Leave encashment

Leave encashment, formally the cash equivalent of leave, is the payment a central government employee receives for the leave standing unused in their leave account, made chiefly on retirement, under Rule 39 of the CCS (Leave) Rules, 1972. On superannuation the employee is paid the cash value of the earned leave at credit, and of half pay leave to fill the balance, up to a combined maximum of 300 days, computed on the last basic pay plus dearness allowance. It is one of the three retirement payments, alongside the pension and the retirement gratuity, and it does not reduce either.

For most employees it is a substantial sum, because earned leave accumulates over a career and the encashment is on the pay at retirement, near the top of the pay scale. An employee who reaches retirement with the full 300 days of earned leave receives about ten months of basic pay plus dearness allowance as a one-time, tax-free payment. This article sets out what leave is encashable and how it accrues, the exact formula and the 300-day cap, the pay that counts, the encashment allowed during service with Leave Travel Concession, the different entitlements on resignation, death, and dismissal, and the income-tax exemption. The leave encashment calculator works out the figure for your own pay and leave.

Earned leave and half pay leave

Two kinds of leave are encashable, and they behave differently. Earned leave is the main paid leave of a government servant. It is credited in advance at 15 days on 1 January and 15 days on 1 July each year, so 30 days a year, and unused earned leave carries forward and accumulates up to a ceiling of 300 days. Because it accrues faster than most employees use it, earned leave tends to build towards the 300-day ceiling over a long career, which is why so many retirees have the full 300 days to encash.

Half pay leave accrues at 20 days a year and is normally availed at half pay, for private affairs or on medical grounds; it can be converted to full-pay commuted leave on medical grounds. Half pay leave does not have the same 300-day accumulation limit as earned leave, but for encashment on retirement it counts only to the extent it fills the balance up to the 300-day cap that applies to earned leave and half pay leave together. So half pay leave matters for encashment only where earned leave is below 300 days at retirement.

The cash-equivalent formula

Rule 39 fixes the cash equivalent. For earned leave it is:

Earned-leave cash = (basic pay + dearness allowance) / 30 x days of earned leave at credit

The pay is the basic pay in the applicable pay matrix Level as on the date of retirement, plus the dearness allowance admissible on that date. The sum is divided by 30, a fixed 30-day-month convention written into the rule, to give the pay for a single day, which is then multiplied by the number of days of earned leave, up to 300.

For half pay leave the formula runs on the half pay leave salary:

Half-pay-leave cash = (half pay leave salary + dearness allowance) / 30 x days of half pay leave

The half pay leave salary is half of basic pay, so with dearness allowance on that half, the half-pay-leave day-rate works out to exactly half the earned-leave day-rate. Half pay leave is encashed only to fill the balance up to 300 days where earned leave falls short, and no pension is deducted for it. The two components are added to give the total cash equivalent.

The 300-day cap

The single most important limit is that earned leave and half pay leave together cannot exceed 300 days for encashment on retirement. The rule counts earned leave first, up to 300 days, and half pay leave only fills whatever balance remains. So an employee with 320 days of earned leave encashes 300 and loses the excess 20; an employee with 260 days of earned leave and 80 days of half pay leave encashes the 260 earned-leave days and 40 half-pay-leave days, reaching 300, and loses the remaining 40 half-pay-leave days. The cap is on the days, not the rupees, so it bites hardest on employees who accumulated large half-pay-leave balances, which are encashable only within the leftover room.

The 300-day cap has been the figure since it was raised from 240 days with effect from 1 April 2002. There is no separate higher cap for any cadre, and the cap is the same whether the leave is all earned leave or a mix of earned and half pay leave.

What pay counts

The base for leave encashment is basic pay plus dearness allowance, a point that distinguishes it from the pension. The pension under Rule 44 of the CCS (Pension) Rules is computed on basic pay alone, without dearness allowance; the leave encashment under Rule 39 adds the dearness allowance to basic pay before dividing by 30. So at a dearness allowance of 55 per cent, the encashment base is more than one and a half times the basic pay, and it rises with every dearness-allowance revision, since it is the rate on the date of retirement that applies.

What is not counted is equally definite. House rent allowance is excluded from the encashment base, as are transport allowance and other compensatory allowances; only basic pay and dearness allowance, plus non-practising allowance where it is treated as pay, feed the calculation. The figure is the pay a day of leave would have cost the government, not the full cost-to-company of the employee.

Encashing leave during service with LTC

Encashment is not confined to retirement. A serving government employee may encash up to 10 days of earned leave at a time when availing Leave Travel Concession, so the leave is turned into cash to help meet the cost of the journey. Two conditions apply: at least 30 days of earned leave must remain at credit after the encashment, so the balance is not run down, and the total encashed against LTC over the whole career cannot exceed 60 days.

Crucially, this in-service encashment is separate from the 300-day retirement entitlement and does not reduce it. The days encashed with LTC are not deducted from the leave that can be encashed at retirement, so an employee who used the full 60 days over a career still retires with up to 300 days encashable. The in-service encashment is valued the same way, on basic pay plus dearness allowance on the date of availing LTC, divided by 30, with house rent allowance excluded.

Encashment on other exits

Retirement on superannuation is the standard case, but the cash equivalent of leave is also payable, on different terms, when service ends in other ways.

