Every January, somebody in finance opens the leave register and asks the question nobody wants to answer. Why does this senior engineer have 68 days of earned leave against her name?
Depending on where she works and what your policy says, part of that leave balance may have lapsed legally. Part of it may be an unavoidable payout. Part of it may be a liability your books never provisioned for. The same number can be all three at once.
Leave balance looks like an HR admin detail until an employee resigns. Or an auditor asks for your leave provision. Or a project manager finds that three of five people on a delivery have to burn 15 days each before December.
This guide covers how leave balance is built, what the law says after the labour codes came into force, where state rules diverge, and how encashment and tax work. Every number here traces back to the statute or notification it comes from.
Leave Balance In India: The Short Answer
Leave balance is the number of paid leave days an employee has available at a given point, for a given leave type. The calculation is:
Closing balance = opening balance, plus leave accrued, less leave availed, less leave encashed or lapsed.
Two sources fill in each term. One is Section 32 of the Occupational Safety, Health and Working Conditions Code, 2020. The other is your state Shops and Establishments Act.
Key points at a glance
- Accrual: one day of earned leave for every 20 days worked. Eligibility begins at 180 days worked in the calendar year.
- Carry forward: 30 days is the central floor. Karnataka, Maharashtra, and Tamil Nadu allow 45 days.
- Refused leave: if you denied a leave request, those days carry forward with no cap at all.
- Encashment: a worker can demand encashment at the end of the calendar year and can encash any balance above 30 days.
- Exit payout: due before the expiry of the second working day after an employee quits.
- Tax: fully taxable during service. At retirement or resignation, exempt up to ₹25 lakh for non-government employees, as a lifetime aggregate.
Each of these is unpacked below.
What Is Leave Balance? Definition And Leave Types
Leave balance is one number that hides four different rule sets. Accrual is set by statute and policy. Availed leave depends on your approval workflow and the accuracy of your attendance records. Lapse depends on carry-forward caps that vary by state. Encashment depends on your policy and, in some cases, on a right the employee can exercise whether you like it or not.
Most Indian employers run three leave buckets. They behave differently:
- Earned leave (EL), also called privilege leave (PL) or annual leave. Accrues with days worked. Carries forward up to a cap. Encashable. This is the bucket that creates balances worth arguing about.
- Casual leave (CL). Credited in a lump for short unplanned absences. Usually lapses at year-end. Usually not encashable.
- Sick leave (SL). Credited annually. Sometimes carried forward, rarely encashable.
When people say “leave balance” without qualifying it, they mean earned leave. That is the bucket with statutory backing, a carry-forward rule, and a rupee value attached.
Leave Balance Rules In India Changed In November 2025
A lot of published guidance is out of date on this point, so it is worth being precise.
India’s four labour codes came into force on 21 November 2025. The 29 central labour laws they subsume stand repealed, and the Factories Act, 1948, is one of them. If a leave policy or template still cites “Section 79 of the Factories Act” as the operative central provision for earned leave, it is citing a repealed statute.
Annual leave with wages is now governed by Section 32 of the Occupational Safety, Health and Working Conditions Code, 2020, brought into force by notification S.O. 5321(E) dated 21 November 2025.
Three things follow for anyone writing policy right now:
- Central rules are notified. The Ministry of Labour and Employment notified central rules under the four codes on 8 May 2026, with the OSH Code rules following on 9 May 2026.
- Those central rules have limited reach. They apply where the Central Government is the appropriate government, covering railways, mines, ports, banking, insurance, and central public sector undertakings. Most private employers sit outside that list.
- State rules are still arriving. For state-jurisdiction establishments, the operative detail comes from state rules, and states are notifying on their own timelines.
State Shops and Establishments Acts have not been repealed. Labour sits on the Concurrent List, so those state statutes continue to run alongside the codes for shops, offices, and commercial establishments. Run an engineering consultancy in Bengaluru and a delivery office in Chennai, and you are working with two sets of leave rules. One payroll system has to reconcile both.
How Leave Accrual Works Under The OSH Code
Section 32(1) sets the central floor. Several details in it are widely misquoted, so read it closely.
The qualifying threshold is 180 days. A worker is entitled to leave with wages in a calendar year after working 180 days or more in that year. The Press Information Bureau explainer on the OSH Code confirms the reduction from the earlier 240-day threshold and frames it as a rest and recovery measure.
