Most leave policies in India start life as a copy of someone's previous employer's policy with the company name changed. It holds up fine until an employee in Chennai points out that the state Act gives them sick leave your Bengaluru-drafted policy never mentioned, or someone resigns with 40 days of accumulated leave and your handbook says it lapses.
Leave is one of the few parts of Indian labour law where the statute sets a floor and then leaves the rest to you. The floor is real, it is mostly decided by the state your employee works in, and it applies whether or not your policy repeats it. A policy that gives less than the floor doesn't reduce what you owe. It just means you find out later.
This piece sets out that floor. Which law governs your leave, how earned leave accrues, what casual and sick leave you owe, which holidays are compulsory, what happens to unused leave when someone leaves, and what has changed now that the labour codes are in force.
One thing up front. Leave entitlements in India are largely state law, so a company in three states is running three sets of rules, not one policy with footnotes. We've kept the state-specific bits marked as such rather than give a single national number that would be wrong for most readers. If you want the wider compliance picture around this, our labour law compliance checklist covers the registrations, filings and registers that sit alongside leave.
This is general guidance for Indian employers, current as at the date above. It isn't legal advice, and state rules under the labour codes are still being notified through 2026, so confirm anything state-specific with your advisor before you act on it.
What the Law Fixes, and What It Leaves to You
Indian law fixes five things about leave and is largely silent on the rest.
There's a minimum rate at which earned leave accrues. Most states set a minimum number of sick and casual leave days on top of that. Paid national and festival holidays are prescribed rather than chosen. Maternity benefit has a national number. And what happens to unused earned leave is decided by statute, both during employment and at exit.
Everything else is yours. Bereavement leave, paternity leave, sabbaticals, comp-offs, whether leave is credited monthly or annually, whether probationers accrue from day one, unlimited leave if you want it. None of that is regulated, which is why company leave policies in India look so different from each other while all sitting on the same base.
Two rules govern how the floor and your policy interact, and they're worth stating plainly because a lot of handbooks get them backwards.
Your policy can be more generous than the statute. It cannot be less. And an employee cannot agree to less, either. A clause in an appointment letter saying leave lapses on resignation does not override a state Act that says accumulated earned leave is payable, and a signature on that letter doesn't help you.
Where your policy is silent, the statute fills the gap. Silence is not an exemption. If your handbook never mentions sick leave and you operate in Tamil Nadu, your employees have 12 days of it.
Which Law Governs Your Leave Policy
This is the question to settle before you write anything, because the answer decides every number that follows.
If you run a factory, leave has always come from the Factories Act, 1948, which the Occupational Safety, Health and Working Conditions Code, 2020 now replaces at the centre.
If you run an office, a shop or a commercial establishment, leave comes from your state's Shops and Establishments Act. These are state laws. The labour codes repeal 29 central Acts, but they do not repeal state Shops and Establishments Acts, which remain in force and continue to set leave for most white collar employers.
Since 21 November 2025 there is a third layer. The OSH Code applies to establishments with 10 or more workers, and its leave chapter sets its own accrual rules. Whether it displaces the state Shops Acts for commercial establishments, or simply runs alongside them, is genuinely unsettled and the state rules being notified through 2026 are meant to clear it up. As of now they largely haven't.
The practical rule while that settles is to apply whichever provision is more favourable to the employee, state by state. It is the conservative reading, it is what most advisors are recommending, and the cost of being generous by two or three days a year is much smaller than the cost of being short.
One assumption to drop before you start. Leave rules are not triggered at 10 or 20 employees the way ESI and PF are. State Shops Acts apply from your first employee in most states, so a five-person company already has statutory leave obligations.
The second assumption is about which state, and it's worth spending a paragraph on because most articles on this get it wrong. You'll read that leave follows the state where the company is registered. That's an oversimplification. Registration under a Shops and Establishments Act is per establishment, and states like Karnataka require every branch to register separately, so the people sitting in your Pune office are covered by the Maharashtra Act, not by the Karnataka Act your head office registered under. Where it genuinely is unsettled is fully remote employees who aren't attached to any registered premises. Most employers apply the registering establishment's rules to them for leave, which is defensible. What you cannot do is carry that answer across to everything else, because professional tax and labour welfare fund follow the employee's work location regardless of where you're registered.
