Why Are Leave Encashment and Notice Period Buyout Calculated Differently? Seeking Clarity

I am part of an IT firm under the Shop and Establishment Act of 1988. I have read many articles where leave encashment is done based on Basic Salary and LOP on gross salary. However, why do we calculate them according to basic and gross respectively? No one has yet stated reasons. I would appreciate it if someone could let me know the reason why we should go with basic and/or gross.

Notice Period Buyout: Basic or Gross Pay?

Also, should the notice period buyout be based on Basic or Gross pay, and why? I request your advice on these.

Thank you.

Regards,
LydGov

It's a very interesting question.

At first, I considered it an unfair practice. But then I realized that it makes sense:

1. Let us assume that it is correct to give leave encashment on a basic plus DA basis. The reason is that you are paid basic plus DA for work, and other things are allowances related to work. (This does not hold very true today since things like education allowance are not on a per-day worked basis).

2. In the case of leave without pay, you will lose the basic plus DA, but then the allowances are also not payable because you did not work during that period. Since you did not work, why should you get paid for it?

3. Another point is that for leave encashment, you are getting your main pay. The allowances have already been given to you in the month in which you worked. So even for monthly allowances like an education allowance, you should not get more education allowance because you did not take leave. It is an amount for the education of your kids. They don't require more money because you didn't take leave.

I am sure you can make similar reasoning for every allowance (to be denied).

In the end, it's a matter of practice and negotiation in most cases. If the union is strong, they will probably try to get the opposite rule passed :)

Thank you.

Understanding Leave Encashment and Loss of Pay

Leave encashment is a facility provided to employees to offer more liquidity when they are in need. It is reimbursed on the basic salary only, which is a practice followed in many establishments.

On the other hand, loss of pay (LOP) is a penalty for not showing up for work or being absent. How can you expect your gross salary, which includes other allowances in addition to the basic salary, when you are not on duty?

Notice Period Buyouts and Deductions

Notice period buyouts or deductions for notice pay are usually based on the basic salary in many establishments, but this can vary depending on the appointment conditions.

Regards.