The accrual rate is one day for every 20 days worked. For an adolescent worker, the rate is one day for every 15 days. The same 1:15 rate applies to a worker employed below ground in a mine.
Some non-working days count toward the 180 but do not earn leave. Layoff, maternity leave, and annual leave availed during the year all count when you test whether the worker crossed 180 days. They do not generate accrual themselves. This is where spreadsheet logic quietly breaks, because one formula cannot do both jobs.
Holidays inside a leave period do not consume leave. Any holiday falling between the leave days availed, or prefixed or suffixed to them, is excluded from the leave counted against the balance.
Mid-year joiners are handled separately. Where service starts on a date other than 1 January, the worker qualifies at the same rate after working one fourth of the days remaining in that calendar year.
Run the arithmetic and the floor is modest. A worker with roughly 240 working days accrues about 12 days of earned leave. Most professional services firms grant considerably more, typically 18 to 24 days. The statutory floor is a floor. The talent market sets the real number.
Who Counts As A Worker, And Who Does Not
This question decides whether Section 32 binds you at all for a given employee. Very little published guidance covers it.
The OSH Code defines “worker” to exclude two groups:
- Anyone employed mainly in a managerial or administrative capacity.
- Anyone employed in a supervisory capacity drawing wages above ₹18,000 per month, unless the Central Government notifies a higher figure.
“Establishment” means a place of industry, trade, business, manufacturing, or occupation with ten or more workers.
For an IT consulting firm, an EPC design house, or a staffing agency of 25 to 150 people, this has a practical consequence. A meaningful share of your headcount may sit outside the statutory definition of worker. Their leave entitlement then flows from the employment contract, the applicable state Shops Act, and your own policy, rather than from Section 32 directly.
That does not make the statutory framework irrelevant. It makes the classification exercise real. Before you write a leave policy, sort your people into three groups: workers under the Code, employees covered by the state Act, and employees governed purely by contract. Then write one policy that meets the most generous applicable entitlement for each group. A single national policy pitched at the lowest number will fail compliance somewhere.
Monthly Accrual Versus Annual Credit
The statute describes accrual against days worked. Company policies usually simplify that into one of two models.
Annual credit: The full year’s entitlement lands on 1 January or on the joining anniversary. Easy to communicate, and generous to anyone who leaves in March. It also creates negative balances at exit that you have to recover in the final settlement.
Monthly accrual: One twelfth of the entitlement credits each month, often 1.5 or 2 days. It tracks the statutory logic more closely. It keeps the accrued liability accurate month to month, and it makes exit settlements far less contentious.
Monthly accrual is the better default for project-based services firms. Your liability is incurred continuously, and finance needs to see it that way. If you are choosing a model while setting up a leave management system, monthly is the one that survives audit questions.
Leave Balance Rules Under State Shops And Establishments Acts
If your people sit in offices rather than factories, the state Act is usually the operative statute. The rules differ in substance. Several widely circulated comparison tables are running on figures that were amended years ago.
| State (statute) | Earned leave entitlement | Carry forward cap |
| Karnataka, Shops and Commercial Establishments Act, 1961, s.15 | One day for every 20 days worked (about 18 days a year) | 45 days |
| Maharashtra, Shops and Establishments (RECS) Act, 2017, s.18 | One day for every 20 days worked, after 240 days in the preceding calendar year | 45 days |
| Delhi, Shops and Establishments Act, 1954, s.22 | 15 days privilege leave after every 12 months of continuous employment | Three times the annual privilege leave entitlement |
| Tamil Nadu, Shops and Establishments Act, 1947, s.25 | 12 days after 12 months of continuous service | 45 days |
Two of those numbers are commonly reported wrong.
Karnataka is 45 days, not 30. The cap was raised by the Karnataka Shops and Commercial Establishments (Second Amendment) Act, 2020, notified as Karnataka Act 8 of 2021, which substituted the first proviso to Section 15(7).
Tamil Nadu is 45 days, not 24. The original proviso to Section 25(1) capped accumulation at 24 days. It was substituted vide G.O. Ms. No. 162, Labour and Employment (K2), dated 14 November 2018. Tables still quoting 24 days are running on pre-2018 text.
Two further details worth noting. Maharashtra credits eight days of casual leave per calendar year on a quarterly basis, and that casual leave lapses if unavailed at year end. Delhi grants 12 days of sickness or casual leave a year on top of privilege leave.
