Leave Encashment Confusion: How Should It Be Calculated in the IT Industry?

Hi,

Leave encashment in my company is done, for example, the arrears paid leave encashment of 5.5 days. Details are as follows:

As per the formula: 50% of your gross or 3 times of your basic, whichever is less.
1. 50% of your gross is Rs. 22,200/-
2. 3 times of basic - Rs. 5,000 x 3 = Rs. 15,000/-
3. So, 15,000 / 31 x 5.5 days = Rs. 2,661/-

Is this right? We have employees asking for leave encashment like this, i.e., ((15,000 x 12) / 365). Although, I know the difference is very little!! Is this correct? How is it calculated in the IT industry?

Please let me know ASAP.

Regards,
Anuradha

Hi Anuradha,

I have not seen this formula. Could you refer to the act/rule where it has been defined? Normally, leave encashment is done by two types:

(a) Mostly - Basic/26 * number of days leave to be encashed

(b) Very less - Gross salary/30 * number of days leave to be encashed

Regards,
Dabas

Anuradha, I feel the following method will be good to implement:

Encashment may be based on the emolument one is getting. Emolument means Basic plus DA (if applicable). All other allowances should not be taken into consideration while calculating the leave encashment.

Regular employees may be given encashment in the following format:

emolument X No. of days to be encashed
----------------------------------------------
30 (days)

Ajay

Ajaysimhan,

We also calculate in the same way in our organization. One more thing is PF calculated on the amount such arrived at?

Regards, Padmini.

Dear Anuradha,

The below formula is correct:

Basic/26 * number of days leave to be encashed. Moreover, PF is also deducted from this amount.

Mohan

The normal practice to encash the leaves is as follows: Basic / 26 * No. of Days. Hope this would suffice your requirement.

Regards, NELLY_BAVA

Hi,

Normally, the calculation part of EL encashment involves the following formula: Basic/26 * number of days. Most companies follow this procedure.

Kiran

Hi everybody,

In our company, we calculate as follows: If you have 5 days balance of leave, the basic salary plus DA equals the total per day salary and total payable amount. Additionally, there is a deduction of 12% for PF, resulting in the net payable amount of 927.39.

To illustrate with an example:
- Basic + DA = Total
- Per day salary
- Total payable
- PF 12%
- Net payable is 927.39

Therefore, using numbers for clarification:
- 5000 + 1534 = 6534
- 210.77 per day
- 5 * 210.77 = 1053.85
- PF deduction of 126.46

Regards,
Reena

Dear Anuradha,

The above procedure is correct, and PF also has to be deducted on the same.

Regards,
Pooja

Hi Anuradha,

Yes, I believe Krishnamohan is right. Leave encashment is done based on the basic number of leaves, either 26 or 22 days, depending on whether the company works for 5 or 6 days in a week. We also have to deduct the PF from the same.

Hi all,

Can someone tell me if there is any law guiding the maximum or minimum leave that can be encashed?

Radha

Hi Anuradha,

As per the law, the formula for calculating the EL encashment is: (Basic + DA) * Total Number of Balance EL / 26. PF is also payable on this amount.

Abhishek

Hi Pooja,

Most of the companies follow the following formula in the calculation of EL encashment: Basic + DA/30 * no. of days for EL encashment. In EL encashment, PF is not deducted. EL encashment is not part of the salary.

Thanks,
Basant

Dear Anuradha,

Actually, all the above procedures are correct. However, sometimes it is subject to your management policies - some companies have the procedure of calculating 3 times their basic salary or 2 times their gross salary.

The universal leave encashment formula is as follows: Basic + D.A / 26 (in some companies 30 days also) * number of leaves = Total - PF = Net amount payable (PF should be deducted).

Harish

Hi, can anyone explain if we made any cash payment for leave with wages (i.e., leave encashment), are there any deductions that need to be made on this amount under the Factories Act?

Hi Reena,

I want to add one point. PF on leave encashment can be limited to 6500 in a month. In whatever month you pay leave encashment, you add the leave encashment Basic (or Basic & Da as applicable) with that month's actual payable basic, and you can make PF deduction up to the 6500 limit.

Let us take an example: Say the monthly basic is Rs. 5000, and say leave encashment basic is 2500. You will be liable to pay PF on leave encashment up to 6500 only and not on the entire 2500.

With regards,
AM

Normally, the method followed is Basic Salary / 26 * leave days. Recent trends of salary decided in CTC per annum form lead to earning being paid and deducted in gross method divided by 30 days, as the salary for a day in a year is committed. Any other combination might not be comprehensively applicable.

Dear Friends,

In terms of Section 2, subsection b, the definition of Basic Wages reads as "Means all emoluments which are earned by an employee while on duty, on leave, or on holiday with wages in either case, in accordance with the terms of the contract of employment and which are paid or payable in cash to him."

As such, PF deductions are to be made from the Leave encashment whenever it is encashed, and matching contributions are to be given by the employer. Leave encashment is taxable, but PF will reduce the burden of tax.

Regards,

SC MAHTO
GAIL, Chandigarh

Hi, Pooja is absolutely correct. Leave encashment now attracts PF contribution as per the recent amendment. Generally, leaves are encashed on the basis of Basic and DA only.

