The privilege or earned leave of an employee is normally allowed to be cashed based on the last drawn salary. Since this is a long term liability of the employer, a few of the insurance companies offer schemes where the employer contributes to the scheme every year and makes a claim on the insurer on the cessation of service of an employee.
Further, according to the Accounting Standard AS-15, Leave Encashment Liability is required to be valued actuarially every year and to be disclosed in the accounts books. Separate funding is not necessary.
Frequently asked questions
What are the tax implications when leave is encashed?
Any leave that is encashed during the period of an employee's service is taxable as salary. However, the leave encashment amount received on retirement is tax-free, subject to certain conditions.
Can an employer claim provision / contributions towards leave encashment liability as business expenses?
No, an employer cannot claim provision / contributions towards leave encashment liability as business expenses. However, the actual payment of leave encashment is allowed as business expense.
Is the provision / disclosure of leave encashment liability mandatory?
Yes, according to the accounting standard AS 15, provision / disclosure of leave encashment is mandatory.