Leave encashment is the process of converting accumulated, unused leave days into a cash payment. It is calculated as: (Basic Pay + Dearness Allowance) ÷ 26 × Number of Unused Leaves. The divisor 26 represents the standard number of working days per month used for per-day salary calculation.

For government employees, leave encashment received at retirement is fully exempt from income tax. For non-government employees, leave encashment received at retirement or resignation is exempt up to ₹25,00,000 (₹25 lakh) under Section 10(10AA) of the Income Tax Act. Leave encashment received during service (while still employed) is fully taxable as salary income.

For non-government employees, the tax exemption on leave encashment at retirement is the least of the following: (1) Actual leave encashment received, (2) ₹25,00,000 (as per the latest limit), (3) 10 months' average salary (basic + DA), or (4) Cash equivalent of leave earned but not availed (leave entitlement – leave actually taken) × per day salary. The amount exceeding the exempt limit is taxable.

Yes, many companies allow partial leave encashment during employment, typically on a yearly basis or against accumulated leave. However, such encashment during service is treated as taxable salary income with no exemption. Leave encashment tax benefits only apply when an employee retires, resigns, or is separated from service.

Earned leave (also called privilege leave or annual leave) is typically the type eligible for encashment. Sick leave and casual leave are generally not encashable and lapse if unused. The exact entitlement depends on the employer's leave policy. The maximum number of earned leaves that can be accumulated and encashed also varies by company and applicable state labour laws.