Earned Leave and How It Accrues
Earned leave, also called privilege leave or annual leave with wages, is the one entitlement that exists everywhere. What varies is how much, how you qualify, and how much you can bank.
| Law | How earned leave accrues | Eligibility | Accumulation cap |
|---|---|---|---|
| Factories Act, 1948 (factories) | 1 day for every 20 days worked by an adult, 1 for every 15 for a young person | 240 days worked in the previous calendar year | 30 days for adults |
| OSH Code, 2020 (establishments with 10 or more workers) | 1 day for every 20 days worked | 180 days worked in the same calendar year | 30 days, with the excess encashable |
| Karnataka Shops and Commercial Establishments Act, 1961 | 1 day for every 20 days worked | 12 months of service | 30 days |
| Maharashtra Shops and Establishments Act, 2017 | 1 day for every 20 days worked in the previous year | 240 days in the calendar year | 45 days |
| Delhi Shops and Establishments Act, 1954 | 15 days of privilege leave a year | 12 months of continuous service | Three years' entitlement, so 45 days |
| Tamil Nadu Shops and Establishments Act, 1947 | 12 days a year | 12 months of continuous service | 24 days |
| Telangana Shops and Establishments Act, 1988 | 15 days a year | 240 days in 12 months | 60 days |
Read the accrual rate carefully, because "1 day for every 20 days worked" is not the same as a fixed annual figure. An employee who works around 300 days in a year earns about 15 days. Someone who joined in August earns proportionately less. Most HR systems credit a flat number at the start of the year instead, which is fine as long as the flat number is at or above what the accrual formula would have produced.
The eligibility threshold trips people up more often. Under the Factories Act and several state Acts, an employee qualifies for next year's leave only after working 240 days this year, and the OSH Code brings that down to 180 days. In both cases the count includes days you might not think of as work. Layoff periods, maternity leave and leave already availed all count towards the qualifying number, so an employee who was on maternity leave for six months does not lose their earned leave for the year.
None of this stops you from crediting leave from day one, and most companies do because a first-year employee with zero leave is a retention problem long before it is a compliance one.
Proration is the other half of this, and the statutes say almost nothing about it, which means your policy has to. Decide how a mid-year joiner accrues, whether part days round up or down, and what happens when someone resigns in March having already used leave you credited on 1 January. That last one is where the arguments start. Recovering advance-credited leave from a final settlement is only defensible if the policy said you would before the employee took it, so write the rule down even though no Act asks you to.
Casual Leave, Sick Leave and Where ESI Fits
Earned leave is the entitlement the codes deal with. Casual and sick leave sit almost entirely in state law, which is why they vary so much.
| State | Sick leave | Casual leave |
|---|---|---|
| Karnataka | 12 days a year with wages, on grounds of sickness, accident or any other reasonable cause | No separate statutory entitlement; the 12 days above cover it |
| Maharashtra | Covered through earned leave and the Act's other provisions | 8 days a year, credited quarterly, lapsing at year end |
| Delhi | 12 days a year of combined casual and sick leave | Included in the 12 days |
| Tamil Nadu | 12 days a year | 12 days a year |
| Telangana | 12 days a year | 12 days a year |
The distinction matters because casual leave almost never accumulates and almost never gets encashed, while earned leave does both. A policy that pools everything into a single "paid time off" bucket is easier to administer and quietly creates an encashment liability on days that never carried one, or worse, denies carry forward on days that legally carried it. If you want a single bucket, keep the underlying statutory buckets in the system even if the employee only sees one number.
Then there is ESI, which people confuse with sick leave and which is a different thing. For employees drawing wages within the coverage limit, the Employees' State Insurance scheme pays sickness benefit at 70% of wages for up to 91 days in a year during certified sickness, provided the employee has contributed for at least 78 days in the relevant contribution period. It is a cash benefit from ESIC, not leave from you, and it typically starts only after around nine months in insurable employment. Your statutory sick leave obligation stands separately from it, as do the contribution and coverage rules.
One more piece worth knowing. Extended sickness benefit runs up to two years at 80% of wages for a specified list of long term illnesses. Employees rarely know this exists, and HR teams who do know it save a lot of difficult conversations about unpaid long term absence.
National and Festival Holidays
Holidays are not leave, and they are not discretionary either. Most states have a National and Festival Holidays Act or equivalent provisions inside the Shops Act, and they set a minimum you have to give with pay.
Karnataka. The Industrial Establishments (National and Festival Holidays) Act, 1963 requires 10 holidays a year: five national days, being 26 January, 1 May, 15 August, 2 October and 1 November, plus five festival holidays chosen from the schedule to the Act.
