Leave Encashment for IT Consultants: Is It Possible with Monthly Fees and TDS?

Can we give leave encashment to an IT consultant? We are providing monthly fees after deducting TDS. Please guide me.

Consultants vs. Employees

A consultant is not an employee. As such, he is not expected to follow the leave rules, rules relating to hours of work, office timing, etc. His fee will be paid as per the bill raised by him. No PF is deducted from it. He is given Form 16A and not Form 16 in respect of TDS deducted. As such, he is not an employee and not eligible for leave or leave encashment.

Consultants in IT Companies

However, many IT companies, who believe that labor laws are not applicable to them, engage employees as consultants! They are designated as consultants but are expected to reach the office on time, remain in the office for 8 to 9 hours, follow the dress codes on par with others, avail leaves, report to somebody on a daily basis, etc. This is an arrangement to avoid paying PF, bonus, and other benefits available under labor laws. When he leaves the organization after long service, he will not be paid gratuity, saying that he was not an employee.

If your consultant falls under the second type, he should be given leave encashment.

Why does this question arise - to pay or not to pay leave encashment to an IT consultant? You only have to pay the amount as per the contract/agreement signed with the consultant. You have to pay leave encashment if there is a provision in the signed contract/agreement.

Hi Madhu, hope you are doing great. Thank you for this valuable post. I need some suggestions regarding "If your consultant falls under the second type, he should be given leave encashment." Please let me know how we calculate leave encashment for this second type of consultant employees as there's only TDS deduction.

Take his monthly fixed remuneration and divide it by 30 to get his daily average remuneration. Then, multiply this amount by the number of days of leave that he wishes to encash.

Thank you, Madhu, for your valuable response. So, encashment is solely the employer's decision, right? I mean, whether it is during service or after resignation.

Encashment While in Service

Encashment while in service is as per service conditions, but encashment of unavailed leave (PL) is mandated by law when it is accrued due to leaving the company.

Thank you again for the suggestion. One final query, Madhu, can you please confirm if we calculate leave encashment for full-time employees like this: (Basic Pay/30) * No. Of Leaves.

Encashment of Leave and Allowances

If your allowances like HRA, conveyance allowance, etc., are fixed allowances that are part of the salary for deduction in proportion to the days an employee remains absent without leave, then encashment of leave should be on the salary inclusive of allowances. At the same time, if you pay HRA, etc., when the employee is on leave without pay and pay is deducted only from the basic pay, then you can take basic pay for encashment of leave. In any case, if the employee is paid a monthly salary, you can use 30 as the divisor, and if daily rated, use 26 as the divisor.