State Acts get amended more often than most policy documents get reviewed. Before you hard-code a cap into payroll, confirm it against the currently notified text for the state where the establishment is registered.
Leave Carry Forward Rules In India, And Where Balances Break
Under Section 32(1)(vii), leave not taken in a calendar year is added to the following year’s leave. The total carried forward to a succeeding year cannot exceed 30 days.
That is the central floor. Karnataka, Maharashtra, and Tamil Nadu allow 45 days. Where a state Act is more generous, that is the entitlement your employees in the state are working with.
Then there is the clause most leave policies ignore.
Refused Leave Carries Forward Without Any Limit
Section 32(1)(vii)(b) says a worker who applied for leave with wages and was not granted it can carry forward the refused leave without any limit.
Consider how that plays out. A delivery lead denies a leave request in November because a client milestone is at risk. The employee’s balance is already at the cap. Under a normal policy, those days lapse on 31 December. Under Section 32(1)(vii)(b), they do not lapse, and the cap does not touch them.
That clause is why leave approval records matter as much as leave balances. If your system records approvals but not refusals, you cannot defend a cap when an employee challenges a lapse. You also cannot quantify the liability sitting in your denied requests. It is the strongest practical argument for keeping requests, approvals, and rejections inside one auditable workflow rather than in managers’ inboxes.
Why Casual And Sick Leave Usually Do Not Carry Forward
Casual leave exists for short, unplanned absences. Statute and standard practice both treat it as use-it-or-lose-it. Maharashtra’s Section 18(2) states explicitly that unavailed casual leave lapses at year-end. Sick leave varies more by state and by policy.
This matters for how you report balances. When an employee sees one consolidated “leave balance” on a payslip, they assume all of it is bankable. Show the buckets separately. Label which ones carry forward and which ones can be encashed. That alone prevents a large share of the disputes that reach HR in the last week of December.
Leave Encashment: When It Is A Right, And When It Is A Policy Choice
Most guidance treats leave encashment as something an employer graciously offers. Under the OSH Code, parts of it are an entitlement the worker can demand.
Encashment on demand at year-end: Section 32(1)(viii) entitles a worker, on their demand, to encashment of leave at the end of the calendar year.
Encashment of the excess above 30 days: Section 32(1)(ix) entitles a worker whose total leave exceeds the 30-day carry-forward cap to encash the excess. Balance above the cap does not evaporate. It converts.
Payment on exit, with a deadline: Section 32(1)(vi) is the clause your finance team should have pinned to a wall. Where a worker is discharged, dismissed, quits, is superannuated, or dies in service, that worker or the heir or nominee is entitled to wages in lieu of the leave earned, even if the worker has not completed the qualifying period. A hard timeline is attached:
- Discharge, dismissal, or the worker quitting: payment before the expiry of the second working day from that date.
- Superannuation or death in service: payment before the expiry of two months from that date.
Two working days, not the next payroll cycle. If your full and final settlement takes six weeks because leave records are reconciled by hand across three spreadsheets, that process is your compliance risk.
How To Calculate Leave Encashment
The formula most Indian employers use:
Leave encashment = (Basic + Dearness Allowance) ÷ divisor × encashable leave days
The divisor is a policy decision, not a statutory one. Section 32 speaks of “wages in lieu” of leave without prescribing a daily rate. Most employers use 30. Some use 26, on the reasoning that 26 reflects working days in a month. The difference is not trivial.
Take a senior consultant on a basic salary of ₹60,000 and dearness allowance of ₹5,000, resigning with 24 encashable earned leave days.
| Divisor | Per-day rate | Payout on 24 days |
| 30 | ₹2,166.67 | ₹52,000 |
| 26 | ₹2,500.00 | ₹60,000 |
An ₹8,000 gap on one exit. Multiply that across 20 exits a year, and an undocumented divisor becomes a real number on your P&L.
Two more points catch people out.
Use the right salary components. The Code defines wages as basic pay, dearness allowance, and retaining allowance. It excludes house rent allowance, conveyance, overtime, commission, bonus, and gratuity. A proviso follows: where the excluded components exceed one half of total remuneration, the excess is added back into wages. A CTC built on a thin basic and a fat allowance stack no longer escapes that as cleanly as it once did.
Decide the divisor once and write it down. Applying 30 to one exiting employee and 26 to the next is how a routine settlement becomes a grievance.
