Leave Encashment Confusion: How Many Days and Which Salary Basis Apply?

Kindly help me out with the following queries:

Leave Encashment Queries

If any employee's PL is 30 for the year 2017-2018 and for the current year 2018-2019, again 18 PLs are added, the total PLs would be 48. Now tell me, how many PLs can be encashed as per Labor Law:

a. Only half of PLs accumulated up to the last year, like half of 30.

b. Half of the full PLs accumulated up to the current period as well, like half of 48.

c. Are the leave encashments based on basics or gross? If the salary is increased in the current month, will it be included for the leave encashment, or will it be based on the last year's gross salary?

Kindly answer the above queries as soon as possible.

The leaves encashment is based on Basics or Gross; it depends on the company's leave policy. Some organizations give (basic+DA+other benefits), which is similar or near to Gross pay, while some organizations give on Gross. As per the rules we follow, we will pay on Gross and also provide 25 PL per year. Sick leave can be transferred and merged with PL by the end of the year. Up to 36 PL can be accumulated, and the rest of the PL can be encashed by the employee during their service. At the time of Full and Final settlement, only available PL can be encashed as a part of F&F.

If F & F is not the case, the employee wants to encash the leaves in an emergency, then what is the policy and how many leaves will be encashed.

And one more query, if the gross salary is increased after the annual increment, will the encashment take place based on the last salary or the new salary?

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Hi,

Encashment of leaves is purely based on company policies. In our company, we do encashment based on the basic salary. Additionally, if an employee receives an appraisal, the encashment would be according to the new salary. Employees can encash the remaining leaves at the time of Full and Final settlement (only Privilege Leave). In cases of emergency, if company policy permits, half of the leaves can be encashed.

Thank you.

Leave encasement is stipulated in the Factories Act as well as the Shop and Establishment Acts of respective states. Employers may frame rules to provide more than stipulated, but the minimum is what is mandated. Kindly check the same for your state.

Col. Suresh Rathi

Leave encashment is always processed at the time of full and final settlement. However, some companies also choose to encash it at the end of each year. It depends on how employee-centric the company is. As per the Delhi - Shops & Establishment Act, leave encashment is done on Basic Salary, and a maximum of 45 leaves can be accumulated in 3 years. Beyond 45 days, PL's will also lapse.

Regards, Shweta Gehlot

Though the law allows EL leaves to employees, there is no provision in the Factory Act regarding leave encashment on Gross or Basic + DA. The Factory Act states that 30 leaves can be accumulated, and more than that can be encashed. However, leave rules are decided by the employer for workers during negotiations and are fixed in the settlement, which will be practiced henceforth.

Regards, Nanasaheb Kolage 9890901957

Shweta,

What is the basis for 45 days, I mean the provision in the law?

The Factories Act limits the accumulation of PL to 30 days and is silent on encashment. Therefore, it all depends on the company's policy on how to treat and make payment. The accumulation limit can also be enhanced as a welfare measure, as it will be helpful to receive a lump sum amount at the time of retirement after long service.

Leave encashment during service can be on basic salary.

Leave encashment on separation (with full and final settlement) should be on total earnings (gross salary) as provided in the Shops & Establishment Acts.

T. Maheswaran

Jurisdiction of the Authority: Leave of Delhi Shops and Establishment Act

I referred to the Jurisdiction of the Authority, Point No. 22 (1A) (i) - Leave of Delhi Shops and Establishment Act, which states:

(1A) (i) Privilege leave to which an employee is entitled under clause (a) of sub-section (1) or under any such law, contract, custom or usage, award, settlement, or agreement as referred to in section 3, or any part of such leave, if not availed of by such employee, shall be added to the privilege leave in respect of any succeeding period to which he is so entitled. However, the total period of such privilege leave which may be accumulated by such employee shall not at any one time exceed three times the period of privilege leave to which he is entitled after every twelve months’ employment under that clause or under such law, contract, custom or usage, award, settlement, or agreement.

Regards,
SG

Impact of Leave Encashment on Income Tax

Every company has its own policy on whether leave encashment will be paid out based on Gross or Basic salary, but what is the impact as per income tax? If the calculation is based on Basic, it is totally exempted up to 10 lakh for the whole life. If calculated on Gross, then the amount other than Basic will be taxable.

For example, let's consider 25 days of leave encashment:
Basic = 15,000
15,000/30*25 = 12,500 is totally exempted from income tax up to a limit of 10 lakh.
Gross = 35,000 (other than basic = 20,000)
20,000/30*25 = 16,667 is taxable.

The same will reflect on Form 16.

Regards, Dhananjoy

Leave encashment has to be paid on Gross Salary. Any policy made by the company is limited up to the company.

Encashment of PL should be done on gross salary instead of basic + DA.

Thanks & Regards,

Sumit Kumar Saxena

One more thing, can we lapse the PL if it exceeds the carry forward limit as stipulated in the company policy.

Carry forward limit is 30 as per the Factory Act. After 30 days, all leave (30+) should be paid.

Is it mandatory to allow leave encashment? Is there any law that binds to pay leave encashment if leave is not granted? Can anyone explain?

In Karnataka shops and establishments, during Full and Final (F & F) settlement, is it compulsory to encash 30 days of Annual Leave, or can it be at the employer's discretion, for example, 15 days of encashments during exits.

Please suggest..!

Dear Asharao,

As per the rules, you are required to make payments for all leaves earned by employees. Paid leave will be calculated at a rate of 1 day for every 20 working days. After calculating the total number of leaves, you must proceed to make payments for all those leaves.

Thank you.

As per what I had learned from my one-year experience in my company, we encash the leaves with gross salary only. This method was implemented because our basic salary accounts for only 60% of the gross salary. However, the encashment process is solely determined by the organization's policies.

Depending on the company policy, the cashment process may vary.

Please clarify what is the maximum number of days of earned leave that can be encashed at the time of full and final settlement. If I have a balance of 500 earned leave days, can a total of 800 days be paid during the full and final settlement?

I could not understand how you can claim or pay for 800 days when the balance is only 500 days. The accumulation of leave should be in accordance with your leave policy or else as per the Factories Act, which stipulates 30 days.

This is why many companies have leave policies that allow for greater accumulation to encourage employee regularity.

Every organization has a different leave policy. Being credited with 1 leave after every 21 working days is mandatory as per statutory compliance. In some companies, I have observed that they offer either 21 or 14 Earned Leave/Privilege Leave (EL/PL). The decision to encash them based on basic or gross is at the company's discretion. The accumulation of EL and the possibility of encashing them again depend on the Company policy. Some company leave policies specify that only 45/47 leaves can be encashed during the Full and Final settlement.