Understanding Leave Encashment Rules: What Does the Factory Act Say About Limits and Taxes?

Please clarify that at the time of separation, what are the rules as per the Factory Act or labor law irrespective of company policy.

1) Leave encashment should be on gross or (basic + DA).
2) Is there any ceiling on the maximum days for leave encashment?
3) Is leave encashment taxable?

Please provide references from the Labor law/Factory Act for all points.

Answer to queries

1) Average salary (basic salary + dearness allowance) of the last 10 months before the employee’s retirement or resignation.

2) Exemption under Section 10(10AA) of the IT Act.

Other Important Points:

If you encash your leave days more than once during your work history, the maximum exemption of Rs. 3 lakh is applicable to the total amount you earn as leave encashment income from all jobs. So if you have already claimed an exemption on Rs. 1 lakh after resigning from one job, then in the next jobs you will have a maximum of Rs. 2 lakh available as exemption.

Factories Act, Shops and Establishment Acts have provisions for leave encashment. Kindly read them as relevant to your factory/office, etc.