Leave Policy Changes in India 2026: Employer Guide to New Labour Codes

India’s leave policy landscape changed materially on 21 November 2025. Four new Labour Codes came into force on that date, repealing 29 central labour laws and rewriting the rules around earned leave, leave encashment, full and final settlements, and the very definition of “wages” that sits underneath every leave calculation. For employers planning their 2026 HR cycle, the changes touch nearly every aspect of leave administration, from policy text to payroll math.

This guide explains the leave policy changes in India for 2026, the official position taken by the Ministry of Labour and Employment (MoLE) in its post-implementation FAQs, the gaps where state Shops and Establishments Acts still apply, and a practical compliance checklist HR teams can run before their next leave-policy refresh.

Note: This article provides a general overview. Actual entitlements and compliance requirements may vary based on applicable Central and State law, the nature of the establishment, and any future notifications issued by the Central or State Governments. It is not legal advice.

What changed on 21 November 2025

• The four Labour Codes (Wages, Industrial Relations, Social Security, and Occupational Safety, Health and Working Conditions) are now in force across India, per the Ministry of Labour and Employment notifications dated 21 November 2025 (with a corrigendum on 19 December 2025).
• The eligibility threshold for annual earned leave has dropped from 240 working days to 180 working days in a calendar year under the OSH&WC Code.
• Workers can carry forward a maximum of 30 days of accumulated leave to the succeeding calendar year. Leave applied for but refused by the employer is carried forward without any limit.
• Annual encashment of leave above 30 days is now an explicit statutory right for workers.
• The definition of “wages” has been standardised; the 50 percent rule means basic + DA + retaining allowance must be at least half of total remuneration, which raises the base on which leave encashment is paid.
• Full and final settlement (including unpaid leave encashment) must be completed within two working days of the employee’s last working day.
• Maternity leave is now governed by Chapter VI of the Code on Social Security, 2020, retaining the 26-week / 12-week structure. A March 2026 Supreme Court ruling further extended maternity rights for adoptive mothers.
• Central and most State Rules are still being finalised. Existing state-level Shops and Establishments Acts continue to apply where they are not inconsistent with, or are more favourable than, the Labour Codes.

Why 2026 is different from earlier policy reviews

In most years, reviewing a leave policy is housekeeping work: updating the holiday list, validating carry-forward balances, and refreshing the maternity section if a recent ruling demanded it. 2026 is different in three ways.

First, the statutory base has moved. Twenty-nine central labour laws have been subsumed into the four Codes, and the Ministry of Labour and Employment confirms the codes are operative even where State Rules are still pending. Existing rules and regulations continue only to the extent they are not inconsistent with the Codes.

Second, the wage definition has been re-engineered. Leave encashment, gratuity, retrenchment compensation, and statutory bonus all flow from the same “wages” figure. When the 50 percent floor on basic + DA + retaining allowance triggers, the encashment base climbs, and so does the employer’s liability.

Third, enforcement timelines have tightened. Two working days for full and final settlement leaves no room for the legacy practice of clearing dues weeks after exit. HR, payroll, and finance need to operate from a single, real-time leave ledger.

For HR teams running pan-India operations, the practical implication is that a policy refresh in 2026 is part legal, part payroll, and part technology. None of those can be done in isolation.

The four Labour Codes and where leave provisions sit

The four Codes consolidate the prior labour-law landscape into a structure that is easier to navigate once you know which Code governs what.

The biggest single source of leave-related change is the OSH&WC Code. The Code on Social Security carries the maternity-benefit framework. The Code on Wages controls the value of each encashed day.

A nuance often missed: the OSH&WC leave provisions apply to “workers” as defined in Section 2(1)(zzl), which now includes sales promotion employees and working journalists but excludes supervisors earning above ₹18,000 per month and apprentices. For senior managerial and white-collar staff in commercial establishments, the State Shops and Establishments Act continues to govern leave entitlements. We unpack that distinction in detail later in this guide.

