Confused About Leave Encashment? Why Use 30 Days Instead of 365 for Calculations?

For calculating leave encashment, we divide the monthly salary (basis + DA) by 30 and multiply it by the number of earned leaves to the credit of the employee. Monthly Salary X No. Earned Leaves / 30... where is this 30 coming from? No Act prescribes this specifically. Why not Annual Salary / 365 X Number of Earned leaves?

Dear Deepak, the way you are calculating is wrong, and the way you are suggesting is also incorrect. Leave encashment should be calculated as follows:

Monthly salary divided by 26, then multiplied by the number of leave days to be encashed. Now, you may be wondering where the number 26 comes from. One day's salary is equal to the monthly salary divided by 26. This calculation is based on the Minimum Wages Act, which specifies how to determine one day's salary.

I hope this clarifies the calculation method for you. Let me know if you have any further questions.

Thank you very much. However, my doubt still persists. VK Singhania's (Income Tax Practice) book suggests the following formula to calculate the exemption value of leave salary:

(Number of completed years x Number of leaves earned) - (Number of leaves utilized during the employment) / 30, multiplied by the Monthly Salary (last 10 months' average salary).

It is noted that a month is considered as 30 days in this calculation. The Central Civil Service (Leave) Rules, which are applicable to central government employees, also use a month as 30 days for their calculations. I am unsure why these departments prescribe this practice when no act clearly mentions it.

Regards

Calculating Leave Encashment for Daily Wagers

If you calculate leave encashment for daily wagers, you use the daily rate of wages as announced by the State Government or the total of the month's basic salary plus DA and VDA, if any, divided by 26. Suppose the minimum wage is Rs. 300 per day and you have to pay for 10 days of encashment, the calculation is 300 x 10 = Rs. 3000. In another case, suppose Basic + DA is Rs. 7800 per month, then for 10 days of leave encashment, the amount payable is 7800 / 26 x 10 = Rs. 3000.

Calculating Salaries for Management Staff

In case you want to calculate employees' salaries, consider your management staff who are mostly monthly rated. For example, if the basic salary, with no DA/VDA, is Rs. 15,000 per month, then divide Rs. 15,000 by 30 or the actual number of days in the month to get one day's salary. For example, 15000 / 30 = Rs. 500 for one day, then multiply it by the number of leave days.

My Experience as HEAD-HR

When I was the HEAD-HR, I used to calculate like this: Rs. 15000 x 12 x number of leaves divided by 365 days. The 365 days represent the days in that particular year the employee is exiting. The justification was that there are 28 or 29 / 30 / 31 days in 12 months of any year, but there are only 365 or 366 days. People were mostly observed to be more satisfied by the second-last formula.

Regards,
RDS Yadav
Labour Laws Advisor

Mr. RDS Yadav,

Your 1st, 2nd, and 3rd paragraphs are very accurate. You could also state that it is as per the provisions of different statutes. However, the last paragraph is confusing. Was this practice followed in your organization? How can one be satisfied with this calculation of 365 days and why?

I would appreciate it if you could provide more words or lines based on your past experiences.

Thank you.

If you are paying wages or salary inclusive of days off, then you can calculate everything based on 30 days; otherwise, calculate based on 26 days.

In general, in almost every statute, the payment of leave with wages or encashment and the payment of overtime wages will be divided by only 26 in almost all enactments.

Adoni Suguresh Labour Laws Consultant

My query is a little different from the above but related to the subject of leave encashment. I need advice as per the Factory Act. Which components (Gross or Basic + DA) are covered for leave encashment of daily wage workers? As per practice, they are not entitled to leave, and after completion of a year or during separation, they are eligible for encashment of leave based on the calculation of 1/20 present. To calculate the number of leave days, we have no issue; the only query is related to the calculation of the amount for payment of leave encashment.

Regards

Sirs and Madams,

Thank you for all the responses. Let me please reiterate the real doubt that I have - If I am applying 30 days for calculating the number of days in a month - which law/statute/rule/circular/notification etc. states that?

Your prompt attention to this matter is greatly appreciated.

Thank you.