How Should We Handle Leave Carryover Limits and Tax Implications for Employees?

We have a system of providing 15 Earned Leaves, 7 Casual Leaves, and 8 Medical Leaves to all our employees. For a long time, we have had a system of carrying over the entire un-availed leaves. We have been encashing the same as and when the employee submits an application. This seems to have helped employees in not taking leave. We have found that some employees have accumulated these leaves over 5-7 years, and the amount now is becoming quite large as it grows with an increase in Basic.

My Query

1. We now plan to put a bar on the number of leaves that can be carried over to the next financial year (or employment year). Is it OK?
2. In the past, we were deducting TDS on the said amount. The employees have requested that we book the Leave Amount under the head of Staff Welfare so the TDS can be saved for them. Is it legally tenable?

If anyone could share "Best Practice" for the above matter.

Thanks,
AnoopA

Considerations for Leave Encashment Policies

Please consider a cap on the number of days for leave encashment. Both public and private firms follow this policy of limiting the number of days. Consider encashment up to 22 days of leave upon separation from the firm. Setting these specifications will help you manage the benefits.

Some private firms have no policy for encashment as they practice the 'forced leave policy' to reduce stress levels at work. The upside to this is leave planning and workforce management, where managers remain responsible for ensuring their teams take these leaves.

Regards

I second Ms. (Cite Contribution) in [practising the 'forced leave policy' to lessen the stress level at work]. The foremost reason is that you call it an Earned Leave. Terms that specify leaves in sectors involve the encashment of Earned Leave (EL) by the end of the calendar year to help overcome such situations.

Leave Carry Over Policy

Casual Leaves have to be taken by the employee in the calendar year, or else they would lapse by year-end. Sick Leaves are also calculated as per the calendar year, and if a person joins in the middle of the calendar year, sick leave will be calculated on a pro-rata basis. Unutilized SL will lapse at the end of the year. Those who are in continuous service in the preceding 12 months (should work not less than 240 days) are eligible for 15 days E.L. during the subsequent year. If a person joins in the middle of the calendar year, they are not eligible for Earned Leaves until the completion of 12 months of service. Leave can be encashed for 8 days in a year. However, the Company pays 15 days wages/salary in lieu of Earned Leaves at the year-end, subject to the availability of 15 days leave. Otherwise, the balance leave is allowed to be encashed.

Tax Deduction at Source (TDS) on Leave Encashment

The TDS can be rebated by adding Sudexo Coupons to the employees as meal vouchers or for spending on groceries. The amount can be adjusted as per the employee level. Other allowances, such as HRA, Child Education Allowance (100-300/-) per mensem to the employee, can be paid. Travel Allowance and Special Allowance in meeting office expenditure can be added too. LTA and Leave encashment also cover tax-exempted benefits.

Further to what (Cite Contribution) & Sharmila Das have mentioned/suggested, please note that this topic was discussed earlier on CiteHR—in a different context. Please see the link below—this may provide you with more options/ideas.

https://www.citehr.com/447536-how-mi...ady-given.html

All the best.

Regards,
TS

Please find the clause which you could include in the leave policy of your organization on Leave Accumulation and Leave Encashment. It could be modified as per your requirement:

ACCUMULATION OF LEAVE

An employee is allowed to accumulate a maximum of 60 days of Privilege Leave. Leave over and above this limit will be encashed. For example, if an employee has 68 days on 31st December, then the leave balance on 1st January will show 60 days as balance plus the current year's credit.

ENCASHMENT OF LEAVE

• Leave encashment for PL will be given for the days exceeding 60 days at the end of the calendar year on request of the employee.

• An employee can apply for leave encashment once a year in the month of December, and the payout will happen along with the March Salary.

• Leave encashment is calculated on basic salary and is taxable.

• Leave encashment will be done through the payroll process only.

Please write to me if you require the leave policy for reference. I will mail it to you.

Regards,
Santhoshi

Thanks to (Cite Contribution), Sharmila Das, Tajsateesh, and Santhoshi for the very prompt reply. I would like to have an idea of what the best practices are regarding the encashment of earned leaves, casual leaves, and medical leaves. Do companies normally encash all of these or just a few?

Regards,
Anoop

Dear Mr. Anoop,

If your employer has allocated 30 days of Earned Leave (EL) in the employee's account, then if the leave accumulated by the employee exceeds 30 days, the excess leave is to be encashed at the end of the calendar year. This is credited to the employee's account in the month of March. For example, if an employee has 40 days of leave accumulated in their account, 40 leaves - 30 EL = 10 days of leave have to be encashed.

Leave Encashment Formula

Basic Salary divided by 26 x Number of days to be encashed.

Regards,
Anoop

Yes, as you said, I have searched through many threads, and there are a lot of discussions on this issue. However, I am not achieving clarity on how to calculate the EL encashment. Please support me on this issue.

I also have a doubt that leave encashment calculation should be done based on 26/30 days. Kindly provide clarification—if I calculate based on 30 days, would it be considered illegal?

Tax Deduction on Leave Encashment

TDS has to be deducted from leave encashment. You cannot show it as staff welfare or any other head. In case of an audit, this will be found out, and you will have a big problem on your hands.