Full and Final Settlement

Leave Encashment Calculator Pakistan

Pay out unused annual leave correctly — at year-end, on resignation, or on retirement — using the standard Pakistani formula and FBR-compliant tax treatment.

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The Formula

Leave encashment = (Last drawn basic salary / 30) × Unused leave days Some employers use: Leave encashment = (Gross / 30) × Unused leave days (more generous) Leave encashment = (Basic + DA / 26) × Unused leave days (Gulf-style)

Check the employee's appointment letter and standing orders. If the policy is silent, most Pakistani courts have upheld 'basic salary ÷ 30' as the baseline.

Worked Example

Example: Employee exits with 12 unused annual leave days, PKR 75,000 basic

Last drawn basic salaryPKR 75,000
Daily basic (basic / 30)PKR 2,500
Unused annual leave days12
Gross encashment12 × 2,500 = PKR 30,000
PKR 30,000 payable in full-and-final, subject to FBR Section 149 tax

When is leave encashment triggered?

There are three common triggers. First, year-end encashment — some employers auto-pay balances above the carry-forward cap to avoid lapsing. Second, resignation or termination — unused earned leave at the separation date is converted to cash on full-and-final. Third, retirement — unused leave accumulated over years is paid out, often with tax exemption under an approved scheme.

Which leave types qualify?

Only annual (earned) leave typically qualifies. Casual leave and sick leave lapse and are not encashed. Special leaves (maternity, paternity, Hajj, bereavement) are use-it-or-lose-it. If your policy permits encashment of any of these, it becomes a taxable salary component.

Tax treatment

Leave encashment during service is taxed as salary under Section 149 — it adds to the month's taxable salary and is withheld accordingly. At retirement, leave encashment paid under an approved scheme is exempt up to statutory limits; amounts above the cap are taxable. Peoplifi applies the correct treatment automatically on the exit payslip.

Policy pitfalls to avoid

Three common mistakes. (1) Using gross instead of basic when the policy says basic — costly for the employer. (2) Forgetting to prorate accrual for mid-year exits — unfair to employees. (3) Failing to run Section 149 tax on the encashment line — creates IRIS mismatches. A clean policy plus Peoplifi eliminates all three.

Frequently Asked Questions

What is leave encashment?

A cash payout of unused annual leave — at year-end, on resignation or at retirement.

What is the formula?

(Last drawn basic / 30) × unused leave days — most common in Pakistan. Some policies use gross or basic+DA.

Is it taxable?

Yes during service. At retirement, encashment under an approved scheme is partly exempt — check with your tax advisor.

Skip the spreadsheets

Peoplifi runs these calculations automatically for every employee, every pay cycle — with FBR, EOBI and bank-sheet exports included.

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