Leave Encashment Tax Exemption Under Section 10(10AA)
The tax position splits on timing.
During service, encashment is fully taxable as salary income at slab rates, with TDS deducted by the employer. No exemption applies.
At retirement or resignation, encashment is exempt in full for government employees. For non-government employees, the exemption is the least of four amounts:
- The actual amount received.
- Ten months of average salary, based on the last ten months.
- The cash equivalent of unused leave, capped at 30 days per completed year of service, however generous your policy is.
- ₹25,00,000.
The ₹25 lakh figure comes from CBDT Notification No. 31/2023 dated 24 May 2023, effective 1 April 2023. It replaced a ₹3 lakh limit that had stood since 2002.
The Press Information Bureau release announcing the change confirms two conditions HR teams routinely miss. The ₹25 lakh is an aggregate where payments come from more than one employer in the same year. It is also reduced by any exemption already allowed in earlier years. Treat it as a lifetime ceiling, not a per-employer one.
The exemption is available under both the old and the new tax regimes, so an employee does not need to switch regimes to claim it.
One forward-looking note. The Income-tax Act, 2025 came into force on 1 April 2026 and replaces the 1961 Act. The substantive treatment and the ₹25 lakh ceiling carry over, but the provision moved into the schedules rather than staying a numbered Section 10(10AA). Returns for AY 2026-27 still reference the old numbering because the income relates to a period before the new Act took effect. If your payroll templates, offer letters, or settlement statements quote a section number, they need a refresh for the next cycle.
Why Leave Balance Is A Liability On Your Balance Sheet
Every accrued, unavailed, encashable leave day is money you owe. It is a compensated absence liability that accounting standards expect you to measure and provision for, and it grows every month whether or not anyone looks at it.
Take a 60-person consulting firm where the average encashable day is worth ₹2,200. An average carried balance of 20 days per head is a liability of roughly ₹26 lakh. If nobody provisioned for it, that number surfaces the first time an auditor asks, or the first time three senior people resign in one quarter.
The distortion compounds in project-based businesses. Revenue is recognised against delivery. Leave liability accrues against time worked on that same delivery. When the two live in different systems, project profitability looks better than the business really is, because a real cost of delivery sits outside the project view.
This is the case for keeping leave, attendance, timesheets, and billing on one data layer instead of three. When the same record of a person’s time feeds the leave ledger, the payroll run, and the project cost, the liability becomes visible where decisions get made.
How Leave Balance Affects Utilization And Project Delivery
Ask a delivery lead about their biggest Q4 capacity risk and you will rarely hear “leave balance”. Ask again in the third week of December.
Concentrated leave is a scheduling problem before it is a cash problem. When carry forward caps force a use-it-or-lose-it rush, the people billable on your largest engagements disappear in the same fortnight. Utilization drops, milestones slip, and the recovery lands in January as overtime or a delayed invoice.
Three habits fix most of it:
- Show forward balances alongside current ones. A manager staffing a March delivery needs to know what the team must burn by December, not what they hold today.
- Flag concentration early. If four people on one project are above the cap in September, that is a resourcing decision to make in September.
- Connect leave to the resource plan. Approved leave should reduce available capacity in the same view project managers use to allocate people. Otherwise your capacity plan is fiction.
This is where a unified platform earns its keep. Juntrax runs HRMS, professional services automation, and Cash-Flow on one data layer. Leave balances, timesheets, and project allocation read from the same record instead of three that drift apart.
Attendance and leave feed the HRMS module. The same hours flow into project planning and billing. Employees check their own balances through self-service instead of emailing HR.
Juntrax works alongside your existing accounting system rather than replacing it. That matters when finance has no appetite to migrate off Tally, QuickBooks, or Xero to fix a leave problem.
How To Audit Your Leave Balance In One Afternoon
You do not need a project to find out whether your leave data is trustworthy. Work through this sequence.
- Pull the outliers. Sort every employee by earned leave balance, descending. Anyone above your stated carry forward cap is a policy exception, a system bug, or an accumulation of refused leave. Find out which.
- Check the cap against the right statute. Confirm the applicable cap per location: the OSH Code floor of 30 days, or the state Shops Act figure where it is more generous. Operating in several states on a single cap means you have a gap somewhere.
- Reconcile availed leave against attendance. Every leave day deducted from a balance should have a matching attendance record. Gaps in either direction mean your attendance data and your leave ledger are not talking to each other.
