Dear All,
It is not mentioned either in the Factories' Act or in any other Acts regarding the method of calculation of leave encashment. Some hold the view that in the case of monthly rated employees, to arrive at the daily rate, the monthly rate of salary should be divided by 30 days. Others argue that the monthly rate of salary should be divided by 26 days. I kindly request someone to highlight the correct and justifiable procedure.
Thank you.
From India, Bangalore
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28It is not mentioned either in the Factories' Act or in any other Acts regarding the method of calculation of leave encashment. Some hold the view that in the case of monthly rated employees, to arrive at the daily rate, the monthly rate of salary should be divided by 30 days. Others argue that the monthly rate of salary should be divided by 26 days. I kindly request someone to highlight the correct and justifiable procedure.
Thank you.
From India, Bangalore
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Actually there are laws on leave encashments, see in every shops and establishment act there are decided leaves and there is a provision for carry forward along with cash payments for them. Like for eg in Punjab and Haryana Shops and Establishment Act
Leave- See Indian Labour Laws & Shram Suvidha Simplified
" Every employee who has been in employment for not less than twenty days in a year shall be entitled to one days earned leave for every such twenty days:
If an employee is discharged or dismissed from or leaves service during the course of the year he shall be entitled to leave with wages or wage in lieu of un-availed leave.
If an employee does not in any one year take the whole of the leave allowed to him under clause (a), any leave not taken by him shall be added to the leave to be allowed to him in the succeeding year: Provided that
Subject to any specific agreement between the employer and the employee, the total number of days of leave that may be carried forward to a succeeding year shall not exceed forty in the case of a young person or thirty in any other case;
The provisions of this section shall not operate to the prejudice of any rights to which an employee may be entitled under any other law or under the terms of any award, agreement or contract of service;
Where such award, agreement or contract of service provides for a longer leave with wages or weekly holidays than those provided under this section the employee shall be entitled to only such longer leave or weekly holidays as the case may be.
Leave period in clause (a) shall, when applied for be granted except for a valid reason to be communicated in writing by the employer to the employee within fifteen days of the application: Provided that the leave so refused shall, if applied for again, be allowed during the year.
Notwithstanding anything contained in the above clauses every employee in an establishment shall be allowed with wages seven days casual leave and seven days sick leave in a year."
Now those covered under this act can follow the same parallel while allotting encashment facility
From India, Kolkata
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Leave- See Indian Labour Laws & Shram Suvidha Simplified
" Every employee who has been in employment for not less than twenty days in a year shall be entitled to one days earned leave for every such twenty days:
If an employee is discharged or dismissed from or leaves service during the course of the year he shall be entitled to leave with wages or wage in lieu of un-availed leave.
If an employee does not in any one year take the whole of the leave allowed to him under clause (a), any leave not taken by him shall be added to the leave to be allowed to him in the succeeding year: Provided that
Subject to any specific agreement between the employer and the employee, the total number of days of leave that may be carried forward to a succeeding year shall not exceed forty in the case of a young person or thirty in any other case;
The provisions of this section shall not operate to the prejudice of any rights to which an employee may be entitled under any other law or under the terms of any award, agreement or contract of service;
Where such award, agreement or contract of service provides for a longer leave with wages or weekly holidays than those provided under this section the employee shall be entitled to only such longer leave or weekly holidays as the case may be.
Leave period in clause (a) shall, when applied for be granted except for a valid reason to be communicated in writing by the employer to the employee within fifteen days of the application: Provided that the leave so refused shall, if applied for again, be allowed during the year.
Notwithstanding anything contained in the above clauses every employee in an establishment shall be allowed with wages seven days casual leave and seven days sick leave in a year."
Now those covered under this act can follow the same parallel while allotting encashment facility
From India, Kolkata
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Dear Labour Law Index,
Your reply is certainly useful to me. However, my query pertains to the method of calculation in the case of leave encashment. To determine the daily rate, should the monthly salary be divided by 30 or 26 days? I would appreciate clarification on this matter. Additionally, if there is any supporting document available, it would be even more helpful.
Thank you.
From India, Bangalore
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Your reply is certainly useful to me. However, my query pertains to the method of calculation in the case of leave encashment. To determine the daily rate, should the monthly salary be divided by 30 or 26 days? I would appreciate clarification on this matter. Additionally, if there is any supporting document available, it would be even more helpful.
Thank you.
From India, Bangalore
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Most Appreciated,
There are two ways we can approach this:
1) Actuarial Standards in India: They value leave encashment on a 26-day basis. https://www.google.co.in/url?sa=t&am...RrCaMdpp25AI7g
2) Civil Service Rule 38A, it does take 30 days.
According to me, 26 days is the correct valuation measure.
