Your new employee joins on October 1. By December, she has already used 10 days of casual leave, is asking for 5 sick days without a medical certificate, and now wants to carry forward all 18 days of earned leave into next year. Your HR policy — written in 2018 — says nothing about carry-forward limits, nothing about encashment, and does not mention the OSH Code at all. This is the moment every HR manager dreads: a leave dispute with no written ground to stand on.
- The Occupational Safety, Health and Working Conditions (OSH) Code, 2020 — effective November 21, 2025 — caps earned leave carry-forward at 30 days; excess must be encashed as an employee’s right, not the employer’s option.
- Qualifying period for earned leave dropped from 240 days to 180 days worked in a calendar year.
- Casual leave (7–14 days) and sick leave (7–12 days) vary by state under Shops & Establishments Acts — not the OSH Code.
- A complete leave policy must address: leave types, accrual formula, approval process, carry-forward limits, encashment rules, and lapse conditions.
What Is a Leave Policy and Why Indian Companies Can’t Wing It Anymore
A leave policy is a written document that defines every type of leave available to your employees, how each type accrues, who approves it, when it can be encashed, and what happens to unused balance at year-end. It is a legally important document — courts and labour authorities look at it when disputes arise.
Most Indian SMEs don’t have one. They manage leave via WhatsApp messages, verbal agreements, and Excel trackers. That works when you have 12 people. With 50 employees across departments and states, it creates disputes, payroll errors, and compliance risk that you simply cannot manage informally.
The OSH Code 2020, which came into force on November 21, 2025, changed the statutory ground rules for leave management across India. If your leave policy predates November 2025, it almost certainly needs a revision.
The Three Statutory Leave Types in India 2026
India does not have one central leave law. Leave entitlements are governed by:
- The OSH Code, 2020 (Section 32) — for workers in factories and scheduled establishments with 10+ workers
- State Shops & Establishments Acts — for commercial offices, retail, IT companies, restaurants, etc.
- The Factories Act, 1948 — still applies in states that have not yet notified OSH State Rules
1. Earned Leave (EL) / Privilege Leave (PL)
Earned leave is the leave employees accumulate by working. It is the most important type to get right in your policy, because it now has statutory encashment obligations under the OSH Code.
Under OSH Code, Section 32:
- Accrual: 1 day of earned leave for every 20 days worked
- Qualifying period: 180 days worked in a calendar year (reduced from 240 days under the old Factories Act)
- Carry-forward cap: 30 days maximum
- Excess above 30 days: must be encashed at year-end — this is the employee’s right, not subject to employer discretion
- Encashment on exit: within 2 days of resignation or dismissal; within 2 months in case of superannuation or death
Under most Shops & Establishments Acts: typically 15–18 working days per year, with qualifying periods and carry-forward rules set by each state. Note: the OSH Code supersedes older Shops Act provisions for covered establishments where Central/State Rules have been notified.
2. Casual Leave (CL)
Casual leave covers unplanned absences — a sudden family emergency, minor illness, or urgent personal matter. It is not governed by the OSH Code. It falls squarely under state Shops & Establishments Acts, and the numbers vary significantly by state.
| State | Casual Leave (days/year) | Sick Leave (days/year) |
|---|---|---|
| Delhi | 12 | 12 |
| Maharashtra | 8 | 7 |
| Karnataka | 12 | 12 |
| Tamil Nadu | 12 | 12 |
| Haryana | 7 | 7 |
| Gujarat | 7 | 7 |
| West Bengal | 14 | 14 |
| Uttar Pradesh | 14 | 14 |
| Rajasthan | 7 | 7 |
| Telangana | 12 | 12 |
Casual leave cannot be carried forward or encashed — it lapses at year-end. Your policy must state this explicitly.
3. Sick Leave (SL)
Sick leave is for medically certified illness. Most state Acts mandate 7–12 days per year. You can require a medical certificate for sick leave beyond 2–3 consecutive days — and you should, or your sick leave balance becomes a de facto second casual leave pool.
A key rule that many HR teams get wrong: sick leave cannot be encashed under any statutory framework. It lapses. State this in your policy and never allow SL-to-EL conversion without explicit legal basis.
What the OSH Code 2020 Changes for Your Leave Policy
The OSH Code 2020, effective November 21, 2025, is the most significant change to leave rules in two decades. Here is a direct comparison:
| Parameter | Old Law (Factories Act / Shops Acts) | OSH Code 2020 |
|---|---|---|
| Qualifying period | 240 working days | 180 working days |
| Carry-forward cap | Varies by state (often uncapped) | 30 days hard cap |
| Excess leave | Employer’s discretion to lapse | Must be encashed (employee’s right) |
| Encashment on exit | At end of service, no fixed timeline | Within 2 days (resignation); 2 months (superannuation) |
| Leave denied by employer | Could lapse after a point | Carries forward without restriction |
One nuance that matters: the OSH Code applies to “workers” — employees below the managerial grade. Managers, supervisors, and senior staff above the applicable wage threshold continue under state Shops & Establishments Acts. Most SMEs will have both categories. Your leave policy must be clear about which rules apply to which employee group.
7 Components Every Leave Policy Must Have
A leave policy is not just a list of leave types. Here is what it must actually contain to hold up under scrutiny:
1. Leave Types and Entitlements
List every leave type with exact days: EL, CL, SL, maternity (26 weeks — mandatory under the Maternity Benefit Act, 1961 for companies with 10+ employees), paternity, comp-off, bereavement, and optional holidays. State the governing law for each.
