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Leave encashment calculator with tax exemption

Work out what unused leave is worth, and how much of it is tax-free when it is paid at resignation or retirement.

For the tax-free part:

Daily rate—
Leave encashment—
Test 1: ₹25 lakh, less any used earlier—
Test 2: amount received—
Test 3: average salary × 10—
Test 4: — of leave, at most 30 days a year—
Tax-free—
Taxable as salary—

An estimate. Your leave policy decides the salary and daily rate for the payment. For the tax tests, salary means basic, DA and commission paid as a fixed percentage of turnover. The tests were written under section 10(10AA) of the 1961 Act, and the Income-tax Act, 2025 has renumbered them, so check the current reference for payments after 1 April 2026.

Doing this every month for your whole team?

AiroHR works this out for every employee from their attendance, then gives you payslips, bank files and the PF ECR file. See it on your own payroll, or get the month's dates by email.

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How leave encashment is calculated

Leave encashment = daily rate × unused leave days

Your leave policy sets the daily rate. Some companies divide basic and DA by 30, some by 26, and some use gross pay. Write the method into your policy and use it every time.

How much is tax-free

  • During service: fully taxable as salary.
  • At resignation or retirement, government employees: fully exempt.
  • On death, paid to the legal heir: fully exempt.
  • At resignation or retirement, private sector: exempt up to the lowest of four tests, and the rest is taxable.

The four tests are ₹25 lakh (a lifetime limit, so earlier exemptions reduce it), the amount actually received, ten months' average salary, and average salary per day × unused leave, counting no more than 30 days of leave for each completed year of service.

A private-sector employee resigns after 15 years. They earned 35 days a year and used 200 days, leaving 325. Average salary is ₹33,000 a month, or ₹1,100 a day, and all 325 days are paid: ₹3,57,500. The lowest test is (30 × 15 − 200) × ₹1,100 = ₹2,75,000, so ₹2,75,000 is tax-free and ₹82,500 is taxable. These are the calculator's starting figures.

The leave encashment guide covers the Labour Codes' 30-day carry-forward limit and what to check in your leave policy.

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FAQ

Leave encashment calculator questions

How is leave encashment calculated?

Daily rate × unused leave days. Your leave policy sets the daily rate, usually basic and DA divided by 30 or 26.

Is leave encashment taxable?

During service it is fully taxable as salary. At retirement or resignation, government employees are fully exempt and private-sector staff get a partial exemption, up to ₹25 lakh across their working life.

What is the leave encashment exemption limit?

For private-sector staff, ₹25 lakh across their working life, or less if one of the other three tests gives a lower figure.

Why is my tax-free amount lower than the ₹25 lakh limit?

The tax-free part is the lowest of four tests. Ten months' average salary, or leave counted at no more than 30 days a year less leave already taken, is often lower than ₹25 lakh.

Leave balances that are always right

AiroHR keeps every leave balance up to date, pays encashment with payroll, and at exit settles encashable days from each leave type's rules.

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