From India, Kolkata
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There are two ways we can approach this:
1) Actuarial Standards in India: They value leave encashment on a 26-day basis. https://www.google.co.in/url?sa=t&am...RrCaMdpp25AI7g
2) Civil Service Rule 38A, it does take 30 days.
According to me, 26 days is the correct valuation measure.
From India, Kolkata
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There is an old case in the Supreme Court that declared for the purpose of gratuity computation, the daily rate from the monthly rate would be obtained by dividing by 26. This rule has been followed by courts since. Even minimum wage regulations and notifications specify dividing by 26 days.
So, you need to divide by 26 days in your case.
From India, Mumbai
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So, you need to divide by 26 days in your case.
From India, Mumbai
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Dear Mr. Mohan,
For monthly-rated employees, do you pay salary for 30/31/29/28 days? You pay salary based on the total days in the month. For the purpose of Leave Encashment, you take the total days in the month in which Leave Encashment is paid to determine 1 Day's Salary.
For example, if you are paying Leave Encashment in April 2017, take 30 days. Similarly, if you are paying Leave Encashment in May 2017, take 31 days.
From India, New Delhi
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For monthly-rated employees, do you pay salary for 30/31/29/28 days? You pay salary based on the total days in the month. For the purpose of Leave Encashment, you take the total days in the month in which Leave Encashment is paid to determine 1 Day's Salary.
For example, if you are paying Leave Encashment in April 2017, take 30 days. Similarly, if you are paying Leave Encashment in May 2017, take 31 days.
From India, New Delhi
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It would be highly beneficial for me if learned members could enlighten me on how to distribute a salary of Rs 1 lakh per month into allowances and perquisites. I am an Administrative Officer who was recently promoted.
Regards,
Syed Adil Mehdi
From India, New+Delhi
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Regards,
Syed Adil Mehdi
From India, New+Delhi
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I'll try to give a twist to the question here. What are the Heads of Salary (Basic, DA, HRA, Overtime Allowance, Tiffin Allowance, Conveyance Allowance...) that should be considered when deciding the amount to be paid for Leave Encashment?
Learned friends, may you kindly enlighten others, please.
Soumitra Sengupta
From India, Pune
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Learned friends, may you kindly enlighten others, please.
Soumitra Sengupta
From India, Pune
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Don’t pose academic question, pose a case question to help you better.
From India, Mumbai
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From India, Mumbai
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Dear Soumitra,
Please peruse "The Factories Act, 1948" and Shops & Commercial Establishments Act to learn about leave encashment. Fixed salary components of gross salary are considered for leave encashment. Extra time allowance/overtime, tiffin allowance, etc., cannot be part of fixed salary components. What an employee earns while on leave, the same amount he earns at the time of surrendering leave.
Thank you.
From India, New Delhi
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Please peruse "The Factories Act, 1948" and Shops & Commercial Establishments Act to learn about leave encashment. Fixed salary components of gross salary are considered for leave encashment. Extra time allowance/overtime, tiffin allowance, etc., cannot be part of fixed salary components. What an employee earns while on leave, the same amount he earns at the time of surrendering leave.
Thank you.
From India, New Delhi
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Dear Seniors,
We can calculate the leave encashment in the following manner:
Example:
Monthly Salary - Rs. 10,000
Number of leaves to be encashed = 10
One day salary = Rs. (10,000 x 12) / 365 = Rs. 1,20,000 / 365 = Rs. 328.8 = Rs. 329 (approx)
Total Leave encashment = Rs. 329 x 10 = Rs. 3,290/-
Please correct me if wrong anywhere.
Regards,
Sandip Shaw
From India, Kolkata
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We can calculate the leave encashment in the following manner:
Example:
Monthly Salary - Rs. 10,000
Number of leaves to be encashed = 10
One day salary = Rs. (10,000 x 12) / 365 = Rs. 1,20,000 / 365 = Rs. 328.8 = Rs. 329 (approx)
Total Leave encashment = Rs. 329 x 10 = Rs. 3,290/-
Please correct me if wrong anywhere.
Regards,
Sandip Shaw
From India, Kolkata
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Dear Sirs,
Of all types of leaves only earned or privilege leave is encashable.
$ Usually the basic salary and dearness allowance is taken in consideration for calculation of the amount but Gross salary is also taken for calculation (subject to Organization's standing order).
$ Leave encashment is only for completed years of service. If you have 20 years and 7 months of svice, the calculation would be for 20 years only.
$There is no statutory compulsion to have Leave Encashment Policy. So your employer may or may not have leave encashment at their discretion.
$Government employees can have maximum of 10 months of leave accumulation and hence encashment
** In industrial law provisions of leave encashment is derived from Factories Act and from Shop and commercial establishment Act.