Six leave-policy changes employers must act on for 2026

1. Earned-leave eligibility drops from 240 to 180 working days

Under the Factories Act, 1948 (Section 79), a worker had to complete 240 days of work in a calendar year before becoming eligible for annual leave with wages. The OSH&WC Code, 2020 lowers this threshold to 180 working days, while keeping the accrual rate at one day for every twenty days of work for adult workers (and one day for every fifteen days for workers below fifteen years of age).

The Press Information Bureau factsheet explains the rationale as ensuring “enough rest and recovery, improving productivity and job satisfaction.” MoLE’s FAQ dated 30 December 2025 confirms the position formally.

What employers should do:

• Update the eligibility clause in your leave policy from 240 to 180 working days.
• Recalculate which mid-year joiners will now cross the threshold during 2026; they will accrue annual leave earlier than your existing policy expects.
• Confirm whether your HRMS leave-accrual logic is configured to apply the 180-day rule from 21 November 2025, not from 1 April 2026.

2. Carry-forward is capped at 30 days, with one important exception

The OSH&WC Code permits a worker to carry forward up to 30 days of accumulated leave to the succeeding calendar year. Anything above that has to be either availed or encashed, depending on the policy.

The MoLE’s March 2026 FAQ clarifies a critical exception: if a worker has applied for leave with wages and the employer has refused it, the refused leave can be carried forward without any limit. This protects employees from being penalised for an employer’s operational decision to deny a leave request.

Where a State law is more favourable to the worker (Andhra Pradesh, for example, has permitted 60 days carry-forward in some categories), the more beneficial provision will continue to apply per Section 132 of the OSH Code.

What employers should do:

• Cap automatic carry-forward at 30 days in your HRMS configuration.
• Build a separate “refused leave” bucket that tracks employer-denied applications and carries the balance forward without cap.
• Document and timestamp every refusal in writing; this becomes the audit trail.

3. Annual leave encashment is now an explicit statutory entitlement

Historically, many private-sector employers operated a “use it or lose it” policy, where leave beyond the carry-forward limit simply lapsed at year-end. The OSH&WC Code formally ends that practice for covered workers.

The MoLE FAQ confirms three points:

1. There is no prescribed maximum limit on the number of days that can be encashed under the OSH&WC Code.
2. Leave exceeding 30 days, if applied for but not granted, may be encashed at the end of the calendar year.
3. On separation from service (resignation, retirement, termination, death), the worker is entitled to encash all accumulated leave to credit.

The implication for employers is that lapsing of accrued leave is no longer a default; encashment is. As the Ved Jain & Associates analysis notes, this represents a “hidden liability” for finance teams that had previously planned around forfeiture assumptions.

What employers should do:

• Replace lapsing-based language in your leave policy with encashment-based language.
• Have your actuarial team revisit the leave-encashment provision in your books; the higher frequency of payouts and the wider wage definition can both inflate the number.
• Decide a year-end calendar process: encash above-30-day balances by a fixed cut-off, document the policy clearly, and communicate it to employees ahead of the next leave year.

4. The new “wages” definition raises the encashment base

This is the change with the most underestimated financial impact. The Code on Wages, 2019 introduces a single, standardised definition of “wages” across all four Codes (Section 2(y)). It includes:

• Basic pay
• Dearness allowance
• Retaining allowance (where applicable)

It explicitly excludes items such as house rent allowance, conveyance, overtime, bonus, commission, statutory contributions, and gratuity.

The proviso is where the math changes. If the total of all “excluded” components (HRA, conveyance, etc.) exceeds 50 percent of total remuneration, the excess is added back to wages. The Ministry’s clarification is that this re-engineered wage figure flows into every statutory calculation: PF, gratuity, leave encashment, overtime, statutory bonus, and retrenchment compensation.

In legacy salary structures, basic pay was often kept low (around 30 percent of CTC) so that PF and gratuity costs stayed contained. Those structures will frequently fail the 50 percent test, which means the wage base used for leave encashment can be significantly higher than the legacy “basic + DA” figure HR teams have historically used.

The KPMG India analysis puts it plainly: until salary structures are realigned, employers will face leave encashment payouts that “may unintentionally work out to be higher than 50 percent of the total package.”

