How it is worked out
Most companies let earned (privilege) leave build up and pay it out when someone leaves; some also let it be encashed every year. The payout is the number of days × one day's pay, where one day's pay is usually basic + DA divided by 30 (a calendar month) or 26 (working days). Your leave policy decides which.
Encashment while still employed is fully taxable as salary. On retirement or resignation, a private-sector employee can claim part of it as exempt — the smallest of four amounts, the largest of them capped at ₹25 lakh over a career.
The rules used
- Payout = days × (monthly basic + DA ÷ 30 or 26), per the company's leave policy.
- Tax-exempt on leaving (non-government employees) — the least of: the amount received; ₹25,00,000; 10 months' average salary; and the cash value of leave at credit, counting at most 30 days for each completed year of service.
- Average salary is the average basic + DA (and commission linked to turnover) of the 10 months before leaving.
- Government employees' leave encashment on retirement is fully exempt.
Assumptions. The ₹25 lakh limit is for a whole career; reduce it by any exemption claimed with an earlier employer. Encashment while in service is fully taxable and not modelled for exemption.