Accrued Leave

There are two ways to give someone leave, and organisations often use both without noticing.

• Credit in advance. The full year's entitlement appears in the balance on the first day, and the employee can take it whenever they like. Simple, popular, and it creates a negative position for anyone who leaves in March having taken it in January.
• Accrual. Leave is earned as work is done, so the balance grows through the year. Slower for the employee, accurate for the employer, and it is how statutory annual leave actually works.

Statutory annual leave with wages accrues at a prescribed ratio of days worked, under the Occupational Safety, Health and Working Conditions Code, 2020 for establishments within its scope and under state shops and establishments legislation for the rest. The ratio means a mid-year joiner earns a proportion, and an employee with substantial unpaid absence earns less than a full year's worth.

Most employers credit discretionary leave such as casual leave in advance and accrue annual leave. That is a reasonable arrangement provided the two are tracked separately, which is exactly where it usually falls down.

Accrued annual leave that is not taken carries forward, up to a prescribed limit on accumulation. Once the cap is reached, further accrual may not continue, depending on the applicable provision.

The consequence people find surprising is that a blanket year-end forfeiture rule runs against the entitlement. An employer can legitimately want employees to take their leave, and there are proper ways to pursue that: requiring leave to be planned, scheduling shutdowns, refusing to approve carry forward above the cap, or paying out at year end where the applicable provision allows. Simply cancelling accrued statutory leave on 31 December is not one of them.

Two related points.

• Discretionary categories are different. Casual and sick leave granted by policy can generally be lapsed at year end, because the entitlement comes from the policy in the first place. The distinction between statutory and discretionary leave is therefore not academic; it decides what the employer may cancel.
• The cap creates a real management problem. An employee sitting at the cap stops accruing, which they will experience as a penalty, and the sensible response is to get the leave taken rather than to let the balance sit.

A caution that applies to this whole section. That statutory annual leave accrues on days worked, carries forward subject to a cap and is generally payable on exit is the structure the entry is built on, and section 33 of the OSH Code confirms leave and leave wages are matters the register must record. But the Code's leave provisions themselves have not been checked against the enacted text, and no state enactment has been read. The ratio, the cap, the qualifying period and the payment rate are therefore not stated anywhere in this entry, and a policy should be configured from the Code and the applicable state rules rather than from this description of how accrual behaves.

Every day of accrued untaken leave is a day the employer will eventually pay for, either as paid time off or as encashment on exit. It is a liability, and it should be provided for.

Three things follow that leave systems often do not reflect.

• The liability moves with pay. A salary revision increases the value of every accrued day, because encashment is computed on the rate at exit rather than the rate when the leave was earned.
• Concentration is a risk. A team where everyone is near the accumulation cap represents a large simultaneous liability and a large simultaneous absence risk.
• An unreconciled leave system understates it. Where leave is tracked in a spreadsheet separate from payroll, the balance and the provision drift apart, and the difference surfaces at exit when someone claims more days than the employer thought they had.

The practical test is whether the leave balance in the system, the liability in the accounts and the figure that would be paid on exit all agree. Where they do not, one of the three is being maintained by hand.

The tax side of the eventual payout is more precisely known than the accrual side. Where earned leave is encashed on retirement by an employee who is not a Central or State Government employee, section 19(1) of the Income-tax Act, 2025 allows a deduction at serial number 14 of its table, computed as the minimum of four amounts: the cash equivalent of earned leave at credit, with entitlement not exceeding thirty days for every year of actual service; ten times the average monthly salary for the ten months immediately preceding retirement; the amount the Central Government may notify; and the actual payment received. That notified amount has not been read, so no ceiling figure appears here. A Central or State Government employee is covered in full at serial number 13.

Employees frequently need leave they have not yet earned, and there are three ways to handle it, only two of which are clean.

The third is common in organisations that credit leave upfront, because the balance never goes negative visibly. It surfaces at exit as a recovery the employee did not expect, which makes it a dispute rather than an arithmetic exercise.

Where advance leave is permitted, say so in the policy, cap it, and state that an unrecovered negative balance is recoverable in the settlement. That single sentence prevents most of the argument.

• Year-end forfeiture of accrued statutory leave, applied uniformly and without reference to the carry forward cap.
• Accrual credited by tenure rather than by days worked, so an employee on long unpaid absence accrues as if they had been present.
• Statutory and discretionary categories held in one bucket, so nobody can tell which balance may be lapsed and which may not.
• Encashment computed on gross pay rather than on the statutory basis, which overstates or understates the settlement depending on the structure.
• Leave tracked outside payroll, so the balance, the provision and the settlement figure disagree.
• Probationers excluded from accrual, when accrual generally follows days worked rather than confirmation status.
• A national leave policy applied across states with different statutory minimums, so the accrual rate is below the floor somewhere.