What employers should do:

• Audit your top three salary structures (junior, mid, senior) and check whether basic + DA + retaining allowance hits 50 percent of total remuneration.
• Where it does not, model the gap and decide whether to restructure salaries or absorb the higher statutory cost.
• Realign payroll-software calculation rules so leave encashment is computed on the new wage base from 21 November 2025, not from a future date.

5. Full and final settlement within two working days

Under the IR Code, 2020 (Section 78), all dues including unpaid leave encashment must be settled within two working days of the employee’s last working day, regardless of whether the exit is voluntary or involuntary. The ELP Law update flags this as a clear departure from the prior regime, where the two-day timeline applied only in cases of dismissal, removal, retrenchment, or closure-related unemployment.

Under the OSH Code, leave encashment in cases of death or superannuation must be settled within two months of the event.

For HR and payroll teams, the operational change is structural rather than incremental. Final settlements can no longer be queued up for the next month-end payroll cycle. The leave ledger, payroll ledger, and finance approval workflow have to operate in parallel during the notice period.

What employers should do:

• Run your exit process backwards from the last working day; identify every approval that needs to happen before day-zero.
• Move leave-balance reconciliation forward in the notice period instead of triggering it on the last day.
• Configure your HRMS to auto-generate the F&F statement (including leave encashment, gratuity, notice pay, expense claims, and recoveries) for HR review at least three working days before exit.

6. Know who is actually a “worker” under the OSH Code

This is the most commonly missed nuance in employer leave policies post-Codes. The OSH&WC Code leave provisions apply only to “workers”, not to all “employees.”

The definition of “worker” under Section 2(1)(zzl) of the OSH Code:

• Includes: persons employed in any establishment to do manual, unskilled, skilled, technical, operational, clerical, or supervisory work; sales promotion employees; working journalists.
• Excludes: persons employed mainly in a managerial or administrative capacity; persons employed in a supervisory capacity drawing wages exceeding ₹18,000 per month (raised from ₹10,000 under the Industrial Disputes Act); apprentices; armed forces.

The Supreme Court Cases Online analysis of MoLE’s March 2026 FAQ confirms that a relationship manager or salesperson drawing wages above ₹18,000 per month is not entitled to leave encashment under the OSH Code (though sales promotion employees specifically are, regardless of pay, because of how the Code defines them).

For everyone outside the “worker” definition (most managerial and senior white-collar staff in commercial establishments), leave entitlements continue to be governed by the applicable State Shops and Establishments Act.

What employers should do:

• Map every role in your organisation against the OSH Code’s “worker” definition and the applicable State Shops and Establishments Act.
• Maintain a clear two-tier classification in your HRIS: covered-worker leaves and other-employee leaves, since the accrual, carry-forward, and encashment rules may differ for the two groups.
• Document the basis for each classification; this is exactly the kind of detail an Inspector-cum-Facilitator under the new digital inspection regime will look at.

Maternity leave in India: rules for 2026

Maternity benefits are now consolidated under Chapter VI of the Code on Social Security, 2020, which subsumed the Maternity Benefit Act, 1961 (along with the 2017 amendment) when the Codes came into force on 21 November 2025. The substantive entitlements remain largely unchanged.

A landmark Supreme Court ruling on 17 March 2026 in Hamsaanandini Nanduri v. Union of India struck down the long-standing rule that limited the 12-week adoption-based maternity benefit to mothers who adopted children below the age of three months. As reported by Employsome’s 2026 guide, the court held the three-month age cap as inconsistent with Article 14 of the Constitution and extended the 12-week entitlement to all adoptive mothers, regardless of the adopted child’s age.

What employers should do for 2026:

• Update your maternity policy to remove any reference to the three-month adoption age limit (it is now unenforceable).
• Confirm wage payment during leave uses the new “wages” definition under the SS Code.
• For establishments with 50 or more employees, audit crèche facilities and access policies (the Ministry clarifies that crèche facilities apply to all employees, regardless of the workforce’s gender composition).
• Document your nursing-break policy (two breaks of prescribed duration until the child is 15 months old) and the option of work-from-home post-leave subject to mutual agreement.