## As per Section 79 of Factories Act 1948,
Provided that the total number of days of leave that may be carried forward to a succeeding year shall not exceed thirty (30) in the case of an adult or forty(40) in the case of a child.
However there has been a recent amendment in 2002 via The Small Enterprises (Employment Relations) Act 2002 which is applicable to whole of India. Under chapter IV - conditions of work, clause no 11 point 4 mentions that A worker shall be permitted to accumulate leave up to 45 days in addition to the leave entitlement of the current year earned on the basis of the work done by him in the previous year and he shall be entitled to encashment of entire accumulated earned leave including leave earned during the current year pro rata in case his services are terminated or he quits the service.
Where as in Shop and Commercial Establishment it is up to 45 days (applicable to each State separately).
$ Leave Encashment is received by the employee at the time of separation or retirement from the employment. The maximum leave encashment exemption limit is up to 3 Lakhs.
$ Leave is calculated for the calendar year January to December.
## How to Calculate Leave Pay and Encashment Payment
Annual leave encashment = (leave days x 12) x (Gross Salary x 12 / 365)
Example:A person gets a salary of Rs.12000 per month and allowed leave days per month is 2. Calculate Leave Encashment Payment.
Employee salary = Rs.12000
Leave Days Per month = 2
Annual leave encashment= (leave days x 12) x (Gross Salary/Basic+D.A x 12 / 365)
= (2 x 12) x (12000 x 12 / 365)
= Rs. 9468.493
## Tax on Leave Encashment:
The tax of leave encashment is dependent on if you are government or private sector employee, or if you are encashing it at the time of retirement or mid-way.
A) At the time of Retirement:
$ Government Employee:The entire amount received as leave encashment is tax free.
$ Non Government Employee:
The leave encashment for private sector employees is stated in Section 10 (10 AA) and is minimum of the following 4 factors:
1.Amount received as leave encashment
2.Maximum cap as stated by government Rs 3 Lakhs after 02.04.1998
3.Last 10 months average basic salary & dearness allowance before leaving the job
4.Cash equivalent of the leave balance, subject to maximum of 30 days for each completed year of service
For Example: A person is a non-government employee who receives Rs 6 lakh as her leave encashment at the time of retirement. She worked here for 25 years and was eligible for 45 earned leaves every year.
Below is the calculation:
No. Of earned leaves person was eligible for = 45 X 25 = 1,125 days
He/she used 585 leaves over her service period
Leaves eligible for leave encashment = 1125 585 = 540 days (18 months)
Average last 10 months basic + dearness allowance = Rs 25,000
Tax Calculation:
The tax exemption would be minimum of the below 4 points:
1.Amount received as leave encashment Rs 6 Lakhs
2.Maximum cap as stated by government Rs 3 Lakhs
3.Last 10 months average basic salary & dearness allowance before leaving the job Rs 2,50,000 (Rs 25000 X 10)
4.Cash equivalent of the leave balance, subject to maximum of 30 days for each completed year of service Rs 1,37,500
Earned leave eligibility as per above rule = 30 days X 25 = 750 days
Leaves used = 585 days
Leaves eligible for encashment (as per above rule) = 750 585 = 165 days (5.5 months)
Cash equivalent = 5.5 X 25000 = Rs 1,37,500
Tax exemption = Rs 1, 37,500
Taxable component = Rs 6, 00,000 Rs 1, 37,500 = Rs 4, 62,500
Post tax deduction the leave encashment would vary from Rs 3.2 lakh (in the 30% tax slab) to Rs 4.15 lakh (in 10% tax slab)
**The leave encashment is tax free for the government employee and the calculation is same as above for non-government employees.
However the limit of Rs 3 lakh for non-government employee is for the entire lifetime.
In case you already got Rs 1 lakh while leaving your job, going forward you can only have Rs 2 lakhs as tax exempted leave encashment.
B) Leave encashment while in Service
If you encash leaves partially or fully while in service the income from encashment is fully taxable for both government and non-government employee.
C) Leave encashment on Death
The leave encashment is tax free when paid to the nominees or legal heirs at the death of employee.
Note: It is not necessary that the workers in the Factories be given only earned leave. Certain factories also design their own leave policies which also include Casual Leave and Sick Leave whereby extending better welfare facility to its employees.
Regards,
Amit
From India, Surat
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Of all types of leaves only earned or privilege leave is encashable.
$ Usually the basic salary and dearness allowance is taken in consideration for calculation of the amount but Gross salary is also taken for calculation (subject to Organization's standing order).
$ Leave encashment is only for completed years of service. If you have 20 years and 7 months of svice, the calculation would be for 20 years only.
