AS | Ankit Sarawagi|Founder, CFOmatrix·June 2026·11 min read | Updated Jun 2026 |
- A leave policy should cover every leave type, its quota, and the rules for accrual, carry-forward, encashment, notice and approval, in one clear document.
- There is no single national leave number: entitlements flow from the State Shops and Establishments Act where your office is registered, so they vary by State.
- Maternity leave is 26 weeks for the first two children under the Maternity Benefit Act; creche facilities are mandatory at 50 or more employees.
- There is no statutory paternity leave in the private sector; many companies offer 5 to 15 days as good practice.
- The most common mistakes are copying another State’s numbers, allowing encashment of casual or sick leave, and leaving accrual or carry-forward rules vague.
| 26 weeks Paid maternity leave for the first two children (Maternity Benefit Act) | 50+ Employee count at which a creche facility becomes mandatory | State law Casual, sick and earned leave quotas come from your State Act |
What a Leave Policy Must Cover in India
A good leave policy answers, in one place, every question an employee or a manager might have about taking time off. If your policy leaves any of these to interpretation, you will end up settling disputes by email instead of by rule.
At a minimum, a leave policy in India should set out:
- Scope and the leave year. Who the policy covers (confirmed employees, probationers, contractors) and whether the leave year runs January to December or April to March.
- Each leave type and its annual quota. Casual, sick and earned or privilege leave, with the exact number of days for each.
- Statutory leave. Maternity leave, and any paternity, bereavement or other special leave you choose to offer.
- The holiday calendar. The list of public and festival holidays for the year, including any optional or restricted holidays.
- The operating rules. How leave accrues, how much can be carried forward, what can be encashed, notice and approval, and how leave is treated during probation and notice period.
- Edge cases. Half-day leave, leave without pay, sandwiching of weekends and holidays, and what happens to unapproved absence.
Your leave policy is not just an HR nicety: it is the document a labour inspector, an auditor, or an employment tribunal will read. It must be consistent with the law that applies to your office, which for most companies is the State Shops and Establishments Act. We cover that in Section 5.
The Main Types of Leave
Indian companies typically structure leave into three core categories, plus statutory and special leave. The exact names and numbers vary, but the logic is consistent.
| Leave type | Used for | Common practice |
|---|---|---|
| Casual Leave (CL) | Short, planned personal absences of a day or two | ~12 days a year; usually not carried forward or encashed |
| Sick Leave (SL) | Illness or medical reasons | ~12 days a year; medical certificate often required beyond 2 to 3 days |
| Earned / Privilege Leave (EL/PL) | Planned holidays and longer breaks | ~15 to 18 days a year; carried forward and encashable per State Act |
| Maternity / Paternity | Childbirth and care | 26 weeks maternity (statutory); paternity at employer discretion |
| Special leave | Bereavement, marriage, compensatory off, leave without pay | Defined by the employer; commonly a few days each |
The numbers above are common market practice, not a legal minimum. The legal floor is set by your State Act, which may prescribe, for example, a minimum number of earned leave days per year of service and a minimum of sick and casual leave. Build your quotas to be equal to or better than that floor.
Casual = ad hoc, Sick = health, Earned = you build it up. Only earned or privilege leave is normally carried forward and encashed. Casual and sick leave usually lapse at year end.
Statutory Leave: Maternity, Paternity and Holidays
Some leave is not optional. The Maternity Benefit Act 1961 is the most important to get right.
- Maternity leave: 26 weeks of paid leave for the first two children, and 12 weeks from the third child onwards. Eligibility is generally for women who have worked at least 80 days in the 12 months before the expected delivery date.
- Creche facility is mandatory for establishments with 50 or more employees, with mothers allowed a set number of visits a day.
- Adoption and commissioning mothers are entitled to 12 weeks of leave under the Act.
- Paternity leave is not a statutory entitlement in the private sector in India. It is entirely at the employer’s discretion; many companies offer 5 to 15 days as good practice and to compete for talent.
Your policy should also publish a holiday calendar. National holidays (Republic Day, Independence Day and Gandhi Jayanti) are observed everywhere; festival and State holidays vary, and many companies add a few optional or restricted holidays employees can choose from.
Maternity benefit is a hard legal right, not a company perk. Denying or shortening it, or treating maternity leave as unpaid, exposes the company to penalties and claims. State the 26 weeks clearly in your policy and never roll it into your general earned leave pool.
Accrual, Carry-Forward and Encashment
This is the section most policies get wrong, because the rules sound simple but interact in tricky ways. Define all three precisely.
Accrual: how leave is earned
Decide whether leave is credited upfront at the start of the leave year, or accrues over the year (for example, earned leave at 1.25 days per completed month). Monthly accrual is fairer when employees join or leave mid-year, because they earn only what they have worked for.
Carry-forward: what rolls over
State how much unused leave can move into the next leave year, and cap it. A common rule is that earned or privilege leave can be carried forward up to a ceiling (say 30 or 45 days), while casual and sick leave lapse at year end. The cap that applies to you may be set by your State Act.