Tamil Nadu. The equivalent Act of 1958 gives 26 January, 1 May, 15 August and 2 October, plus five festival holidays fixed in consultation with the inspector and employees.
Maharashtra. Holidays sit inside the Shops and Establishments Act, 2017 itself: eight paid holidays, being 26 January, 1 May, 15 August, 2 October and four festival days agreed with employees before the year starts. If you require someone to work one of those days, the Act asks for double the daily average wages and a compensatory day off, not one or the other.
Delhi. The Shops Act requires the three national holidays as closed days alongside the weekly close day.
One related rule belongs here even though it isn't a holiday. Every employee is entitled to a weekly day off, and if you require someone to work it, the state Acts ask for a compensatory holiday within a fixed window, and in Maharashtra double wages as well. The window differs: Maharashtra gives you two months, Karnataka allows up to 90 days. Comp-off itself is not a statutory leave type, so if your policy grants it, your policy also has to say when it expires. Comp-offs with no expiry date quietly turn into a balance nobody budgeted for and somebody eventually claims.
Two practical points on the holiday list. The festival holidays are usually chosen before the year begins and displayed or filed, so a holiday list published in March is already late. And a company with employees in four states cannot publish one holiday list, because both the count and the compulsory days differ. Most companies handle this with a common core list and a state annexure, which is the cleanest way to do it. If you need the dates themselves, our state holiday lists carry them year by year.
Maternity, Paternity and the Rest
Maternity benefit is the one statutory leave with a national number. Under the Maternity Benefit Act, 1961, as amended in 2017 and now carried into the Code on Social Security, a woman is entitled to 26 weeks of paid leave for the first two children and 12 weeks from the third onwards. Adoptive mothers of a child below three months and commissioning mothers get 12 weeks. The entitlement applies in establishments with 10 or more employees, and the employee must have worked at least 80 days in the 12 months before the expected date of delivery.
Two conditions attached to it get missed. Establishments with 50 or more employees have to provide a creche facility with visits allowed during the day. And work from home after the maternity period is permitted where the nature of the work allows it and both sides agree, which is a useful lever rather than an obligation.
Menstrual leave has moved, and it's the change most handbooks haven't caught up with. Karnataka notified its Menstrual Leave Policy in November 2025, requiring establishments covered by the Karnataka Shops and Commercial Establishments Act, the Factories Act and the Plantation Labour Act to give women employees aged 18 to 52 one paid day of leave a month, up to 12 days a year. Karnataka is the first state to make this binding on private employers, and the Karnataka High Court upheld the policy in April 2026, so the wait-and-see position some employers took through last year has run out. Everywhere else it stays narrow. Bihar has given its own state government employees two days a month since 1992, and Odisha announced one day a month in 2024. If you employ people in Bengaluru, this is a compliance item now, not a benefits decision, and it sits outside your casual and sick leave buckets.
Paternity leave has no statutory floor in the private sector. Central government employees get 15 days under their service rules; private employers give what they choose, and where a policy exists it usually sits between five and fifteen days. The same is true of bereavement leave, marriage leave, sabbaticals and study leave. None are required, all are common, and because they're unregulated your policy is the whole of the law on them, so write them properly rather than leaving them to be decided case by case by whoever is asked.
One caution on unlimited leave policies. They work as an employee proposition but they don't dissolve the statutory floor underneath. You still have to be able to show that each employee got at least their statutory earned leave, and you still owe the exit payout on accrued statutory leave. If you run unlimited leave, keep the statutory accrual tracked in the background even though nobody sees it.
Carry Forward, Encashment and the Exit Payout
Unused leave is a liability sitting on your books, and the rules governing it come from three different places: the state Act for carry forward, the OSH Code for encashment during the year, and the Income Tax Act for how the payout is taxed.
Carry forward. Unused earned leave carries into the next year up to the cap in the table above, between 30 and 60 days depending on which law covers you. Anything over the cap can lapse. Casual leave generally lapses at year end. A policy that lapses earned leave entirely at 31 December is below the statutory floor in every state listed here, and it is one of the most common defects we see in handbooks.
There is an exception worth knowing. Under the Factories Act and several state Acts, if an employee applied for leave and you refused it, the refused days carry forward regardless of the cap. The cap protects you against hoarding, not against your own rejections.
