Leave Encashment When You Resign: How It Is Calculated and Taxed

When you resign, any unused earned leave can be turned into money. That payment is called leave encashment, and it usually shows up in your full and final settlement. How much you get depends on your company's leave policy and your basic pay, and how much of it is taxed depends on a formula in the Income-tax Act. For most private-sector employees leaving a job, a large part of it can be tax-free, up to an overall lifetime limit of ₹25 lakh.

That's the short answer. The details matter, because this is one of the payments people most often get wrong in their head before they resign.

Which leave gets encashed, and which doesn't

Generally it's earned leave (also called privilege leave or annual leave) that is encashable. Casual leave and sick leave usually lapse, though some employers do pay for them. Your HR policy or appointment letter decides this, not general rules on the internet, so pull up the policy before you do any maths.

There is also a legal floor. Under the Occupational Safety, Health and Working Conditions Code, 2020, which has been in force since 21 November 2025, a "worker" covered by Section 32 earns one day of paid leave for every 20 days worked in a calendar year (once they have worked 180 days in that year). If such a worker quits, they are entitled to wages in lieu of the leave they had earned, and that payment is due before the end of the second working day after quitting. Unused leave can be carried forward up to 30 days, and the worker can ask for encashment at the end of the calendar year.

Whether you count as a "worker" under that Code depends on your role and pay (people in managerial or administrative roles, and supervisors above a wage threshold, are generally excluded from the definition). State shops and establishments laws can add their own leave rules too. If you're in a mid-level or senior corporate role, your company policy is what you'll mostly be working from.

How the amount is usually calculated

Most companies calculate it as:

Leave encashment = (Basic pay, plus DA if any, ÷ 30 or 26) × number of earned leave days balance

Whether they divide by 30 or 26 is a policy choice, and it makes a real difference. On a basic of ₹30,000 with 20 days of leave:

• ÷ 30: ₹1,000 a day, so ₹20,000
• ÷ 26: about ₹1,154 a day, so about ₹23,077

It's based on basic (and DA), not on your CTC or gross salary. People who calculate on gross salary are usually disappointed. If you're unsure what your basic is, our guide on CTC vs in-hand salary explains the components.

Some companies also cap how many days can be encashed, for example "maximum 45 days". Again, check the policy.

The tax side, in plain words

Leave encashment you take while still employed (some companies let you encash leave every year) is taxed as part of your salary.

Leave encashment received when you leave the job is treated differently. From 1 April 2026, the Income-tax Act, 2025 replaced the old 1961 Act, and the rule now sits in Section 19 (the salary deductions table). The earlier provision was Section 10(10AA). The substance is the same. For a non-government employee, the tax-free part is the lowest of:

1. The actual amount received.
2. The cash value of the earned leave at your credit, with leave entitlement counted at no more than 30 days for each year of actual service.
3. Ten times your average monthly salary for the ten months before you leave (for this purpose, salary means basic plus DA where your terms of employment provide for it, and not other allowances or perquisites).
4. The limit notified by the government, which has been ₹25 lakh since 1 April 2023.

Anything above that lowest figure is taxable. The ₹25 lakh is a lifetime cap. If you claimed ₹4 lakh as exempt when you left one employer, you have ₹21 lakh left for the rest of your career. The CBDT made this explicit when it raised the limit from ₹3 lakh to ₹25 lakh in May 2023.

For most people with a few years of service, the limiting factor is the 30-days-a-year entitlement or the ten-months-salary cap, not the ₹25 lakh.

The words in the law are "retirement, whether on superannuation or otherwise". Resignation is generally treated as covered by "otherwise", and employers commonly show the exemption in Form 16. But if your amount is large or your employer has taxed all of it, check with a tax professional before filing your return rather than assuming.

What to check before your last day

• Your leave balance. Take a screenshot of the HR portal showing your earned leave balance. Mistakes happen when systems are closed after exit.
• Notice period adjustment. Many companies let you adjust earned leave against your notice period instead of encashing it. That gets you out sooner, but you lose the money. Decide which you actually need. Our guide on notice periods when the new company wants you sooner covers this trade-off.
• Notice recovery. If you leave without serving notice, the company may deduct notice pay from your settlement, which can wipe out the leave encashment entirely.
• The settlement statement. Ask for a written break-up of your full and final. Check the number of leave days, the per-day rate, and how TDS was calculated.

If your settlement is delayed or the leave figure looks wrong, raise it in writing quickly. Our guide on delayed full and final settlement walks through escalation.

And when you join the new company and they ask for your previous employer's income for TDS, include the taxable portion of the leave encashment. Skipping it is a common cause of tax notices later; see changing jobs mid-year and Form 16.