When you resign or retire, most employers pay out the earned leave you haven't used. Part of it can be tax-free, up to ₹25 lakh over your career if you're not a government employee.
Here's how the amount and the tax-free part are worked out.
How it's worked out
Encashment = (basic + DA a month) ÷ 30 × days paid outFor non-government employees leaving a job, the tax-free part is the lowest of these four amounts:
- The leave encashment you actually received.
- ₹25 lakh, less any exemption you've claimed before.
- 10 months' average salary (basic and DA over the last 10 months).
- Unused leave × average monthly salary ÷ 30, counting at most 30 days of leave for each completed year.
Government employees pay no tax on leave encashed at retirement. From 2026-27 the rule is in section 19 of the Income-tax Act, 2025, and it applies in both regimes.
Worked example
Example: ₹60,000 basic, 45 days paid out after 6 years
Encashment: ₹2,000 a day × 45 = ₹90,000.
Leave earned at 24 days a year for 6 years is 144 days; 100 were used, so 44 are unused: ₹88,000 is the lowest limit.
₹88,000 is tax-free; ₹2,000 is taxed with your salary, about ₹312 at a ₹15 lakh income. Encashed while still employed, all ₹90,000 would be taxed: ₹14,040.
Leaving a job also brings gratuity and notice pay. See the gratuity calculator and notice period buyout calculator.
How to use this calculator
- Enter your basic pay and DA, and the days being paid out.
- Choose how your employer works out a day's pay.
- Say whether you're leaving, and if you're a government employee.
- Enter your years of service and leave history for the exemption.
FAQs
How much leave encashment is tax-free?
For non-government employees, up to ₹25 lakh over your whole career, subject to the other three limits. It applies in both the old and new regimes.
Has the section changed?
From tax year 2026-27 the exemption is in section 19 of the Income-tax Act, 2025. It was section 10(10AA), and the rules are the same.
Is leave encashment during service taxable?
Yes, fully, as part of your salary. The exemption only applies when you retire or resign.
Is encashment based on basic pay or gross salary?
Usually basic pay and DA, unless your company policy says otherwise. Check your offer letter or HR policy.
Sources
- Zoho Payroll: Leave encashment exemption under section 19 (2026)
- Keka: Leave encashment exemption, ₹25 lakh limit
Results are estimates for resident individuals under 60 and aren't tax, legal or financial advice. For your own return, check with a chartered accountant. Spotted a mistake? Tell us.