Encashment during service. The OSH Code allows a worker to demand encashment of leave above the 30 day cap during the year, rather than waiting for it to lapse or for exit. Tax treatment is the part people get wrong: leave encashed while still in service is fully taxable as salary. The exemption does not apply.
Encashment at exit. On resignation, retirement or termination, accrued earned leave is payable in cash. For non-government employees the exemption under Section 10(10AA) of the Income Tax Act is the lowest of the amount actually received, ten months' average salary, the cash value of unused leave capped at 30 days for each year of service, and Rs 25 lakh. That Rs 25 lakh is a lifetime ceiling across all employers, not per employer, so an employee who used part of it at a previous job has less left.
A worked example, since the formula reads worse than it calculates. An employee resigns after 6 years, on basic plus DA of Rs 60,000 a month, with 55 days of accumulated earned leave. Run the four figures. The amount actually paid, at Rs 2,000 a day, is Rs 1,10,000. Ten months' average salary is Rs 6,00,000. The cash value of leave capped at 30 days for each year of service works out to 180 days, which is more than the balance, so it doesn't bind. And the statutory ceiling is Rs 25,00,000. The lowest of the four is Rs 1,10,000, so the entire payout is exempt. The Rs 25 lakh cap only bites on long service at high salaries, which is why it catches senior exits and almost nobody else. One thing to settle in writing before you run any of this: whether your per-day rate divides by 30 or by 26. No statute picks for you, and the choice changes every payout you make.
Timing. Under the Code on Wages, final dues have to be paid within two working days where employment ends by resignation, removal, dismissal or retrenchment. Most companies still run a 30 to 45 day full and final cycle, which sits well outside what the code allows and is worth fixing before someone raises it.
The value of the payout has also moved. The codes require basic pay plus dearness allowance to be at least 50% of total remuneration, and encashment is calculated on wages as defined there, so companies that kept basic low and allowances high are paying out more per day than they used to. If you're re-cutting salary structures for that reason, our guide to employee salary structure in India works through how the components fit together.
What the Labour Codes Change for Leave
The four codes came into force at the centre on 21 November 2025. The central rules under all four were notified in May 2026. State rules are the missing piece: a minority of states have notified final rules, most are still at draft stage, and until your state finishes, the existing state Act and its numbers continue to apply to you.
Four changes matter for leave specifically.
The qualifying threshold drops from 240 days to 180 days worked in a calendar year. This is the biggest practical change, and it pulls a lot of mid-year joiners and employees returning from long absence into entitlement a full year earlier than before.
Leave now accrues and is counted in the same calendar year rather than being earned this year and taken next year. Systems built on the old model need the accrual logic itself re-checked, because the yearly totals can look right while the rule underneath them is wrong.
Mid-year encashment above the 30 day cap becomes a right the employee can exercise, which changes cash flow planning for companies carrying large leave balances.
And exit timelines tighten, with two working days for resignation and dismissal cases and two months where employment ends by superannuation or death.
Everything else about leave stays recognisable. The accrual rate is unchanged at one day per 20, the carry forward cap stays at 30 days, and the state Shops Acts continue to operate. The codes themselves are published on the Ministry of Labour and Employment site, and the sensible thing is to re-check your state's position once a quarter rather than trying to track notifications yourself.
Where Leave Policies Go Wrong
One policy for every state. The single most common problem, and the one that costs most at exit. Sick leave, casual leave, holidays and accumulation caps all differ by state. A company in Bengaluru, Mumbai and Chennai owes three different things.
Lapsing earned leave at year end. Legal for casual leave, not legal for earned leave up to the statutory cap. The clause is usually inherited from an old handbook and nobody has read it against the state Act since.
Merging casual and sick leave with earned leave. Convenient in the system, expensive in principle, because the pooled bucket usually inherits the wrong carry forward and encashment treatment.
Not counting maternity leave and layoff in the qualifying days. Both count towards the 180 or 240 day threshold. Excluding them denies employees leave they've earned and is hard to defend if it's ever examined.
Refusing accumulated leave and then capping it anyway. If you rejected the leave request, the refused days carry forward outside the cap. Companies routinely apply the cap to days they themselves refused.
No leave for probationers. Common, and usually indefensible. Statutory leave accrues on days worked, and probation isn't a statutory category. You can restrict when leave may be taken. You can't stop it accruing.
