Termination Benefits

Leave Encashment

At the time of retirement or termination, the earned leaves can be encashed by an employee. As per the Delhi Shops and Commercial Establishments Act, EL is calculated as 1 day for every 20 days worked by an employee. This is the leave an employee has earned and it is accumulated unlike the casual or sick leave. 

The shops and establishment Act provides that every employee shall be authorized to preserve his earned leave for 40 days and allowed to encash the unused earned leaves. There is no provision of leave encashment while in service even with assent of Management but an employee can take the encashment while retiring or at the time of resignation, superannuation, release, dismissal or demise. Leave encashment ought to be calculated according to the average day by day wage of an employee.


Step 1 – Discover duration/tenure of services in number of years

Step 2 – Find out the rate of earned leave entitlement from the service rules – how many days of leave is credited at the rendered service each year.

Assuming, in any case, earned leave is credited at the rate of 23 days leave for every time of administration, for step (b) calculation should be made at the rate of 23 days leave for each year of service.

Step 3 – Find out earned leave really taken or enchased (in number of days) amid the time of service, the calculation might be made as follow:-

Method- Step 1 × Step 2 less Step 3 ÷ 30


In CIT vs. R V Shahney wherein the case of a non-Government employee, leave salary encashed on resignation or retrenchment is taxable. But, relief u/s. 89 read with rule 21A of Income Tax Act would be acceptable. Notwithstanding, leave salary encashed on Voluntary Retirement or Compulsory Retirement is exempt u/s.10(10AA) (ii) to the degree specified therein. The extent of said section is reached out to leave encashment at the time of retirement whether such retirement is on superannuation or otherwise. The word “otherwise” covers the instance of Voluntary Retirement from service as held by Madras High Court.


In Sri Ganesh Sehnoy vs. The Managment Of Sherton Limited, insofar as leave encashment was concerned under this case, the court directed that it is only the basic salary which would be considered. The factors of basic pay, Dearness Allowances and all monthly allowances (including fuel expenses or vehicle cost, if applicable) would be considered.

In Khem Chand vs. Union of India, it was held that  a government servant under suspension shall be entitled to a subsistence allowance at an amount equal to the leave salary which the Government servant would have drawn if he had been on leave on half average pay or on half pay and in addition, dearness allowance, if admissible on the basis of such leave salary.

Notice Period

An employer can’t dismiss any employee from the service who has been employed for at least a continuous period of three months without giving a prior notice of one month or one month’s salary in lieu of the same.*

*Please note that this is as per the provisions of the Delhi Shops and Establishment Act, 1954.

Severance Pay or Retrenchment Compensation

The Delhi Shops and Establishment Act, 1954 does not provide for the same but there are states which provide benefits to their employees at the time of termination of employment.

Provident Fund

At the time of retirement or termination of service, if the employee is eligible and the deduction for contribution to the provident fund was done at the time of employment by the employee, the provident fund accumulation would be paid to the employee.


If the establishment where the employee is working is under the ambit of EPF&MP Act for the payment of Pension, the contribution paid by the employee during the employment to the Pension fund would be paid to the employee at the time of retirement or termination of the service of the employee.


If the Payment of Gratuity Act is applicable in the employee’s workplace and if the employee has completed at least of a continuous service of 5 years, then the gratuity would be payable to the employee at the time of retirement/ resignation/ demise/  disablement due to an Accident or a disease/ termination/ voluntary retirement/ lay off due to retrenchment.