For a deeper treatment of maternity leave compliance, including ESI coverage for women earning under ₹21,000 per month and the Pradhan Mantri Matru Vandana Yojana (PMMVY) cash benefit, refer to the Ministry of Women and Child Development guidelines.

Paternity, adoption, surrogacy, and other special leave

India still does not have a central statutory paternity-leave entitlement for private-sector employers. The current position:

• Central government employees are entitled to 15 days of paid paternity leave within six months of childbirth or adoption, per the Central Civil Services (Leave) Rules, 1972.
• Private-sector employers offer paternity leave voluntarily. Around 14 percent of Indian companies have a formal policy, with leading employers offering significantly more: Zomato has publicly committed to 26 weeks, Wipro offers 8 weeks (extended to biological, adoptive, and in loco parentis caregivers).
• The Paternity and Parental Benefit Bill, 2025 (introduced by MP Supriya Sule in the Lok Sabha) proposes 8 weeks of paid paternity leave plus 8 weeks of shared parental leave within 18 months of birth. The bill is currently a private member’s bill and has not been taken up for discussion.

The Supreme Court’s March 2026 observations in Hamsaanandini Nanduri explicitly urged Parliament to legislate paternity leave as a social security right, which increases the likelihood of formal legislation over the next 12 to 24 months. Employers planning competitive parental-leave benefits will want to monitor this space closely.

State-specific leave entitlements: where the Shops and Establishments Acts still apply

For most office, IT, and commercial establishments (and for any employee outside the OSH Code’s “worker” definition), leave continues to be governed by the applicable State Shops and Establishments Act. These Acts vary significantly. The table below covers the major employment-heavy states.

These figures are statutory minimums; employers are free to offer more. Where the State law is more favourable than the OSH Code (for example, Andhra Pradesh’s 60-day carry-forward limit), the State law continues to govern per the OSH Code’s non-derogation provision.

The takeaway for HR teams running distributed teams: a single pan-India leave policy will rarely be compliant in every state. Configure your HRMS to apply the location-based rule, and document the basis for any difference an employee in Bengaluru sees from a peer in Mumbai.

For state-by-state working-hour limits, overtime rules, and registration thresholds, the labour department portals of each state are the authoritative source.

National and public holidays: what is statutorily required

India has three nationally observed public holidays that are compulsory across all states and union territories:

• Republic Day (26 January)
• Independence Day (15 August)
• Gandhi Jayanti (2 October)

Beyond these, each State Government notifies a list of festivals and restricted holidays under the Negotiable Instruments Act, 1881 and the applicable Shops and Establishments Act. The number varies significantly: Karnataka typically notifies around 20 to 25 holidays, Maharashtra around 15 to 20, and Kerala around 25 (driven by religious diversity in the state).

Most employers offer a combination of:

• Fixed (closed) holidays: typically 8 to 12, including the three national holidays and major regional festivals.
• Optional / restricted holidays: 2 to 4 days an employee can pick from a published list.

If a covered worker is required to work on a notified holiday, the OSH&WC Code and most State laws require the employer to provide a substituted day off (compensatory off) or pay the worker for the holiday at the standard rate, plus overtime where applicable.

Other leave types employers should document clearly

The Labour Codes do not explicitly mandate every category of leave most Indian organisations offer. The categories below are governed either by State law, by company policy, or by best practice; documenting them in writing avoids most disputes.

• Casual leave: For unanticipated personal needs, typically 7 to 12 days a year. Cannot usually be carried forward or encashed.
• Sick leave: For medical reasons, typically 7 to 12 days a year. Medical certificate required for absences over 2 to 3 consecutive days. Some State Shops Acts (Karnataka, for example) combine casual and sick leave into a single bucket.
• Compensatory off (comp off): One day off, typically usable within the same or next month, for working on a weekly off or notified holiday.
• Bereavement leave: Not legally mandated. Most employers offer 3 to 5 days; some offer up to 10.
• Marriage leave: Not legally mandated. Most employers offer 3 to 5 working days, usable once during employment.
• Study leave / sabbatical: Discretionary; covered entirely by company policy.
• Compensatory leave for women on night shifts: Per OSH Code, women have the right to work in any establishment and on night shifts with the safeguard of adequate safety, transport, and security arrangements, subject to the worker’s written consent.