2. Accrual Formula
Specify whether leave accrues monthly, quarterly, or is front-loaded at the start of the fiscal year (April 1). For mid-year joiners, state the pro-ration formula explicitly. Many disputes arise here because the policy was silent.
3. Carry-Forward and Lapse Rules
Per the OSH Code: EL caps at 30 days carry-forward; any excess must be encashed. For CL and SL: they lapse at December 31 or March 31, depending on your leave year. State this explicitly — ambiguity is expensive.
4. Leave Encashment Formula
Define the encashment formula: typically (Basic + DA) ÷ 26 × number of leave days. Specify the wage base (basic only? basic + DA? gross?) and when encashment payments are processed.
5. Application and Approval Process
Define minimum advance notice: recommend EL requires 3 working days’ notice; CL can be applied same-day. Who approves? What is the escalation if a leave application is rejected? What happens if approved leave is cancelled by the company?
6. Leave Without Pay (LWP)
Define when LWP kicks in — after exhausting all EL only? Or after CL and SL too? State the deduction formula clearly: (Gross salary ÷ working days in the month) × absent days. This matters for payroll accuracy and PF/ESI calculations.
7. Comp-Off Policy
If employees work on weekly offs or holidays, they earn compensatory off. Most SMEs manage this informally. Your policy must define: how comp-off is earned, the request process, and the expiry window (recommend: 60–90 days). Undocumented comp-off is a dispute waiting to happen.
Leave Policy Compliance Checklist (Run This Before Publishing)
Before your leave policy goes live, verify each of these:
- Does the policy reference the OSH Code 2020 and the 30-day EL carry-forward cap?
- Does it align with your state’s Shops & Establishments Act for CL and SL entitlements?
- Have you separated rules for “workers” (OSH Code) vs. managerial staff (Shops Act)?
- Is the accrual formula clearly defined — including pro-ration for mid-year joiners?
- Is the encashment formula and wage base explicitly stated?
- Does it cover maternity leave (26 weeks for first two childbirths, 12 weeks for third)?
- Are comp-off rules documented — how earned, by whom approved, when they expire?
- Does it list all public holidays — 3 national + state public holidays?
- Is there a clear escalation path when leave is denied or disputed?
- Has each employee acknowledged the policy in writing or via your HRMS?
What HR Managers Get Wrong About Leave Policies
Treating sick leave as a second earned leave pool. Employees who save their SL balance hoping to encash it will be disappointed — and confused — when you tell them SL lapses. State this clearly, early, and repeatedly.
Ignoring the 30-day carry-forward cap. Many HR teams let EL accumulate indefinitely. If a worker has 48 days of earned leave, you legally owe encashment on 18 days at year-end under the OSH Code. This is a hidden payroll liability that catches companies off-guard.
One policy for all employees. A factory worker and a senior manager follow different statutes. A single leave policy that doesn’t distinguish between them is technically non-compliant for at least one of the two.
Front-loading leave without recovery clauses. If you front-load 18 EL days on April 1 and the employee resigns in May, they’ve used leave they haven’t earned. Your policy must state that excess leave will be recovered from the full and final settlement.
Not documenting leave denial. Under the OSH Code, if you deny a leave application, that leave carries forward without restriction — it cannot be lapsed. If you’re not documenting denials, you may be creating an unlimited carry-forward liability without knowing it.
FAQ: Leave Policy in India 2026
Q: Does the OSH Code apply to IT companies and offices?
A: Yes, the OSH Code 2020 applies to all establishments with 10 or more workers, including offices, IT companies, and retail. However, your state must have notified the OSH Central or State Rules. As of November 2025, most major states are covered. Check with your state Labour Department for confirmation.
Q: Can employees carry forward more than 30 days of earned leave?
A: No. Under the OSH Code, 30 days is the hard cap for EL carry-forward. Any leave balance above 30 days at year-end must be encashed. This is an employee right under Section 32 of the OSH Code — you cannot substitute it with additional leave or other benefits.
Q: Is casual leave compulsory? Can we replace CL with additional EL?
A: CL is mandated by state Shops Acts, not the OSH Code. You cannot replace it with EL or any other type. You must offer CL per your state minimum. You can offer more days — you cannot offer fewer.
Q: What is the qualifying period for earned leave under OSH Code 2026?
A: An employee must work 180 days in a calendar year to qualify for earned leave under Section 32 of the OSH Code. Days on approved leave, maternity leave, and public holidays count toward the 180-day threshold.
Q: Does maternity leave reduce an employee’s EL or CL balance?
A: No. Maternity leave under the Maternity Benefit Act, 1961 is a completely separate entitlement. It does not reduce EL, CL, or SL balance. Deducting maternity leave from any other leave type is illegal and can attract penalties under the Act.
Q: Can we offer more leave than the statutory minimum?
A: Yes — and many competitive employers do. Offering 24 EL days, 12 SL days, and 12 CL days is increasingly common in IT and services sectors. Statutory minimums are floors, not benchmarks. More generous leave policies reduce attrition and are worth the cost.
Writing the policy is 20% of the work. The other 80% is making it run without errors every single month — tracking accruals, enforcing carry-forward caps, calculating encashment on exit, and keeping a clean audit trail. EZHRM’s leave management software automates all of this, including state-wise leave rules for multi-location teams. If you’re still managing leave on Excel, see how EZHRM handles statutory compliance end to end.