Work out your leave encashment amount, then see how much of it is tax-exempt under Section 10(10AA) — full exemption for government employees, the least-of-4-limits ₹25 lakh rule for everyone else.
Two different calculations, one page
"Leave encashment calculator" searches usually want one of two things: the amount you'll actually receive when you encash leave, and the tax you'll pay on it. They are separate calculations with separate rules, so this tool does both — Part 1 gives you the amount, Part 2 tells you how much of it is tax-free under Section 10(10AA).
Part 1 — how the encashment amount is calculated
Encashment amount = (Monthly Basic + DA ÷ divisor) × leave days encashed
The formula itself is simple; the divisor is where employers differ. Government rules and most online calculators divide by 30 (calendar days in a month). Some private-company payroll systems instead divide by 26, treating a month as 26 paid working days — the same leave balance then pays out a slightly higher amount, since you're dividing by a smaller number. Neither convention is universally "correct"; check your own company's HR policy or leave-encashment letter to see which one applies to you.
Example: at ₹40,000 monthly Basic+DA and 30 leave days encashed, the 30-day convention gives (40,000 ÷ 30) × 30 = ₹40,000, while the 26-day convention gives (40,000 ÷ 26) × 30 ≈ ₹46,154.
Part 2 — how much of it is tax-free (Section 10(10AA))
Once you know the amount, the next question is how much tax you owe on it. The Income Tax Act treats government and non-government employees very differently here.
Government employees: fully exempt
If you are a Central or State Government employee, the entire leave encashment amount you receive on retirement or resignation is tax-exempt. There is no formula and no upper limit — the full amount is tax-free.
Private / non-government employees: least of four limits
For everyone else, Section 10(10AA)(ii) exempts only the least of these four amounts:
- Actual amount received — the encashment amount from Part 1.
- ₹25,00,000 — a lifetime aggregate limit across all the employers you've ever worked for, not a per-employer or per-encashment limit.
- 10 months' average salary (Basic + DA only — no HRA, bonus or other allowances) drawn in the 10 months preceding retirement or resignation. This calculator uses your current monthly Basic+DA as a simplifying proxy for that 10-month average — use your actual last-10-months average from payslips or Form 16 for an exact figure.
- Cash equivalent of unutilised leave, where the leave itself is capped at a maximum of 30 days for every completed year of service, even if your employer's policy lets you accumulate more. This limit always uses the standard 30-day divisor by law, regardless of which convention you picked in Part 1.
Whichever of these four numbers is smallest is what you get tax-free; anything above that is added to your income and taxed at your slab rate.
The ₹25 lakh limit is new — did you know?
The lifetime exemption limit for private-sector employees used to be just ₹3,00,000 — a figure that had stayed frozen for nearly two decades even as salaries grew many times over. Following Budget 2023, the CBDT raised it to ₹25,00,000 effective 1 April 2023. That change is still in force for FY 2025-26 and FY 2026-27, and it means far more of a typical resignation or retirement payout now escapes tax entirely for private-sector employees.
Encashing leave while still employed
The Section 10(10AA) exemption only applies when leave encashment is received at retirement, resignation or superannuation — when your employment relationship is ending. If your company lets you encash accumulated leave once a year while you're still working, that amount is fully taxable as salary income, added straight to your slab-rate tax, with no exemption at all — whether you work for the government or a private company.
Frequently Asked Questions
How is leave encashment amount calculated?
The common formula is (monthly Basic + DA ÷ days-in-month convention) × number of leave days encashed. The catch is the divisor: government rules and most calculators use 30 days, but some private-company payroll systems use 26 days (paid working days in a month) instead — the same leave balance pays out a bit more under the 26-day convention. Always check your company's HR policy or leave-encashment letter for which one it uses.
What is the tax-free limit on leave encashment?
For government employees, the entire amount is fully tax-exempt — no cap. For private-sector employees, the exemption under Section 10(10AA) is the least of four limits: the actual amount received, a lifetime cap of ₹25,00,000, 10 months' average Basic+DA, and the cash equivalent of leave capped at 30 days per year of service. Whatever is left after the exempt amount is taxed at your slab rate.
Did the leave encashment exemption limit change?
Yes — the lifetime tax-exempt limit for private-sector employees was raised from ₹3,00,000 to ₹25,00,000, effective 1 April 2023 (CBDT notification following Budget 2023). This ₹25 lakh limit is still current for FY 2025-26 and FY 2026-27, and it applies cumulatively across all employers you have worked for in your lifetime, not per employer.
Why do government employees get full tax exemption but private employees don't?
The Income Tax Act carves out a separate, unconditional exemption for Central and State Government employees under Section 10(10AA)(i) — their entire leave encashment on retirement or resignation is exempt, full stop. Employees of other employers (private companies, PSUs, local authorities in some readings) fall under 10(10AA)(ii), which caps the exemption at the least of four limits instead of exempting the full amount.
What are the four limits for the private-employee exemption?
The exempt amount is the smallest of: (1) the actual leave encashment amount received, (2) the ₹25,00,000 lifetime aggregate cap, (3) 10 months' average Basic+DA drawn before retirement/resignation, and (4) the cash equivalent of earned leave, where the leave itself is capped at a maximum of 30 days per completed year of service even if your employer's policy allows you to accumulate more. Whichever of these four numbers is lowest is what you get tax-free.
Is leave encashed while still working taxable?
Yes, fully. The Section 10(10AA) exemption applies only to leave encashment received at retirement, resignation or superannuation — i.e., when your employment is ending. If you encash accumulated leave while still actively employed (many companies allow this once a year), the entire amount is added to your salary income and taxed at your normal slab rate, regardless of whether you are a government or private employee.
Does the 30-day leave cap use my chosen divisor?
No. The 30-day-per-year-of-service cap on limit (4) of the private-employee exemption is fixed by the statute itself and always uses a 30-day divisor for the cash-equivalent calculation — it is unrelated to whether your employer's payroll uses a 30-day or 26-day convention for the encashment amount in Part 1. This calculator applies the literal 30-day rule to limit (4) regardless of which divisor you pick above.
Estimates are for information and education only — not financial, tax or investment advice. Verify current rates and rules with official sources.