Leave Encashment in Payroll: Can Someone Explain the 5% Rule on Basic+DA?

Hi all, please help me understand the leave encashment rule (e.g., 5% on (Basic+DA)) in payroll.

Regards,
Ajinkya More.

Leave encashment policy

Leave encashment policy varies from organization to organization. The usual practice is to allow encashment up to a certain limit and, in some cases, beyond the accumulation limit.

Calculation of encashment value

The value of encashment is usually calculated as the number of days of encashment multiplied by the per day gross salary.

S K Bandyopadhyay (WB, Howrah)
CEO-USD HR Solutions

Yes, I agree with you, Mr. Bandhyopadhyay, that leave encashment varies from organization to organization. However, I would like to know if there is any rule mentioned in any act regarding leave encashment as part of gross salary, which is calculated at 5% on (Basic + DA). Particularly, I am interested in how this applies to the salaries of contractual employees.

Regards,
Ajinkya More

As per the law, you cannot surrender leave while you are in service, but it can be done at the time of leaving the company. However, many companies permit the accumulation of leave beyond the limit as permitted under the law and also allow the surrender of a certain number of leaves during service. In such scenarios, the management may determine the surrender value of leaves, which in practice is typically 100% of Basic pay and DA.

Leave encashment at the time of termination of employment should be based on the salary that is paid to an employee when they avail a leave. Normally, an employee on leave will not be paid only 5% or such other percentage of Basic and DA, but will receive their gross salary, which includes allowances like HRA, special allowances, etc. Therefore, 100% of that salary should be paid when unavailed leaves are surrendered.

Dear Ajinkya,

The majority of construction sites and project sites pay their employees 1.5 days of paid leave each month, which is 5% of their gross wage, in accordance with standard procedures (which is not addressed in any statute at all). Every worker is entitled to one day of leave for every twenty days of working under the terms of the Factories Act. As a result, he or she is qualified for a maximum of up to 15 days of earned leave in a calendar year, with a monthly average of 1.25 days. However, instead of paying 1.25 days, firms are paying 1.5 days of leave every month.

Regards,

Suresh

Dear Ajinkya,

Leave Policy and Labour Laws in India

The leave policy is designed by any organization keeping in mind the Labour Laws under the Factories Act and the Shops and Establishment Act in India. According to the Factories Act/Shops Establishment Act, earned/privilege leave is accrued at the rate of one leave for every 20 days worked, and it must be encashed if not utilized, based on basic pay and VDA or DA components. However, the company can enhance and go beyond the features specified by the Labour Laws. Please refer to the Factories Act/Shops Establishment Act state rules that are applicable to your organization.