The 2026 employer compliance checklist

The single-most useful artefact for an HR team in 2026 is a compliance checklist that captures every policy update, payroll re-configuration, and process change triggered by the new Codes. The list below covers the items most teams will need.

Policy and documentation

• Update the eligibility threshold for earned leave from 240 to 180 working days in the policy text.
• Cap general carry-forward at 30 days; add a separate, no-cap bucket for refused-leave carry-forward.
• Replace any “lapse” language with “encashment” language for leave above 30 days.
• Update the maternity-leave clause to reference Chapter VI of the Code on Social Security, 2020, not the Maternity Benefit Act, 1961.
• Remove the three-month age cap on adoptive-mother maternity leave (struck down in March 2026).
• Confirm the F&F settlement clause specifies a two-working-day timeline from the last working day.
• Maintain a separate policy section for State Shops Acts; do not assume the OSH Code covers every employee.
• Document the worker-vs-employee classification used for each role.
• Republish the updated policy on the employee portal and capture digital acknowledgement.

Payroll and HRMS

• Reconfigure your HRMS leave-accrual rule for the 180-day eligibility threshold from 21 November 2025.
• Audit your top salary structures for the 50 percent wage-rule compliance.
• Update leave-encashment calculation logic to use the new wages definition (basic + DA + retaining allowance, plus any add-back).
• Build automated alerts for year-end leave balances above 30 days.
• Configure exit workflow to auto-generate F&F statements three working days before the last working day.
• Set up a refused-leave register with timestamps and reasons.
• Verify state-specific leave entitlements are applied based on the employee’s work location, not company headquarters.

Finance and actuarial

• Revisit leave-encashment provisions in the books; recalculate using the higher wage base and the loss of forfeiture assumptions.
• Estimate year-end encashment liability for excess-30-day balances.
• Confirm gratuity provisions are recalculated using the wage definition effective 21 November 2025.
• Review actuarial valuation assumptions with your auditor before financial-year close.

Communication and change management

• Brief the payroll team, HR business partners, and people managers on the new rules before the next leave year begins.
• Communicate the updated carry-forward and encashment rules to employees in plain language.
• Train approving managers on the legal weight of refusing a leave application (refused leave carries forward without limit).
• Document the basis on which any role is classified outside the OSH Code’s worker definition; this can be reviewed during inspection.

Penalties for non-compliance

The Codes raise the penalty regime for non-compliance materially. Under the Code on Wages alone, the maximum penalty for repeated violations can reach ₹1 lakh with imprisonment up to three months. The OSH&WC Code carries fines up to ₹3 lakh for offences related to working hours, leave, and other welfare provisions. The IR Code provides for penalties up to ₹1 lakh for violations relating to retrenchment, layoff, and standing orders.

The newly redesignated Inspector-cum-Facilitator under each Code now operates through a web-based, randomised inspection scheme, which reduces the discretion that earlier inspectors had but also makes audits more consistent. Maintaining clean digital records is now the lowest-cost compliance investment an employer can make.

How a unified HRMS reduces compliance risk

The practical complexity of post-Codes leave administration sits at the intersection of three teams: HR (policy), payroll (calculation), and finance (provisioning). When each runs on a separate spreadsheet or a partially integrated system, gaps appear at exactly the points where the Codes have tightened scrutiny: leave-accrual triggers, carry-forward exceptions, the wage base used for encashment, and the two-working-day F&F timeline.

A unified business-management platform like Juntrax lets HR, payroll, and finance operate from a single leave and attendance ledger, which directly addresses the audit points the Codes care about:

• Location-aware leave accrual: apply the OSH Code rules where they govern, and the relevant State Shops Act elsewhere, automatically.
• Real-time encashment liability tracking: surface the value of accrued leave on the new wages base, not the legacy basic.
• Automated F&F workflow: generate the settlement statement on the second working day from exit by default.
• Audit-ready logs: every leave application, refusal, accrual change, and carry-forward decision sits in a timestamped record.

