WHAT IS THE RATE OF WAGE/ SALARY FOR LEAVE ENCASHMENT?

If an employee wants leave encashment of one month, how much will your pay?

PRACTICES

Companies follow different practices to determine the salary for leave encashment. Some companies pay only the basic pay, some others pay basic pay and dearness allowance, and few others pay the gross salary. It is so because law does not say, what constitutes wage/ salary for the purpose of leave encashment.

CONSEQUENCES

You can pay anything in non-unionised organizations and labour inspectors also do not bother you much about it. But it will have serious adverse implications in unionised organizations.

RIGHT APPROACH

If the employee had availed leave instead of seeking encashment, you would have paid him all the components like basic, DA,HRA, CCA  i.e. gross salary. Hence it is both wisdom and professionalism to pay gross salary for encashment, subject to the following.

Leave encashment will not qualify for ESI, PF, deduction.

Leave encashment amount should not be considered for determining the bonus and gratuity.

Leave encashment is subject to deduction of income tax.