Is Our Earned Leave Encashment Plan Fair and Effective? Seeking Your Advice

Hi all, we have an earned leave policy. We have to encash the leaves which are more than 60 for every employee, but every year we are putting aside the encashed leaves. Now, some of our employees have leave balances of 100 or more. Management now wants to encash all the leaves for every employee, starting with the balance of 30. However, they want to encash the leaves with respect to the basics in the respective years.

Example Calculation

For example:

x employee:
- Encashed leaves: 15
- Year: 2008
- Basic amount: 4500
- Calculation: 4500/30*15

- Encashed leaves: 15
- Year: 2009
- Basic amount: 5000
- Calculation: 5000/30*15

- Encashed leaves: 15
- Year: 2010
- Basic amount: 6000
- Calculation: 6000/30*15

- Encashed leaves: 15
- Year: 2012
- Basic amount: 7500
- Calculation: 7500/30*15

Present balance: 60
- Year: 2013
- Basic amount: 8000
- Calculation: 8000/30*30

Is this the right approach? Kindly suggest on this.

Regards

Encashment of leave is calculated based on the "Last Salary Drawn" and not on a yearly basis. This is why staff are encouraged to accumulate leave up to the allowable extent; otherwise, they would have encashed it every year.

Regards

My question is: would the calculation be based on the gross salary or the basic salary?

Regards,
Jayeeta

It will be calculated based on Basic + DA. If DA is not included, only Basic will be considered.

Regards,
Karthik Nayudu

Leave encashment should be done on gross salary, and the formula should be: gross salary/26 * number of leaves.

Thanks & Regards,
Sumit Kumar Saxena

Understanding Leave Encashment Calculations

There cannot be any confusion. Leave encashment should be calculated at the present salary (gross), i.e., what he/she would have drawn when on authorized leave (minus productivity-linked bonus, OT, and such allowances which are not automatically accruing to an employee every month).

Please be advised that when referred to only Basic, it denotes "Basic Pay - excluding other allowances" only. When it's "Gross salary/total emoluments," it means "Basic pay + DA + other allowances." At the same time, the term "CTC" has a different composition which includes Gross Salary + OT + Bonus + PF + Gratuity + leave encashment, etc.

It is requested that everybody better have a common connotation and understanding in order to avoid confusion in the usage of such terms.

Regards,
Kumar S.

Dear Seniors, We are a recruitment company, but we do not implement a leave encashment policy in our company. Could I please know why our company is not using these terms? I asked whether it depends on the company policy; we use 21 PL and 10 SL for our employees.

Regards, Priya

Leave Encashment Calculation

The calculation of leave encashment is based on the gross salary at the time of encashment, which is generally when the employee leaves the organization or retires. The calculation can be done based on inputs from Mr. Saxena and Mr. S. Kumar. It is the same formula used in the Indian Army.

The encashment shall be based on PF Pay, which includes Basic + DA.

Regards,
S.K. Limaye

Leave Encashment Exemption for Non-Government Employees

As per section 10(10AA), leave encashment by a non-Government employee at the time of retirement (whether on superannuation or otherwise) is exempt. The exemption will be the lower of the following amounts:

1. Period of earned leave standing to the credit in the employee's account at the time of retirement × Average monthly salary (see Note 1 and Note 2).
2. Average monthly salary (as computed in Note 2) × 10 (i.e., 10 months' average salary).
3. Maximum amount as specified by the Government, i.e., Rs. 3,00,000.
4. Leave encashment actually received at the time of retirement.

Note 1: is in the attached image.

Note 2: Calculation of Average Monthly Salary

Average monthly salary for this purpose means the average salary drawn in the past ten months immediately preceding the retirement (i.e., preceding the day of retirement). Salary for this purpose will include only the following:

• Basic salary.
• Dearness allowance, if considered for computing all the retirement benefits.
• Commission based on a fixed percentage of turnover achieved by the employee.

Apart from the above items, salary for this purpose does not include any other allowances or perquisites.

Regards

Leave Encashment Policies and Practices

Generally, leave encashment is given on Basic + DA or on total wages in the case of minimum wages. In contrast, the salary for the duty period is based on Basic + all allowances. The differentiation may be due to the fact that the person availing encashment of leave does not incur expenditure on account of various factors such as house rent. Anyway, this is the rule applicable in Government and PSUs.

Accumulation and Encashment Policies

Secondly, the number of leaves permitted to be accumulated and encashed is based on the policies of the company or the agreement between management and labor/labor union. Even the components of salary for encashment of leave can be part of such an agreement. Certain companies have a policy of closing the leave account every year, either financial or calendar, by availing or encashing to avoid higher financial liability arising out of promotion, increment, etc., in the future.

