Glossary
What is leave encashment?
What leave encashment means, which leave can be paid out, and how a day's pay is worked out for unused annual leave.
Updated
In short
Leave encashment is paying an employee cash for unused annual 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, or payment in lieu of leave, is a cash payment for annual leave an employee has not taken. Depending on the employer's policy and local 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 salary multiplied by the number of unused days.
Leave encashment: a worked example
Ana M, welder at Harbour Steel Furniture, a fictional business paying in US dollars, leaves in October 2026 with 10 days of annual leave unused. Her salary is $1,760 a month, and the business's policy divides by 22 working days.
| Step | Working | Amount |
|---|---|---|
| One day's salary | $1,760 ÷ 22 | $80 |
| Encashment for 10 days | $80 × 10 | $800 |
FAQ
Questions, answered
Which leave can be encashed?
Usually only annual or earned leave. Sick and other leave are generally not paid out unless the policy says so. Some countries set a minimum payout for unused statutory leave when employment ends, and some forbid paying it out while employment continues; check the rules where you employ people.
Is leave encashment taxable?
In most countries it is taxable pay, with income tax and social security withheld as on salary. Some offer an exemption on leaving or retirement within limits. This is not tax advice; ask your accountant.
Does SimpleERP track leave balances?
SimpleERP tracks leave balances. Leave types, seeded for your country, carry an annual allowance and a carry-forward limit you can change. 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 unused leave, 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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