On voluntary retirement or retirement under a rule such as FR 56(j), the entitlement is the same as on superannuation: earned leave and half pay leave up to 300 days. On resignation, the entitlement is smaller, reflecting that a resignation is a voluntary exit rather than a completed career: only earned leave is encashed, to the extent of half the earned leave at credit, subject to a maximum of 150 days, with no half-pay-leave component. On death in service, the family is paid the cash equivalent of both earned leave and half pay leave up to 300 days, so the leave the employee built up is not lost to the family. On retirement on invalidation, where an employee is retired as permanently incapacitated, the entitlement is again up to 300 days of earned and half pay leave. And on dismissal or removal as a penalty, the leave at credit lapses and no cash equivalent is paid, since the leave account ceases on the date of dismissal.

Tax treatment

For a government employee the tax position is simple and generous. The cash equivalent of leave received on retirement by an employee of the central government or a state government is fully exempt from income tax under Section 10(10AA)(i) of the Income-tax Act, with no monetary ceiling. So the whole of a Rs. 15 lakh or larger encashment reaches a government retiree untaxed.

Two boundaries are worth noting. A non-government employee falls under Section 10(10AA)(ii), where the exemption is capped at the least of four limits, the overall ceiling being Rs. 25 lakh with effect from 1 April 2023, raised from Rs. 3 lakh; this cap does not touch government retirees. And an employee of a local authority, such as a municipal body, panchayat, or cantonment board, is not treated as a government employee for this purpose and gets only the capped exemption, not the full one. For a central government employee proper, the encashment is exempt in full.

A worked example

Take an employee retiring on a last basic pay of Rs. 1,00,000 a month, with dearness allowance at 55 per cent, and 300 days of earned leave at credit. The pay for encashment is Rs. 1,00,000 plus 55 per cent, Rs. 1,55,000, and the per-day rate is Rs. 1,55,000 divided by 30, Rs. 5,166.67. The earned-leave cash equivalent is Rs. 5,166.67 times 300, which is Rs. 15,50,000, paid once and exempt from tax. With the full 300 days of earned leave, no half pay leave is needed.

Now take an employee with 250 days of earned leave and 60 days of half pay leave. The earned leave gives Rs. 5,166.67 times 250, Rs. 12,91,667. The balance to 300 is 50 days, so 50 days of half pay leave are encashed at half the rate, Rs. 2,583.33 a day, which is Rs. 1,29,167, and the remaining 10 days of half pay leave are dropped by the cap. The total is Rs. 14,20,834. A lower-paid employee on a basic pay of Rs. 50,000 with dearness allowance at 50 per cent and 100 days of earned leave has a per-day rate of Rs. 2,500 and a cash equivalent of Rs. 2,50,000.

The 2009 change

The current shape of the rule dates from an amendment of 1 December 2009. Before it, half pay leave was not encashable on retirement at all, and the encashment was of earned leave only, up to 300 days; where an employee had less than 300 days of earned leave, the balance was simply lost. The 2009 amendment allowed half pay leave to be encashed to fill the shortfall up to 300 days, and, importantly, removed the earlier practice of reducing the half-pay-leave encashment by a pension-equivalent amount. So an employee retiring with, say, 250 days of earned leave now gains from the half-pay-leave balance that would earlier have been wasted, with no deduction against pension. The 300-day combined cap, and the (pay plus dearness allowance) divided by 30 formula, have been stable since.

See also

• Leave encashment calculator
• Central government pension
• Pension calculation
• Rule 44 pension calculator
• Gratuity for central government employees
• Gratuity calculator
• Commutation of pension
• Take-home salary for central government employees
• Dearness allowance
• Old Pension Scheme
• National Pension System
• Unified Pension Scheme
• Income tax for government employees
• 7th Central Pay Commission
• Central government employees in India
• Department of Personnel and Training

External references

• Department of Personnel and Training
• Department of Pension and Pensioners’ Welfare
• Income Tax Department

References

1. CCS (Leave) Rules, 1972, Rule 39 (cash equivalent of leave on retirement: earned leave and half pay leave up to a combined 300 days; formula (pay plus DA) divided by 30 times the days) and Rule 40 (definitions of pay and half pay leave salary); current provisions substituted by DoPT Notification No. 11012/1/2009-Estt.(L) dated 1 December 2009.
2. Department of Personnel and Training Notification No. 13026/1/99-Estt.(L) dated 18 April 2002, raising the maximum encashable leave to 300 days.
3. CCS (Leave) Rules, 1972, Rule 38-A, encashment of up to 10 days of earned leave with Leave Travel Concession, career limit 60 days; inserted by DoPT Notification No. 14028/1/2010-Estt.(L) dated 26 August 2011.
4. CCS (Leave) Rules, 1972, Rule 39(6) (resignation, earned leave to the extent of half, maximum 150 days), Rule 39-A (death in service), Rule 39-B (invalidation), and Rule 9 (lapse of leave on dismissal or removal).
5. Income-tax Act, 1961, Section 10(10AA)(i), fully exempting the leave encashment of a central or state government employee; the Section 10(10AA)(ii) cap for non-government employees raised to Rs. 25 lakh from 1 April 2023 by CBDT Notification No. 31/2023 dated 24 May 2023.