain a clause regarding encashment of medical leave).

(iv) If the appointment order is silent, then the encashment can be according to the policy of the company in this regard. Though your company policy may not say that the encashment of medical leave of an employee who leaves the company in the middle of the year will be proportionate to the services rendered by him during that year, you will be justified in permitting encashment proportionate to the services rendered during that year. However, I want to sound a note of caution here. If the practice of allowing the encashment of full medical leave to an employee even if he leaves the services of the company at the beginning of the year is in vogue for a long time, a change to proportional encashment may attract Section 9A of the Industrial Disputes Act regarding a change in conditions of service. If you have a Union of workmen, there is a possibility that they may raise a dispute over this issue under the provisions of the Industrial Disputes Act.

Regards,