Glossary
What is leave encashment?
What leave encashment means, which leave can be encashed, and how a day's pay is worked out for unused earned leave.
Updated
In short
Leave encashment is paying an employee cash for unused earned leave, at year end or when they leave. SimpleERP tracks leave balances but does not compute encashment; you add it as a payslip line.
Leave encashment is a payment in cash for earned leave an employee has not taken. Depending on the employer's policy and state law, it is paid when the employee leaves, at year end for leave above the carry-forward limit, or both. It is usually worked out as one day's Basic, with dearness allowance where paid, multiplied by the number of unused days.
Leave encashment: a worked example
Selvam P, fitter at Lakshmi Steel Furnitures, leaves in October 2026 with 10 days of earned leave unused. His Basic is ₹16,000, and the business's policy divides by 26 working days.
| Step | Working | Amount |
|---|---|---|
| One day's Basic | ₹16,000 ÷ 26 | ₹615.38 |
| Encashment for 10 days | ₹615.38 × 10 | ₹6,153.85 |
FAQ
Questions, answered
Which leave can be encashed?
Usually only earned or privilege leave. Casual and sick leave are generally not encashable unless the employer's policy says so. State shops and establishments acts and the OSH Code 2020, formerly the Factories Act, set minimums for some workers; check the current rules.
Is leave encashment taxable?
Encashment during service is taxable as salary. Encashment on retirement or resignation may be partly exempt within limits, as notified, depending on whether the employer is government or private. This is not tax advice; ask your CA.
Does SimpleERP track earned leave balances?
SimpleERP tracks earned leave balances. Leave types such as EL have an annual allowance and a carry-forward limit, seeded at 15 days with up to 30 carried forward. Balances update as leave is approved, and the leave balances report shows them per employee.
How do I pay leave encashment in SimpleERP?
Check the employee's balance in the leave balances report, work out the amount, then open their payslip in the run review and use Add line → Other earning. The amount is posted to salary expense when the run is approved.
Related
Keep reading
Full and final settlement
The last payment to a leaving employee: salary to the last day, plus dues such as encashment and gratuity, less recoveries.
Read moreLoss of pay (LOP)
The salary cut for unpaid days, applied by pro-rating each component by paid days over working days.
Read moreHR, attendance & leave
Employees, a daily attendance sheet, phone check-in, holidays and leave balances.
Read more
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