Leave Salary

This query is : Resolved 

27 May 2008

Hi Experts,

What is basis of leave salary Calculation?
whether HRA to be included for the calculation?
What are the statutory obligations for the same?

Thanking you in advance


CA Hemant T Dewani (Expert)
27 May 2008

As per Service rules every employee is entitled to certain no. of leaves per annum. If an employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form during the continuity of employment or on retirement, it is known as leave salary.

The taxation of Leave salary for various categories of employees is shown here under:

Status of Employee
Nature of Leave Encashment

Government/ Non-Government employee
Leave encashment during Continuity of employment
It is chargeable to tax. However relief can be taken under section 89

Government employee
Leave encashment at the time of retirement / leaving job
It is fully exempt from tax under section 10(10AA)(i)

Non-Government employee
Leave encashment at the time of retirement / leaving job
It is fully or partially exempt from tax in some cases under section 10(10AA)(ii)

In Simple words from the above tabloid summary we can conclude that Leave Salary is chargeable to tax only in two cases first accumulated leave being enchased by any class of employee- Govt. or Non Govt. during the continuation of employment whereof it is fully chargeable to tax.

Second being accumulated leaves enchased by a non govt. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary comes into picture which can be calculated as LEAST of the following:

Period of earned leave (in no. of months) to the credit of the employee at the time of his retirement leaving the job ×Average monthly salary.

10 × Average monthly salary.

The amount specified by the Government i.e., Rs. 3,00,000 /-;

Leave encashment actually received at the time of retirement.

How to find out leave standing to the credit of an employee at the time of retirement or leaving the job – THREE STEPS THEORY

Step (a) – Find out duration of services in number of years (ignore any fraction of year).

Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).

For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service.

Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:-

Step (a) × Step (b) minus Step (c) ÷ 30
How to find out Average monthly salary?

Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.

Shekar (Expert)
27 May 2008

There is no income tax exemption available if you encash your earned leave during your service period. The amount of earned leave encashed by you will be taxed as salary income in your hands. Tax exemption is available only when you encash your earned leave at the time of retirement, subject to certain conditions. The maximum exemption limit is Rs 3 lakh.

The total amount of earned leave is calculated by taking 30 days earned leave for every one year of completed service and multiplied by the total service period. The method to calculate the amount of encashment is very simple. The average salary drawn by the employee during the preceding 10 months is used as the base for calculating the amount due to him.

Satish T (Querist)
27 May 2008

Thank you for your reply Sir

our employer has bifurcated our salary into Basic + HRA + Citi Comp. Allowances.

we have recd. the leave encashment upto 31-dec-07 on the basis of 30days per year, it was calculated on Basic only.
upon inquiring, we have been told that the Leave Encashment will be calculated on BASIC + DA + Fixed percentage of Comm.

as there is no DA & Commission it is calculated on BASIC only.

How can i confirm if the above true? is there any statutory guidelines for the same?

awainting for your reply


Shekar (Expert)
27 May 2008

Ur employer is right in calculation..
If u want to confirm...calculate leave salary by taking only basic...

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