Keeping no leave register. Nearly every state Act wants the record in a prescribed form, not just somewhere in your system. Karnataka asks for Form F, the register of leave with wages, with earned leave in Part I and sick leave in Part II, and a Form H leave book issued to each employee. Other states have their own equivalents. It's the second thing an inspector asks for after the wage register. It's also the record that decides a disputed exit payout, so the absence of one tends to be read against the employer. If your attendance data and your leave records live in different systems, this is usually where the gap shows up.
Questions People Ask
How many leaves are mandatory in India per year?
There's no single national number. Earned leave is the one universal entitlement and typically accrues at one day for every 20 days worked, which is about 15 days for a full year. On top of that, most states require 12 days of sick or casual leave, and between three and ten paid national and festival holidays depending on the state. A policy offering around 15 days of earned leave, 12 days of casual and sick leave and the state holiday list is at or above the floor almost everywhere.
Can unused leave be forfeited at the end of the year?
Casual leave, generally yes. Earned leave, no, up to the statutory accumulation cap of 30 to 60 days depending on the law that covers you. Days above the cap can lapse. Days you refused when the employee applied for them carry forward regardless of the cap.
Is leave encashment mandatory in India?
At the end of employment, yes, for accrued earned leave. During employment it depends on the applicable law, and the OSH Code now lets an employee demand encashment of the balance above 30 days. Tax treatment differs between the two: encashment during service is fully taxable, while encashment at exit gets the Section 10(10AA) exemption up to a lifetime cap of Rs 25 lakh for non-government employees.
Does the leave policy follow the head office state or the employee's state?
Neither, exactly, and the widely repeated answer that it's the registered office state is an oversimplification. Shops and Establishments registration is per establishment, and several states require each branch to register separately, so employees attached to your Chennai office are covered by the Tamil Nadu Act even though your head office registered in Karnataka. For fully remote employees not attached to any registered premises the position is unsettled, and most employers apply the registering establishment's rules to them. Professional tax and labour welfare fund work differently and always follow where the employee actually works.
Are probationers and fixed-term employees entitled to leave?
Yes. Statutory leave accrues on days worked, and neither probation nor a fixed-term contract is an exemption. Under the labour codes, fixed-term employees are entitled to the same statutory benefits as permanent employees on a pro-rata basis, and gratuity eligibility for them now comes at one year of service rather than five.
Is paternity leave mandatory for private companies in India?
No. There's no statutory paternity leave for private sector employees. Central government employees get 15 days under their service rules, and private employers decide for themselves, with most policies that exist falling between five and fifteen days. Because it's unregulated, your policy document is the only source of the entitlement, which also means an inconsistently applied practice is harder to defend than a written rule.
Is menstrual leave mandatory in India?
In Karnataka, yes. The state's Menstrual Leave Policy, notified in November 2025 and upheld by the Karnataka High Court in April 2026, requires covered establishments to give women employees aged 18 to 52 one paid day a month, up to 12 days a year. No central law requires it, and elsewhere it's either limited to state government employees, as in Bihar, or announced at state level, as in Odisha. Employers with a Bengaluru presence need this in the policy and in the leave system as a separate type.
What has changed for leave under the new labour codes?
Four things. The qualifying threshold falls from 240 days worked to 180. Leave accrues and is counted within the same calendar year. Employees can demand encashment of the balance above 30 days during the year. And final settlement, including leave encashment, is due within two working days of resignation, dismissal or retrenchment. The accrual rate of one day per 20 days worked is unchanged.
Where This Leaves You
A defensible leave policy in India is not a complicated document. It is a state-wise floor written down correctly, then whatever you choose to add on top of it.
So work in that order. Establish which law covers each location, take the earned leave accrual and the casual and sick leave numbers from the state Act that applies there, add the state holiday list before the year starts, write the carry forward and encashment rules to match the statutory caps rather than the previous employer's handbook, and keep a leave register that will still make sense to somebody two years from now. Then add your paternity, bereavement and comp-off policies on top, which is the part that actually differentiates you, and the part nobody can dispute because nobody regulates it.
The payroll consequences of all this, encashment values, final settlement timelines and the wage definition that drives both, sit in our Indian payroll compliance guide, and smaller teams handling this without a dedicated HR function will find the practical version in our guide for small businesses.
If you'd rather your leave rules, accruals and encashment ran state-wise out of the same system that already handles attendance and payroll, that's what our leave management software is built to do. Book a free demo and bring the states you operate in. It's a faster conversation when you can see the actual accrual logic and leave register rather than a feature list.