For a deeper view on the payroll-side implications, our companion piece on Indian Labour Code updates for payroll teams in 2026 walks through the wage-definition math in detail.

Conclusion

Leave policies in India are shaped by layered laws and local variation. As 2026 approaches, the priority for employers is not anticipating dramatic legal changes but ensuring that existing policies are applied correctly, consistently, and in line with current expectations.

A periodic review grounded in applicable laws and supported by reliable systems can help organizations avoid compliance gaps and operational friction as they scale.

Frequently asked questions

What is the new earned-leave eligibility threshold under the Labour Codes?

Under the Occupational Safety, Health and Working Conditions Code, 2020, a worker now needs to complete 180 working days in a calendar year (down from 240 days) to become eligible for annual leave with wages. The accrual rate remains one day for every twenty days worked for adult workers.

When did India’s new Labour Codes come into force?

The four Labour Codes (Code on Wages, 2019; Industrial Relations Code, 2020; Code on Social Security, 2020; and OSH&WC Code, 2020) came into force on 21 November 2025 by notification of the Ministry of Labour and Employment, with a corrigendum issued on 19 December 2025.

Is leave encashment mandatory in India in 2026?

Yes, for covered workers under the OSH&WC Code. Leave above the 30-day carry-forward cap, if applied for but not granted, can be encashed at the end of the calendar year. At separation from service (resignation, retirement, termination, or death), the worker is entitled to encash all leave to credit. There is no prescribed maximum on the number of days that can be encashed.

How is leave encashment calculated under the new wage definition?

Leave encashment is calculated on “wages” as defined in Section 2(y) of the Code on Wages, 2019: basic pay plus dearness allowance plus retaining allowance. If the total of excluded components (HRA, conveyance, overtime, bonus, etc.) exceeds 50 percent of total remuneration, the excess amount is added back to wages, raising the encashment base.

Does the Labour Code’s 180-day rule apply to white-collar managerial employees?

Not directly. The OSH&WC Code’s leave provisions apply to “workers” as defined in Section 2(1)(zzl), which excludes employees in managerial or administrative roles and supervisors earning above ₹18,000 per month. For these employees, leave entitlements continue to be governed by the applicable State Shops and Establishments Act.

What is the maximum number of days a worker can carry forward under the OSH Code?

A worker can carry forward a maximum of 30 days to the succeeding calendar year. There is a critical exception: if a worker has applied for leave and the employer has refused it, the refused leave carries forward without any limit.

Has maternity leave duration changed under the new Labour Codes?

The substantive entitlements have not changed: 26 weeks for the first two children, 12 weeks from the third child onwards. The governing statute is now Chapter VI of the Code on Social Security, 2020, which subsumed the Maternity Benefit Act, 1961. A March 2026 Supreme Court ruling (Hamsaanandini Nanduri v. Union of India) expanded adoptive-mother maternity rights by striking down the three-month age cap on the adopted child.

What is the timeline for full and final settlement under the Industrial Relations Code?

All dues, including unpaid leave encashment, must be settled within two working days of the employee’s last working day, irrespective of whether the exit is voluntary or involuntary. In cases of death or superannuation, leave encashment must be paid within two months.

Do State Shops and Establishments Acts still apply after the Labour Codes are in force?

Yes. State Shops and Establishments Acts continue to apply to commercial establishments and to employees who fall outside the OSH&WC Code’s “worker” definition. Where State law conflicts with the Code, the Code prevails, except where the State provision is more favourable to the worker.

What penalties can an employer face for leave-policy non-compliance under the new Codes?

Penalties vary by Code. The OSH&WC Code carries fines up to ₹3 lakh for offences related to working hours, leave, and welfare provisions. The Code on Wages carries fines up to ₹1 lakh with imprisonment up to three months for repeated violations. Inspections are now conducted by Inspector-cum-Facilitators through a web-based, randomised system.