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Pakistan country pack — this guide covers Pakistan-specific statutory rules. Octal HR is configurable for other regions too.

What is leave encashment?

Leave encashment is the process of paying an employee for leave days they have earned but not taken. It is commonly done at:

  • Year-end — When unused annual leave lapses, some companies pay it out instead of forfeiting it
  • On-demand mid-year — Employee requests to encash a portion of their leave balance while still employed
  • Separation / Full & Final Settlement — Remaining annual leave is encashed as part of F&F when the employee leaves

Only leave types marked as Encashable in leave type settings are eligible. Annual leave is encashable under Pakistan law; sick leave and casual leave generally are not.

Encashment types

Year-End Encashment (30 June / 31 December)

At the end of the leave year, Octal HR processes year-end encashment for all employees whose annual leave balance exceeds the carry-forward limit. Excess days are encashed and added to the July payroll (or the first payroll of the new leave year).

Mid-Year On-Demand Encashment

Employee requests to encash a specified number of leave days while still employed. Common practice in Pakistan during Eid (Eid-ul-Fitr or Eid-ul-Adha) when employees want extra cash. Requires manager or HR approval.

Separation Encashment (F&F)

When an employee resigns, retires, or is terminated, all remaining encashable leave balance is paid out as part of Full & Final Settlement. Calculated on the date of separation, prorated if the leave year is in progress.

Encashment formula

Daily rate for encashment:
Daily Rate = Monthly Basic Salary ÷ 26 working days

Encashment amount:
Encashment = Daily Rate × Number of Days Encashed

Example:
Basic Salary: PKR 80,000/month
Daily Rate: 80,000 ÷ 26 = PKR 3,077
Days to encash: 8 days
Encashment = 3,077 × 8 = PKR 24,615

Divisor options: The encashment divisor can be configured as 26 (most common), 30, or "actual working days in month." Most Pakistani HR practices use 26. Configure under Payroll → Settings → Leave Encashment → Daily Rate Divisor.

Some companies encash on gross salary rather than basic only. This is more generous and sometimes required by employment contracts. Configure under Payroll → Settings → Leave Encashment → Base Salary Component: Basic / Gross.

Year-end encashment process

1
At year-end (30 June), go to Leave → Year-End Processing. Octal HR shows all employees with leave balances exceeding the carry-forward limit.
2
Review the encashment list. You can override individual employees — exclude them from encashment or adjust days to encash.
3
Click Generate Encashment. Octal HR creates encashment records for each eligible employee with the calculated amount.
4
The encashment amounts are pushed to the next payroll run as an "Annual Leave Encashment" addition. Verify in Payroll → Run Payroll → Additions before finalizing payroll.
5
After payroll is finalized, the encashed leave days are deducted from each employee's leave balance and the new year's balance is initialized.

Separation encashment

When an employee's separation date is set in the system, Octal HR automatically calculates the encashment due as part of F&F:

1
Set the employee's Last Working Day under Employees → [Employee] → Separation.
2
The system calculates the prorated leave balance earned up to the last working day (if the leave year is in progress).
3
The leave encashment amount is included in the F&F Settlement payslip as a separate line item "Annual Leave Encashment".
Separation encashment example (prorated):
Leave year: Jul–Jun | Separation date: 31 October (month 4 of 12)
Entitled: 14 days | Days earned prorated: 14 × (4 ÷ 12) = 4.67 days (≈ 5 days)
Days used: 2 days | Encashable balance: 5 − 2 = 3 days
Daily rate: PKR 3,077 | Encashment: 3 × 3,077 = PKR 9,231

FBR tax treatment

ScenarioTax treatment
Year-end / Mid-year encashment (during employment) Fully taxable as salary income under FBR. Added to monthly taxable income and WHT calculated accordingly. Shown in annual income tax return as salary.
Separation encashment — annual leave (on retirement/resignation) Under FBR's reduced computation (Section 12 of the Income Tax Ordinance 2001), leave encashment received on separation is subject to reduced tax computation. The excess over 6 months' average salary is taxed at a reduced rate. See FBR Circular for current limits.

Best practice: For separation encashment, have your tax advisor verify the applicable FBR computation for each employee's tax bracket before finalizing F&F. Octal HR applies the standard computation; reduced-computation scenarios may need manual tax override in the F&F payslip.

Payroll processing

Encashment amounts flow to payroll automatically once approved:

  • Year-end encashment → added to July payroll additions (or first payroll of new leave year)
  • On-demand mid-year encashment → added to the current month's payroll or a supplementary payroll
  • Separation F&F encashment → included in the F&F payslip generated at separation

All encashment payments appear as a dedicated "Leave Encashment" line on the payslip, separate from regular salary components. This makes it easy to identify and report correctly in FBR submissions and EOBI returns (encashment is not part of EOBI-liable wages).