Leave Encashment Confusion: Is It Calculated on Basic or Gross Salary?

Hi all,

Can anyone guide me in knowing under which head Leave Encashment is calculated? Is it based on Basic or Gross salary?

Thank you.

Leave encashment is calculated on basic (+DA).

Regards,
Rahul

I wish to differ from the view of our learned friend Rahul. He may be correct based on the conventional practice followed in the private sector enterprises or the Leave Policy of such institutions. My personal view is based on the logic behind the sanction of leave encashment to government employees. That is, all the components of the regular salary included in leave salary have also to be paid concerning leave surrender for cash benefit.

There are two ways of doing the calculation, and in most private sectors, as Mr. Rahul has pointed out, it is Basic [+DA], though no one pays DA as such in private companies. Leave encashment during employment is usually calculated on the Basic salary of the employee, though it will be better if you have them as a policy; else employees may insist on gross salary. This calculation of leave encashment on basic salary is done to discourage employees from accumulating too many leaves and not availing them during the employment period. Employers want the employees to enjoy their vacation and come refreshed rather than toiling all through the year. One of the reasons why it has been mandated to avail a minimum of 5 ELs in a year is also for the same reason. The Shops & Establishment Act also has the provision to avail 8 days of EL in a year for encashment after deducting the mandatory 5 days. If you want to go for basic salary encashment, first have a policy and circulate it before enforcing. Of course, no employee would have any grudge if you happen to pay full pay for leaves.

Thanks and Regards

Shop & Establishment Acts and Leave Encashment

Shop & Establishment acts discuss the encashment of earned leaves upon cessation of service. For example, the Punjab S&E Act states:

"14. (b) If an employee is discharged or dismissed from or leaves service during the course of the year, he shall be entitled to leave with wages or wage in lieu of un-availed leave at the rates laid down in clause (a)."

The wage here is as defined in the Payment of Wages Act 1936. Wages as per the said act include only basic pay (+DA) and do not encompass any allowances, reimbursements, or retirals. Therefore, encashing leaves on gross is not mentioned in the act. The underlying principle is to encash leaves on basic (+DA) alone; however, an organization may choose to do it on gross as well. The industry practice in private organizations is to do it on Basic alone.

I hope this clarifies the information.

Regards, Rahul

Dear all,

Leave encashment will be paid on gross salary because leave encashment is always paid based on total earnings.

Thanks,
Ravi Khandelwal
Assistant Manager - IR
+917566204983

Hi,

In the private sector, leaves are encashed based on the basic salary. However, this may differ if the organization's policy allows encashment on the gross salary.

Question on Leave Encashment Calculation

So, my question to this thread is this: Since private companies don't generally have DA as a component, why is any Earned Leave not paid out based on fixed components (Basic + HRA = Med Reimb, etc.)?

To be fair to employees, things such as HRA, medicals, etc., are all baked into the fixed component. It just seems silly to hide behind "Basic" only and say that employees are encouraged to take leave to come back refreshed. Deep in our hearts, we all know it is just a nice way to save money by companies. Some companies allow employees to encash unutilized leave accumulated beyond 10 days (as an example). Am I being too simplistic to ask this: do companies feel employees require to be paid HRA only if they 'take' the leave but not if they encash their leave?