There is no hard & fast rule/act stipulating any methodology for this purpose. Leave encashment generally has to be computed on the basis of monthly basic gross salary last drawn (excluding any arrears, occasional incentives like production/sales incentive, OT etc.), divided by 30 days, multiplied by no.of days of leave encashed. Annual charges not payable on monthly salary towards bonus contribution, gratuity, ESI etc are also excluded. The amount of leave encashed is taxable as 'salary income' but will not earn any contribution towards EPF/EPS. (pl.see EPFO circular attached.)