Leave Encashment - What Is The Meaning Of Leave Encashment And Its Importance | HRMantra Hr Software

Leave Encashment - What Is The Meaning Of Leave Encashment And Its Importance | HRMantra Hr Software

 5-7 minutes 

Leave Encashment Definition

Leave encashment is a monetary compensation that an employee receives from an organization on a yearly basis in lieu of the paid leaves that were not utilized by the employee. Legally speaking, every salaried employee has a certain amount of paid leaves that are provided to him/her by his/her employer.

Not many working employees are aware that their harnessed leaves can help earn extra money. In leave encashment, every working man is entitled to get a refund on the accrued but not availed leave balance.

If you are an HR manager, then you will often come across numerous questions regarding the encashment of unused leaves and what the procedure is for the same. So you should be aware of everything under this concept.

Let''s see:

• Meaning of Leave Encashment
• Types of Leaves
• How to Calculate Leave Encashment
• Leave Encashment Tax

Meaning of Leave Encashment

At the time of leaving an organization, leave encashment refers to the amount of money paid by an employer for the leaves that are to the credit of.

As per this policy, it is the employer''s responsibility to either pay the dues of the employee for employment services provided or to record the adjustment in the employee''s leave quota for the incoming calendar year.

The leave encashment for an employee is included in the F&F performed by the organization.

Some employers usually pay for the leaves taken, and other employers adjust the benefits in the following year. However, in the Factories Act, 1948, any due leaves and bonuses will have to be repaid in the 7th or 10th of the month following the resignation date.

Types of Leaves

• Medical Leave: Medical leaves are the most powerful tools available to tackle issues there are to one''s health. Normally the employees are required to produce their absence as a proof on medical leave.
• Privilege Leave: Can be accumulated by an employee due to prolonged services provided to an organization. They can be taken simply through filling the advance required by the employer.
• Casual Leave: An employee is given these leaves in case of emergency on a personal level or for a personal purpose.
• Holiday Leave: An employer gives this leave to an employee without deduction from one''s pay. It is often given to employees on official holidays, like public or national holidays. This is the only form of leave that is given explicitly to female employees during their pregnancy or delivery.
• Paternity Leave: This is the only leave that is given and uniquely designed for male employees whenever they make the life achievement of becoming father. In India, access to paternity leave is only allowed for workers within the state.
• Sabbaticals: These are paid leaves that employers grant employees to enhance their professional skills and become more competent. Employers pay an employee the days they took off work if they are attending or seeking skill training.

How to Calculate Leave Encashment

Understand the process of calculating retirement leave encashment with the following example:

Assume that Mr. Aman retired after twenty years of service. He was getting Rs. 60,000 per month as his basic salary plus dearness allowance at the time of retirement. Aman''s private company had sanctioned him paid leave of 20 days in a year. On retirement Aman had a balance of 200 days of paid leave to his credit out of which he availed 200 days of leave.

For the uninitiated, the leave encashment formula is as follows:

Encashed amount = Basic salary per day X Number of unused earned leaves

For the case of Aman, the amount encashed would be:

Amount paid = (60,000 / 30) X 200, or 2,000 X 200, or Rs. 4,00,000.

Therefore, Aman needs to be paid leave encashment of Rs. 4 Lakhs.

The encashment value of Aman is partly exempted from tax under the calculations provided by the Section 10(10AA) since he is not a government employee.

Leave Encashment Tax

During Employment

The employee, whosoever, asks for encashing of leaves, whether unutilized or accumulated, during the course of employment is to be taxed as salary.

This makes the employee qualified for the Section 89 tax relief. According to Section 89, the employee can claim a tax relief that is obtainable within the amount that is received through the process of leave encashment.

The attached Form 10E is the application document through which employees claim relief on tax payments accruing from leave encashment. The form is accessed after it is filled and filed duly through the e-portal of income tax department.

After Retirement & Resignation

An employee is allowed to encash his or her paid leaves on being retired or resigning from the organization.

However, there are a few other pointers for paid leave encashment:

• Employees who have served with central or state government organizations will be given full permission to claim and exempt themselves from the tax on encashment of paid leave.
• If an employee dies before encashment of leave, then his legal heirs are answerable to getting the whole amount of leave encashment on behalf of him. They will not be taxed on the same.

Voila, we are done with the leave encashment.

Timely and accurate leave encashment, remember, is a MUST. However, this is easier said than done if done manually. So, here''s where automation is the answer. Rely on HRMantra—the simplest HR software in India that can help you manage multiple leaves and encashments like a PRO.

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