Dear Ms.Lathamani,
Strictly speaking, pay or salary or wages for any wage period is to be taken as a single package only.
When an employee goes on any authorised leave, the entire package has to be paid as leave salary and if at all any deduction is to be made from the head of allowances, it can only be those paid to the employee in order to defray special expenses,if any related to the job or the monetary compensation regarding the arduousness of any operation involved in the job. For instance if an employee goes on E.L for 10 days, you may deduct his lunch allowance or heat allowance, if paid; but, would you deduct HRA proportionately? Same analogy applies to encashment also.
Since, encashment of EL/PL during the normal course of employment is not statutorily recognized, some organizations formulate such a leave policy treating encashment of EL/PL as if a concession bestowed by them on their own accord. But a fair and correct method of calculation of the surrender value of such leave is on the basis of the gross salary minus the exceptions mentioned above only.