Calculation of Encashment

Thirdly, if the leave is encashed, the component of salary shall be of the month of encashment and not on the historical components. However, the calculation shall be total wages divided by the number of days of the month multiplied by the number of days of leave encashed.

Regards

Dear Seniors, I have worked in the service industry for 2 years. I left my job with a 1-month notice period. I have a balance of 30 days of Earned Leave (EL). As per company policy, the employer needs to provide EL encashment upon leaving the present company. However, the employer is not willing to provide the encashment to me. What can I do? Please suggest.

Thank you.

Encashment of Leave as Part of Wages

Encashment of leave is considered part of wages. If there is non-payment, one can file a complaint with the labor commissioner. Seniors are also invited to comment.

Regards

Encashment of earned leave is always based on the current year's basic salary and not on last year's. So, it's just as simple as having tea every day 

Regards,
Chetan Kumar.

For example, if the monthly basic salary is Rs. 15,000, then calculate it on a per-day basis, which would be Rs. 500 daily (15000/30). Now, if the earned leave encashment balance is 50 days, then multiply 50 by 500, which will amount to Rs. 25,000.

Regards,
Chetan Kumar.

Leave Encasement Calculation

Leave encashment is always calculated based on the Basic Pay of the current salary when you are encashed.

Thank you.

Views on Leave Encashment

After going through the responses, I offer my views regarding leave encashment. In my opinion, the formula you adopt for Leave Without Pay (LOP) should be followed for leave encashment. In other words, if you consider Basic + DA (if applicable) for LOP, then it should be followed. Alternatively, if the Gross wages are considered, then that should be followed.

In any case, the encashment should only be based on current wages. This is because, assuming for some reason, if the employee avails leave now and chooses to exhaust the Earned Leave (EL) standing to his credit, he will be paid salary based on the current salary only.

Regards,
M.V. Kannan

Leave Encashment Calculation

Encashment leave amount must be calculated based on basic pay plus dearness allowance (DA) only, not the gross salary. The formula to calculate it is: (basic pay + DA) / 26 * number of days.

Thank you.

Regards

Dear all,

Encashment leave amount must be calculated based on basic salary + DA only, not the gross salary: (basic salary + DA) / 26 * number of days.

No, absolutely not. Leave encashment should be done based on the gross salary. Only gratuity, bonus, and EPF contribution should be calculated based on the basic salary.

Thanks & Regards,
Sumit Kumar Saxena

Encashment of earned leave is always calculated based on the gross salary of the current year.

Please enclose the government order or any rule related to the encashment of earned leave. It must be calculated based on the gross salary.

Thank you.

Leave Accumulation and Encashment Under the Bombay Shops and Establishment Act

As per the Bombay Shops and Establishment Act, only 42 leaves can be accumulated, and the rest of the leaves can be forfeited by the company. However, it totally depends upon the policy of the company. The formula for leave encashment is as follows:

(Basic + HRA) / 30 x number of days to encash

Regards,
Rahul

For the first query, you cannot encash leave with the salary from the respective year. The payment should be made based on the last drawn wages or salary. Please let me know if your organization falls under the Shops and Establishments Act or the Factories Act so that I can suggest whether you need to make payments based on Basic + DA or gross salary.

Regards

Earned Leave Encashment Policy

Earned leave encashment depends on the company's policy only. I'm supporting Priya's statement. The company should decide whether they will give it based on the basic salary or other criteria.

Regards,
Narayan

Leave Encashment on Gross Salary

Leave encashment should be on gross salary. For more details, see Sections 79 and 80 of the Factory Act 1948.

Regards

One thing people are not understanding is that when they take leave, they want to have their one-day salary deducted from the Gross amount. However, when they encash it, they expect it to be calculated based on Basic + DA. How will this logic match up?

I strongly support all others who have said that Leave should be encashed from the Gross salary.

Thank you.

Calculation of Earned Leave

Earned leave should be calculated based on the basic salary, not on the gross salary. Let's avoid creating confusion in this matter. If you need any references, feel free to ask, and I will provide them here.

Regards,
M.N. Sekhar

In your case, you have to settle the leave wages with the current salary/wage you have committed to pay your employees as per the terms of employment. The Factories Act clearly states that Leave with wages is 'all total full-time earnings exclusive of overtime and bonus but inclusive of DA.' If we refer to the definition of wages under the Payment of Wages Act for better clarity, it is further evident that any remuneration payable under any award or agreement and any additional remuneration payable under the terms of employment but does not include bonus and other allowances.

Therefore, we can conclude that you have to make this leave settlement with the last drawn salary/wages. If you pay any additional pay other than what is mentioned in your terms of employment, that should not be considered for leave wages calculation.

Regards