Introduction:

Leave Encashment As per labor laws, each salaried employee is ensured a minimum annual allotment of paid leave hours. However, it’s not mandatory for an individual employee to exhaust all entitled leave hours within one year. Many organizations permit employees to carry over any unused paid leave time.

When a person retired or left the company, they would almost always have accumulated leave that was unused. It depends on specifics of the situation.. This forces the company to pay its workers for any unused paid time off that they have accrued. This concept is commonly referred to as “leave encashment“.

Types of leaves:

The company’s leave policy typically details the types of leave available to employees, with variations in time-off policies between organizations. Commonly offered leaves include:

Casual leave: 

Employees are entitled to take seven to ten days of casual leave for personal needs, with the amount that can be cashed out varying among companies.

Medical leaves:

Employees are required to notify their employers when unable to fulfill their duties due to health reasons, requesting medical leave. The maximum number of medical leave days permitted varies significantly among companies.

Earned Leave:

Employees may utilize accrued leave with prior notification to authorities. After a specified duration, these leaves become eligible for encashment, subject to varying policies among organizations.

Holiday Leaves:

Employees have the freedom to request holiday leave, which does not affect their compensation. The maximum number of vacation days allotted to an employee varies among firms.

Sabbaticals:

Employees are encouraged to utilize their sabbatical time to enhance their education and acquire new skills. They have the option to enroll in courses, with the employer covering the costs of their leave during the course period.

Maternity leaves: 

Maternity leave, ranging from 12 to 26 weeks based on pregnancy duration, is exclusively available to female employees. While extensions can be requested, any additional time taken remains unpaid, and it’s important to note that these leaves cannot be converted into cash benefits.

Advantages of Leave Encashment : 

• The ability to cash in unused leave offers employees several benefits, including increased financial resources that can help them achieve their monetary goals.

• Knowing they will be compensated for their efforts through leave encashment, employees are motivated to work harder and perform better, as they understand their hard work will be duly recognized and rewarded.

• Lastly, leave encashment can also function as a tool for employee retention, as employees are more inclined to stay with an organization that provides such benefits, thereby reducing turnover rates and promoting employee loyalty.

• Participation in leave encashment incentivizes employees to remain engaged in their work, as they have the opportunity to receive monetary compensation for their unused leave days. This benefit encourages employees to maintain their productivity without taking an excessive number of leave days.

• This benefit facilitates cash flow for employees, providing them with additional financial resources that can be particularly helpful during times of crisis.

Tax benefits:

• The timing of an employee’s receipt of leave encashment determines its taxation status. If encashed while still employed, the amount is classified as ‘Income from Salary’ and is fully taxable. However, you may qualify for tax incentives under Section 89 of the Income Tax Act. To claim the associated tax reduction, complete form 10E, which can be submitted online through the federal government’s income tax filing website.

• Leave encashment received by central or state government employees is fully tax-exempt. For non-government employees, leave encashment is partly exempt and partly taxable, following the calculation outlined in Section 10(10AA)(ii). In the case of a legal heir receiving leave encashment from a deceased employee, the entire amount is fully tax-exempt.

• Furthermore, the leave encashment amount received by the legal heir of a deceased employee is fully exempt from taxation in the hands of the legal heirs.

• Non-government employees are granted a tax exemption on a portion of their leave encashment. Since 2002, this exemption has been capped at Rs. 3 lakh, but it has recently been increased to Rs. 25 lakh to align with the overall rise in income from salary.

Conclusion: 

Leave encashment provides employees with a chance to receive compensation for their unused paid leave days. Taxation rules apply to leave encashment received during employment, with varying exemptions for government and non-government employees upon retirement or resignation.