Earned leave in India accrues at the rate of one day for every 20 days worked, under both the Factories Act, 1948, and the new Occupational Safety, Health and Working Conditions (OSH) Code, 2020. State Shops and Establishments Acts use a different method entirely, fixing a flat annual entitlement of 15 to 21 days instead of a day-for-day ratio.
Which formula applies depends on whether the establishment is a factory governed by central law, or a shop, office, or commercial establishment governed by state law. Since November 2025, on whether the OSH Code has actually been notified in that state.
Applying the wrong formula means either underpaying statutory dues or triggering a mismatch that surfaces during a labour audit.
What Laws Govern Earned Leave in India?
Three laws govern earned leave in India:
- The Factories Act, 1948, for factory workers.
- State Shops and Establishments Acts for office, retail, and services employees.
- The OSH Code, 2020, in force since 21 November 2025.
Each was written for a different kind of workplace, so the first step in any calculation is identifying which one actually applies to the employee in question.
- Section 79 of the Factories Act requires 240 completed days of work in a calendar year before earned leave applies. The standard still applies for factories that haven’t transitioned under the OSH Code.
- State Shops and Establishments Acts set their own annual numbers. For example, Karnataka fixes 18 days, whereas Maharashtra fixes 21, and other states fall in between.
- The OSH Code’s Central Rules were only finalized on 8 May 2026, nearly six months after the Code itself took effect, and several states are still notifying their own versions.
So the applicable framework can vary by state as much as by industry. It is worth checking before finalizing any leave policy update.
What Is the Earned Leave Calculation Formula?
The formula is one day of earned leave for every 20 days worked, once a worker crosses the eligibility threshold, under both the Factories Act and the OSH Code. An employee who works 240 days in a year earns 12 days of leave (240 ÷ 20). Adolescent workers accrue faster under the Factories Act, at one day for every 15 days worked.
State Shops and Establishments Acts skip the per-day ratio and 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 (annual days ÷ 12) rather than crediting it as a year-end lump sum.
Who Is Eligible for Earned Leave?
Eligibility depends on days worked in a calendar year: 240 days under the Factories Act, or 180 days under the OSH Code.
That 60-day drop brings a larger share of the contract and short-tenure workforce into eligibility earlier than before, and unused earned leave no longer lapses at year-end under the OSH Code, a real difference from the Factories Act.
Mid-year joiners benefit too. The Factories Act required a new hire to work two-thirds of the remaining days in the year to qualify, whereas the OSH Code cuts that to one-quarter, which matters most for contract staff and anyone hired outside the usual January intake.
Can Earned Leave Be Carried Forward?
Yes, though the rules differ by law and come with one exception worth knowing.
- Under the OSH Code, unused earned leave carries forward up to a cap of 30 days.
- Any balance above that isn’t the employee’s call to make, the employer must mandatorily encash it at year-end.
- One carve-out. 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. Maharashtra and Karnataka hold at 30, while some states allow more.
Hardcode a single carry-forward rule into a
leave management system, and it will misfire the moment an employer operates across two or three states.
How Is Earned Leave Encashment Calculated?
Encashment 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; casual and sick leave cannot be encashed under any of these frameworks.
Tax treatment depends on timing. Encashment during employment or on resignation is fully taxable as salary. Encashment at retirement is exempt up to ₹25 lakh as a lifetime aggregate under Section 10(10AA), a limit in force since 1 April 2023. Two employees encashing the same number of days can walk away with very different take-home amounts, purely because one retired and the other resigned.
What Are the Most Common Earned Leave Compliance Mistakes?
Three errors show up repeatedly during payroll audits, and all three trace back to policies that haven’t caught up with the OSH Code.
The first is running the outdated 240-day threshold on establishments that now qualify under the OSH Code’s 180-day rule, creating an under-accrual that surfaces as a dispute months later.
The second is treating the 30-day carry-forward cap as optional, when the OSH Code makes excess encashment a mandatory employer obligation, not a policy choice.
The third is assuming every encashment is tax-exempt, when only retirement payouts qualify for the ₹25 lakh exemption under Section 10(10AA).
Conclusion
Earned leave calculations come down to two variables: which law applies to a given employee, whether it’s the Factories Act, a state Shops and Establishments Act, or the OSH Code, and whether accrual, carry-forward, and encashment rules have actually been updated to match it.
With Central Rules under the OSH Code now finalized and states still rolling out their own versions, HR and finance leaders have a narrow window to correct these mechanics before the next compliance cycle.
Paysquare’s payroll specialists track these state-by-state notifications as part of running
statutory-compliant payroll, so HR teams don’t have to monitor every state gazette themselves.
FAQs
1. How is earned leave calculated in India?
It depends on which law applies. The Factories Act and OSH Code use a day-for-day formula, that is, one day of leave for every 20 worked, while state Shops and Establishments Acts assign a fixed annual number instead of a ratio.
2. Who is eligible for earned leave?
Employees become eligible after 240 days of work in a year under the Factories Act, or 180 days under the OSH Code. State Shops and Establishments Acts set their own thresholds, so eligibility should be checked against local law.
3. Can earned leave be carried forward?
Yes, up to a cap. The OSH Code sets that cap at 30 days and requires employers to encash anything above it, while state acts allow anywhere from 30 to 45 days depending on where the establishment operates.
4. How is earned leave encashment calculated?
It’s calculated using basic salary plus dearness allowance per day encashed, with the divisor set by company policy or the relevant state act. Whether it’s taxed depends on timing; exempt up to ₹25 lakh at retirement, fully taxable otherwise.
5. Is earned leave different from casual leave?
Yes. Earned leave accrues based on days worked and can be carried forward or encashed, while casual leave is a fixed short-term allowance for unplanned absences that lapses at year-end and cannot be encashed.
