A salaried employee may be allowed various leaves, some may be carried forward to next year i.e can be availed in next year, and some if not availed are not allowed to carry forward to next year. When an employee, does not avail all the leaves that were allowed to him, but instead encashes the same and earns salary on such unavailed leaves, it is called Leave Encashment.
Such amount so received on encashing the leaves, is taxable under the head salary. It is taxable if received while in service. However, subject to some conditions, certain amount is allowed as exemption from the amount so received, at the time of retirement and the balance amount is taxable.