Leave Encashment Dilemma: Should It Be Based on Full Salary or Just the Basic?

I am conducting a survey on the leave encashment policy. Please suggest whether leave encashment should be calculated based on the full monthly salary or the basic salary.

My company has 70 employees. I want to know what other companies of similar employee sizes are following.

Understanding Leave Encashment

"Leave encashment" literally and actually means the surrender of leave at credit for cash benefit. Instead of surrendering the leave, if the employee actually goes on authorized leave, how will you calculate and pay the salary for the leave period? Only basic? Logically and legally not. If any other similar employer follows such a practice, it is certainly illegal, and any illegal practice cannot be a precedent to be followed.

Therefore, leave encashment should be based on the monthly gross salary minus special allowance, if any, paid to defray certain expenses to be incurred by the employee due to the nature of his job.

It is not mandatory for any organization to provide leave encashment under any law. Usually, there are three types of leaves, namely Casual Leave (CL), Sick Leave (SL), and Earned Leave (EL). Most companies provide leave encashment only for EL. There are certain accumulation limits for both SL (e.g., 30 days) and EL (e.g., 30, 60, or 90 days), depending on the organization. The main purpose of setting accumulation limits is so that when an employee resigns, the leave can be adjusted against the notice period, either partially or fully. If encashment is given, most organizations provide it based only on the Basic Pay.

Regards, A B Srinivasan

Leave Encashment During Service

Leave encashment during service is not provided in the Factories Act or Shops Act. However, it is provided under the OSH Code.

Leave encashment policy differs from company to company; there's no fixed pattern on which component an employee should be paid. However, the majority of companies pay on a per-day gross basis. Additionally, the leave encashment amount is also taxable if the yearly package exceeds the tax exemption bracket.

Thank you.

I do agree with the contention that there is no statutory compulsion to provide leave encashment while the employee is in service. However, on termination of employment, payment of salary for the number of days of earned leave at the credit is a statutory obligation, and it forms part of the Full and Final Settlement.