- Test three exit settlements. Recompute the encashment from first principles: closing balance, salary components, divisor, tax treatment. If you cannot reproduce the number, neither can an auditor.
- Find the refusals. Ask whether your system records rejected leave requests with dates and reasons. If it does not, add that before year end.
- Put a rupee value on the total. Multiply the aggregate encashable balance by the average per-day rate. Take that figure to finance and ask whether it is provisioned.
- Publish the buckets. Make sure every employee can see earned, casual, and sick leave separately, with carry-forward and encashment rules stated per bucket. An employee self-service portal that surfaces this clears most of the December queue.
Getting Your Leave Balance Right Before Somebody Asks
Leave balance sits where three functions meet and rarely share a system. HR owns the policy. Finance owns the liability. Delivery owns the consequences when four people take three weeks off in the same month.
The compliance layer is not complicated once you know where to look. Accrual and the 180-day threshold under Section 32. The carry forward cap from whichever of the Code or the state Act is more generous. The refused-leave exception. Encashment rights at year-end and at exit. The four-part tax test at retirement.
The difficulty is practical. The data lives in a leave sheet, an attendance system, a payroll file, and a project plan, and no two of them agree. Fix the data layer, and the policy questions get much easier to answer.
Start with the audit above. If the numbers do not reconcile, you have found your project for the quarter.
Frequently Asked Questions
How Is Leave Balance Calculated?
Leave balance is the opening balance for the period, plus leave accrued, minus leave availed, minus any leave encashed or lapsed under the carry-forward cap. Under Section 32 of the OSH Code, 2020, a worker accrues one day of leave for every 20 days worked. Eligibility begins after 180 days worked in the calendar year.
How Many Earned Leaves Can Be Carried Forward In India?
The central floor under the OSH Code, 2020, is 30 days. Several state Shops and Establishments Acts allow more. Karnataka, Maharashtra, and Tamil Nadu each permit accumulation up to 45 days, and Delhi permits up to three times the annual privilege leave entitlement. Leave that was applied for and refused by the employer carries forward without any limit.
Is Leave Encashment Taxable In India?
Leave encashment received while still in service is fully taxable as salary. Encashment at retirement or resignation is fully exempt for government employees.
For non-government employees, it is exempt up to the least of four amounts: the actual sum received, ten months of average salary, the cash equivalent of leave capped at 30 days per year of service, and ₹25,00,000. That ceiling was notified by CBDT Notification No. 31/2023, with effect from 1 April 2023. It is a lifetime aggregate across employers, and it applies under both the old and the new tax regimes.
Can Leave Encashment Be Claimed During Service?
Yes, where company policy allows it, and Section 32(1)(viii) of the OSH Code also entitles a worker to demand encashment of leave at the end of the calendar year. The tax treatment differs from that of an exit payout. Encashment received during service is fully taxable as salary income, with no exemption available.
Can An Employer Let Leave Balance Lapse?
An employer can apply a carry-forward cap, and the balance above the cap may lapse or be encashed depending on policy and the applicable statute. Two limits apply. Leave the employee applied for and the employer refused carries forward without limit under Section 32(1)(vii)(b). Accrued earned leave also cannot be extinguished at exit without payment, because Section 32(1)(vi) creates a right to wages in lieu of the leave earned.
Does Casual Leave Carry Forward?
In most cases, no. Casual leave is designed for short, unplanned absences and typically lapses at the end of the year. Maharashtra’s Shops and Establishments Act, 2017 states explicitly that unavailed casual leave lapses at year-end. Casual leave is also generally not encashable, though the final position sits in your company policy, which should state it clearly.
What Is The Difference Between Earned Leave And Privilege Leave?
They are the same thing under different labels. “Earned leave” is the term used in central legislation and government service rules. “Privilege leave” appears in several state Shops and Establishments Acts, notably Delhi, and in many private sector policies. Both describe paid leave that accrues with service, carries forward up to a cap, and can be encashed.
What Happens To Leave Balance When An Employee Resigns?
The unavailed earned leave balance is paid out as wages in lieu of leave, as part of the full and final settlement. Under Section 32(1)(vi) of the OSH Code, that payment is due before the expiry of the second working day from the date the worker quits. Where an employee has taken more leave than they accrued, the negative balance is usually recovered in the same settlement at the same per-day rate.