$There is no statutory compulsion to have Leave Encashment Policy. So your employer may or may not have leave encashment at their discretion.
$Government employees can have maximum of 10 months of leave accumulation and hence encashment
** In industrial law provisions of leave encashment is derived from Factories Act and from Shop and commercial establishment Act.
## As per Section 79 of Factories Act 1948,
Provided that the total number of days of leave that may be carried forward to a succeeding year shall not exceed thirty (30) in the case of an adult or forty(40) in the case of a child.
However there has been a recent amendment in 2002 via The Small Enterprises (Employment Relations) Act 2002 which is applicable to whole of India. Under chapter IV - conditions of work, clause no 11 point 4 mentions that A worker shall be permitted to accumulate leave up to 45 days in addition to the leave entitlement of the current year earned on the basis of the work done by him in the previous year and he shall be entitled to encashment of entire accumulated earned leave including leave earned during the current year pro rata in case his services are terminated or he quits the service.
Where as in Shop and Commercial Establishment it is up to 45 days (applicable to each State separately).
$ Leave Encashment is received by the employee at the time of separation or retirement from the employment. The maximum leave encashment exemption limit is up to 3 Lakhs.
$ Leave is calculated for the calendar year January to December.
## How to Calculate Leave Pay and Encashment Payment
Annual leave encashment = (leave days x 12) x (Gross Salary x 12 / 365)
Example:A person gets a salary of Rs.12000 per month and allowed leave days per month is 2. Calculate Leave Encashment Payment.
Employee salary = Rs.12000
Leave Days Per month = 2
Annual leave encashment= (leave days x 12) x (Gross Salary/Basic+D.A x 12 / 365)
= (2 x 12) x (12000 x 12 / 365)
= Rs. 9468.493
## Tax on Leave Encashment:
The tax of leave encashment is dependent on if you are government or private sector employee, or if you are encashing it at the time of retirement or mid-way.
A) At the time of Retirement:
$ Government Employee:The entire amount received as leave encashment is tax free.
$ Non Government Employee:
The leave encashment for private sector employees is stated in Section 10 (10 AA) and is minimum of the following 4 factors:
1.Amount received as leave encashment
2.Maximum cap as stated by government Rs 3 Lakhs after 02.04.1998
3.Last 10 months average basic salary & dearness allowance before leaving the job
4.Cash equivalent of the leave balance, subject to maximum of 30 days for each completed year of service
For Example: A person is a non-government employee who receives Rs 6 lakh as her leave encashment at the time of retirement. She worked here for 25 years and was eligible for 45 earned leaves every year.
Below is the calculation:
No. Of earned leaves person was eligible for = 45 X 25 = 1,125 days
He/she used 585 leaves over her service period
Leaves eligible for leave encashment = 1125 585 = 540 days (18 months)
Average last 10 months basic + dearness allowance = Rs 25,000
Tax Calculation:
The tax exemption would be minimum of the below 4 points:
1.Amount received as leave encashment Rs 6 Lakhs
2.Maximum cap as stated by government Rs 3 Lakhs
3.Last 10 months average basic salary & dearness allowance before leaving the job Rs 2,50,000 (Rs 25000 X 10)
4.Cash equivalent of the leave balance, subject to maximum of 30 days for each completed year of service Rs 1,37,500
Earned leave eligibility as per above rule = 30 days X 25 = 750 days
Leaves used = 585 days
Leaves eligible for encashment (as per above rule) = 750 585 = 165 days (5.5 months)
Cash equivalent = 5.5 X 25000 = Rs 1,37,500
Tax exemption = Rs 1, 37,500
Taxable component = Rs 6, 00,000 Rs 1, 37,500 = Rs 4, 62,500
Post tax deduction the leave encashment would vary from Rs 3.2 lakh (in the 30% tax slab) to Rs 4.15 lakh (in 10% tax slab)
**The leave encashment is tax free for the government employee and the calculation is same as above for non-government employees.
However the limit of Rs 3 lakh for non-government employee is for the entire lifetime.
In case you already got Rs 1 lakh while leaving your job, going forward you can only have Rs 2 lakhs as tax exempted leave encashment.
B) Leave encashment while in Service
If you encash leaves partially or fully while in service the income from encashment is fully taxable for both government and non-government employee.
C) Leave encashment on Death
The leave encashment is tax free when paid to the nominees or legal heirs at the death of employee.
Note: It is not necessary that the workers in the Factories be given only earned leave. Certain factories also design their own leave policies which also include Casual Leave and Sick Leave whereby extending better welfare facility to its employees.
Regards,
Amit
From India, Surat
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Leave Encashment & Salary Calculation.xls x
LEAVE ENCASHMENT NOT INCLUDED IN WAGES FOR P. F. CALCULATION.pdf