Earned Leave Rules in India: A Complete Guide for Employers and Employees

Earned leave rules in India are set by three overlapping frameworks: the Factories Act, 1948, state Shops and Establishments Acts, and the new Occupational Safety, Health and Working Conditions (OSH) Code, 2020. Which one applies depends on the type of establishment and, since November 2025, on whether a given state has notified the OSH Code yet. Entitlement, eligibility, carry-forward, and encashment all differ depending on which law governs a workplace, which makes a single earned leave policy for companies operating across multiple states harder to standardize than it looks. This guide covers what employers are required to do, and what employees are entitled to expect, under each framework currently in force.

What Laws Set Earned Leave Rules in India?

Three laws set the substantive entitlement, and a fourth sets how it has to be documented:

• Section 79 of the Factories Act, 1948 requires 240 completed days of work in a calendar year before earned leave applies.
• State Shops and Establishments Acts govern office, retail, and services employees instead, fixing their own annual numbers: Karnataka sets 18 days, Maharashtra sets 21.
• The OSH Code, 2020, in force since 21 November 2025, replaces the Factories Act’s provisions where it applies; its Central Rules were only finalized on 8 May 2026, with several states still notifying their own versions.
• The Industrial Employment (Standing Orders) Act, 1946, now folded into the Industrial Relations Code, 2020. This requires larger industrial establishments to formally certify their leave rules as binding standing orders. The applicable worker threshold has risen from 100 to 300.

In practice, this means correct earned leave labour laws on paper aren’t enough. Once an establishment crosses that threshold, the policy also has to be certified in the right document.

Who Is Eligible for Earned Leave?

Eligibility comes down to days actually worked in a calendar year: 240 days under the Factories Act, or 180 days under the OSH Code. That lower threshold brings a larger share of the contract and short-tenure workforce into earned leave eligibility sooner than before, and unused leave no longer lapses at year-end under the OSH Code, unlike under the older Factories Act framework. Mid-year joiners see a similar shift. The Factories Act required a new hire to work two-thirds of the remaining days in the year to qualify for that year’s leave; the OSH Code cuts this to one-quarter, which matters most for contract staff and anyone hired outside the usual January intake.

What Is the Earned Leave Entitlement Formula?

Under the Factories Act and the OSH Code, entitlement is a ratio: one day of earned leave for every 20 days worked, once the eligibility threshold is crossed. An employee who works 240 days in a year earns 12 days of leave. Adolescent workers accrue faster under the Factories Act, at one day for every 15 days worked. State Shops and Establishments Acts don’t use a ratio at all. They fix an annual number outright, typically 15 to 21 days, regardless of exactly how many days were worked, as long as the minimum eligibility condition is met. Most private payroll systems convert that annual number into monthly accrual rather than crediting it as a single year-end lump sum, so employees can use leave well before the twelve months are up.

Can Earned Leave Be Carried Forward or Encashed?

Yes to both, though the rules and caps differ by law. Under the OSH Code, unused earned leave carries forward up to 30 days. Any balance above that must be mandatorily encashed by the employer at year-end, not the employee’s call to make. One exception: leave an employee applied for and the employer refused carries forward without that 30-day limit. State Shops and Establishments Acts set their own caps instead, generally 30 to 45 days, with Maharashtra and Karnataka holding at 30. Encashment itself is calculated on basic salary plus dearness allowance for each day encashed, though the exact divisor varies by company policy and the applicable state act. Only earned leave and privilege leave qualify, whereas casual and sick leave cannot be encashed. Tax treatment depends on timing: fully taxable if encashed during employment or on resignation, exempt up to ₹25 lakh as a lifetime aggregate if encashed at retirement, under Section 10(10AA) since 1 April 2023.

What Must Employers Do to Comply With Earned Leave Rules?

Calculating the entitlement correctly is only part of the obligation. A compliant leave policy for companies also needs the following in place:

• Leave rules certified as part of standing orders, for industrial establishments that cross the applicable worker threshold.
• Leave wages paid in advance whenever an employee takes a leave block of four days or more, a Factories Act requirement that’s easy to miss in monthly payroll cycles.
• Leave records maintained accurately enough to survive a labour audit, since eligibility and entitlement calculations depend entirely on days actually worked.
• Policies updated to reflect the OSH Code’s lower 180-day eligibility threshold and its mandatory year-end encashment rule, in any state where the Code has been notified.

How Do State Laws Affect Earned Leave Entitlement?

State Shops and Establishments Acts differ in two distinct ways. Entitlement itself runs 15 to 21 days depending on the state, and carry-forward caps range from 30 to 45 days. On top of that, the OSH Code’s rollout isn’t uniform: its Central Rules are finalized, but individual states are notifying their own versions on their own timelines through 2026, so which framework currently governs a given workplace can depend on where that state is in the process.

Conclusion

Earned leave rules in India aren’t a single formula, they’re a layered set of obligations that shift depending on the establishment, the state, and how far the OSH Code has been rolled out there. Getting this right means tracking eligibility, entitlement, carry-forward, and documentation together, not treating any one of them as a standalone HR task. Paysquare’s payroll specialists manage earned leave compliance across these frameworks as part of running statutory-compliant payroll, so employers don’t have to track every state’s rollout themselves.

FAQs

1. What are the earned leave rules in India?

There’s no single rule. The one that applies depends on whether the employer is a factory, a shop or commercial establishment, or already covered by the OSH Code, and each category sets its own eligibility and entitlement terms.

2. How many earned leaves are employees entitled to?

It depends on which law applies, but most employees land somewhere between 12 and 21 days a year. Factory and OSH Code workers under a formula tied to days worked, and office or retail employees under whatever flat number their state has set.

3. Can earned leave be encashed?

Yes, but only earned or privilege leave qualifies, and how much tax is owed depends entirely on timing — resignation-linked encashment is taxed like regular salary, while retirement encashment gets a ₹25 lakh exemption.

4. Are earned leave rules the same across all states?

No. A company with offices in more than one state can’t run a single earned leave policy nationwide, since entitlement, carry-forward caps, and even which law governs the workplace can all differ from state to state.