Amit Goyal

There is no limit on the PF deduction on Leave Encashment. It is the Basic Wage on which PF is deducted, and Leave encashment also comes under the definition.

Hi,

This is Nishu working in Ltd. company, and we calculate leave encashment as follows:
Last Basic salary Drawn * No. of PL Balance / 24 or 26.
I have written 24 or 26 based on the weekly off.
Our Branch Offices are closed only on Sunday, and the Corporate office is closed on the Second and Fourth Saturday, so that's why the number of days worked varies.
Kindly tell me, is it correct...

Hi all,

After referring to all of your valuable suggestions on Leave Encashment (i.e., on Basic + DA), I have a query on calculating LOP. I have observed that most companies calculate LOP based on one day's gross salary. In this case, how can we justify Leave Encashment being paid only on Basic + DA without referencing one day's salary?

I welcome debates or justifications on the above topic with illustrations or any relevant case law.

Regards,
Suresh Ramalingam

I need the contact numbers for HR people for the city of Ahmedabad, Gujarat, which would enable me to contact them for recruitment-related queries.

Hi all,

Recently, our management proposed to provide leave encashment facility to its staff and workers. Now, I have to deduct PF if leave encashment is given. Please provide details of the PF account number, i.e., how I can post the employer's contribution in accounts 1, 10, 2, 21, and 22.

With regards,
Avi

Can you please explain why we do calculations by 26 and not by 30? Is it a part of any act/law?

Hello Everyone,

For leave encashment according to the law, there is only one formula, i.e., Gross Salary/26 * No. of EL's, and yes, you need to deduct PF from the outcome amount.

Regards,
Vijeta

Hi Vijeta,

Thank you very much for your reply. However, in my company, the formula applied is:

(Last Basic * No. of EL) / 30

Is there any rule or act which mentions that we need to consider it as 26?

Regards,
Jyoti

The granting of leave encashment depends on the rules framed by the organization in this regard. Normally, basic pay and DA are taken into consideration, and other allowances like HRA, CCA, conveyance allowance, and other allowances are not considered as per rules. The monthly sum can be divided by 30 to ascertain the average salary and can be multiplied by the number of days of leave encashment, and the resultant disbursement can be made to the employee. I may mention that it is the mathematical convention to treat the month as 30 days.

DEEPAK THUKRAL
CHANDIGARH

Can you tell me what is the rate applicable for Leave encashment? (As per rule)

a) Basic. Or b) Gross.

Hi,

It is calculated based on gross. Leave encashment is provided as an alternative for compensatory off in situations where it is not feasible to grant leave, such as excessive workload or a lack of qualified staff.

Regards,
GS

Hi, Normally, the leave encashment is calculated based on the basic salary of an employee (where DA is not applicable). However, the PF deduction on the amount is mandatory.

Sincerely,
S S Sinha

Hi all,

Leave encashment is calculated on Basic + City compensatory allowance and the productivity incentive. Is this according to the law? If not, how does the law affect it?

Shweta

Can you tell me in which rules mention that Basic + DA should be considered for the calculation of leave encashment?

Leave encashment is to be made according to a formula formulated by the company. In the absence of any specific formula, Basic wages + Dearness Allowance shall be divided by 26 to get the daily average salary, which shall be multiplied by the number of days to get the sum payable.

Remember that provident fund should not be deducted from the leave encashed amount since the amount an employee receives by encashing his leave will not form part of wages, as decided by the Supreme Court in Manipal Academy of Higher Education's case.

Regards,
Madhu T.K

Dear Madhu,

In my company, which is a newly established MNC, the formula is only based on the Basic salary. Do we also need to pay PF over and above Basic as per your view?

Please clarify.

Regards,
Navneet

Mr. Navneet,

The thread relates to leave encashment, and in some postings, I find views supporting the deduction of PF from the amount paid by way of leave encashed. My posting was to shed light on the recent SC verdict on PF deduction on leave encashment. My post was in no way related to basic salary and contribution to PF.

If you do not have a DA system, then the basic salary alone will qualify for the deduction of PF. In the case of leave encashment also, the sum payable will be decided according to the basic salary only.

Regards,

Madhu.T.K

Hi Anuradha,

Every company follows its rule for leave encashment. But in general, it is as follows:

Encashment will be done in two cases:
i) At the time of separation or retirement from the company.
ii) When an employee has earned leave exceeding the specified limit.

In our company, we follow the following method:
1) During service - Monthly Salary (Basic + D.A.) / 30 days * Leave Balances.
Note: Any excess of 30 days will be considered as leave balance eligible for encashment.

Illustration:
Basic Salary Rs. 10,000 + D.A. Rs. 5,000, i.e., Rs. 15,000/-
(Deduct the P.F. amount if any)
The denominator will be 30 days, and if there are 5 days over the 30, it will be considered for leave balance calculation:
=> 15000/30*5 => Rs. 2,500/-

Note: The denominator is generally taken as 26 days for 6 working days a week and 22 days for 5 working days a week. However, this practice is not common in Indian companies.

For any further queries, please reach me at my personal email id: mannupauri@yahoo.com.

Kind Regards,
Mannu Negi

Dear Padmini,

Earlier, PF used to be deducted upon encashment of leave. However, after the judgment of the Supreme Court in 2008, PF is no longer deducted on leave encashment.

Regards,