Coming soon. This feature isn't available in Octal HR yet — this guide is published ahead of release. For what’s available today, see the Help Center or contact us.
🇵🇰
Pakistan country pack — this guide covers Pakistan-specific statutory rules. Octal HR is configurable for other regions too.

Overview

Leave encashment converts an employee's unused leave days into monetary payment. Octal HR calculates the encashment amount automatically based on the employee's current basic salary (or gross, depending on your policy), deducts the encashed days from the leave balance, and adds the payment as an earning on the payslip.

Leave encashment vs. leave salary: Leave encashment converts unused leave to cash while the employee remains on the job. Leave salary is the regular pay during an approved leave period. This article covers encashment only.

Types of encashment

TypeWhen it occursLeave types eligible
Year-end encashmentAt the close of the leave year (June 30)Annual / earned leave — typically any balance above the carry-forward cap
Mid-year on-demandEmployee requests encashment of a portion of their balanceAnnual / earned leave (if your policy allows)
On separationEmployee resigns or is terminatedAll unused annual leave (mandatory under law)
Eid / festival encashmentEmployer decides to encash a fixed number of daysAnnual leave — typically 10–15 days

Encashment formula

Octal HR uses the following formula for leave encashment:

Formula (Basic Salary basis)
Daily rate = Basic Salary ÷ Working days per month
Encashment amount = Daily rate × Encashed leave days
Example — Basic PKR 90,000, 26 working days, encashing 8 leave days
Daily rate = 90,000 ÷ 26 = PKR 3,461.54
Encashment = 3,461.54 × 8 = PKR 27,692

If your leave encashment policy uses gross salary as the basis, update the setting under Leave Settings → Encashment Calculation Basis.

Mid-year on-demand encashment

1
Leave → Leave Encashment — Click New Encashment Request.
2
Select employee and the leave type to encash (e.g., Annual Leave).
3
Enter number of days — The system shows the employee's current balance and maximum encashable days per your policy.
4
Preview amount — The calculated encashment amount and the resulting leave balance after deduction are shown.
5
Submit for approval — The encashment request follows the configured approval workflow.
6
Mark for payroll — Once approved, the system queues the encashment for inclusion in the next payroll run. It appears under Payroll → Pending Adjustments.

Encashment on separation

When processing a full and final (F&F) settlement for a departing employee, leave encashment is calculated automatically:

  1. Go to Employee → Separation and initiate the separation process.
  2. Octal HR calculates unused annual leave as of the last working day, prorated for the partial year if applicable.
  3. The encashment amount is included in the F&F payroll run as the Leave Encashment earning.
  4. Leave balance is zeroed out and the employee record is moved to Former Employees.

Proration on separation: If the employee accrued leave based on service months (e.g., 21 days/year = 1.75 days/month), Octal HR automatically prorates the annual entitlement for the months worked before computing the unused balance.

Adding encashment to a payroll run

Approved encashment requests flow into payroll automatically. You can also manually add a one-off encashment during payroll:

1
In an open payroll run, find the employee row and click Edit Adjustments.
2
Under Earnings, click Add Line and select Leave Encashment as the component.
3
Enter the number of days or the fixed amount.
4
Save. Octal HR recomputes the payslip total and WHT immediately.
5
Manually deduct the days from the leave balance via Leave → Balance Adjustment if not using the approval workflow.

Tax treatment of leave encashment

Under FBR rules for salaried employees:

  • Leave encashment paid during service is treated as additional taxable income in the month it is paid — it is added to that month's gross salary for WHT calculation.
  • Leave encashment paid at separation (full and final) qualifies for a reduced tax computation under the separation benefits rules — Octal HR applies this automatically when the encashment is part of a final settlement payroll run.
  • Leave encashment does not attract EOBI or PESSI contributions.

Large year-end encashments (e.g., 30+ days) can push an employee into a higher WHT slab for that month. If you spread encashment across two months, WHT is lower. Consult your tax advisor for large amounts.