Encashment: paying for unused leave
Encashment usually applies only to earned or privilege leave, and is paid on exit or at year end based on the employee’s basic (or basic plus dearness allowance) per day. Casual and sick leave are not normally encashable. Spell out the formula so payroll is never guessing.
Do not confuse leave encashment with gratuity. Gratuity (under the Payment of Gratuity Act 1972) is a separate benefit payable after 5 years of service at 15 days of wages per completed year, capped at Rs 20 lakh. Leave encashment is the payout for unused earned leave. Keep them distinct in your policy and in your full-and-final settlements.
The Shops and Establishments Act Decides Your Numbers
Here is the point most templates online miss: for office-based private companies in India, there is no single national leave law. Leave entitlements are governed by the State Shops and Establishments Act of the State where your establishment is registered. That is why the numbers differ across Karnataka, Maharashtra, Delhi, Telangana and the rest.
- Each State Act prescribes its own minimum earned, sick and casual leave, plus rules on carry-forward and, in some States, encashment.
- If you have offices in more than one State, you may need State-specific annexures so each office meets its local minimum.
- Factory workers are not covered by the Shops Act at all; they fall under the Factories Act 1948, which has its own annual leave with wages provisions.
So the right way to set your numbers is: start from the State Act minimum for each office, then set your company quota equal to or above it. Do not copy another company’s leave table without checking which State it was written for.
A leave policy is one of roughly 40 policies a growing Indian company eventually needs, from POSH and data protection to expense and remote-work policies. See all 41 policy templates to build your full HR and compliance handbook.
How to Write a Leave Policy: Step by Step
You do not need to draft from scratch. Follow these steps, using our template as the starting point.
| Find your State Act minimum |
Identify the State Shops and Establishments Act for each office and note the minimum earned, sick and casual leave and the carry-forward rule. This is your legal floor.
| Set your quotas and leave year |
Choose your CL, SL and EL numbers at or above the floor, decide your leave year (calendar or financial), and confirm maternity at 26 weeks and your paternity offer.
| Write the operating rules |
Define accrual, carry-forward caps, encashment formula, notice and approval, half-days, leave without pay, and treatment during probation and notice period.
| Review, approve and publish |
Have the draft reviewed against your State Act, get management sign-off, publish it in the employee handbook, and link it to your leave-tracking system so the rules are actually enforced.
“A leave policy is only as good as its edge cases. The disputes never come from the obvious days off; they come from the carry-forward cap, the notice-period leave and the encashment formula nobody wrote down.”
Ankit Sarawagi, CFOmatrixCommon Mistakes to Avoid
These are the errors we see most often when reviewing leave policies for Indian companies.
- Copying another State’s numbers. A template written for Karnataka may not meet the minimum in Maharashtra or Telangana. Always match your office’s State Act.
- Allowing encashment of casual or sick leave. These are meant to be used, not banked. Encashment normally applies to earned or privilege leave only.
- Vague accrual and carry-forward rules. “Leave can be carried forward subject to approval” invites disputes. Put numbers and caps in writing.
- Rolling maternity into general leave. The 26-week maternity entitlement is statutory and separate. Never net it against earned leave.
- Ignoring probation and notice period. State clearly whether leave accrues during probation and whether leave can be taken during the notice period.
- No holiday calendar. Publishing leave quotas but no list of holidays leaves employees guessing every festival season.
Treat your leave policy as a living document. Review it once a year, when you open an office in a new State, and whenever a relevant law changes, so it stays accurate and enforceable.
Frequently Asked Questions
What should a leave policy in India include?
A leave policy in India should set out the leave year and who it covers, every leave type and its annual quota (casual, sick, earned or privilege leave), statutory leave such as maternity (26 weeks for the first two children), paternity and bereavement leave, the list of public holidays, and the operating rules: accrual, carry-forward, encashment, notice and approval, leave during notice period, and how leave interacts with weekends and holidays. It must also align with the State Shops and Establishments Act that applies to your office.
How many casual, sick and earned leaves are mandatory in India?
There is no single national number. Leave entitlements come from the State Shops and Establishments Act where your office is located, so they vary by State. As a common pattern many companies offer around 12 casual leaves, 12 sick leaves and 15 to 18 earned or privilege leaves a year, but the legal minimum is whatever your State Act prescribes. Always check your specific State rule.
How much maternity and paternity leave is required in India?
Under the Maternity Benefit Act 1961, eligible women employees get 26 weeks of paid maternity leave for the first two children and 12 weeks from the third child onwards. Establishments with 50 or more employees must provide creche facilities. There is currently no statutory paternity leave in the private sector in India, so paternity leave is at the employer’s discretion; many companies offer 5 to 15 days as good practice.
What is the difference between accrual, carry-forward and encashment of leave?
Accrual is how leave is earned over the year, for example a fixed number credited monthly or upfront. Carry-forward is how much unused leave an employee can take into the next leave year, often capped. Encashment is paying an employee for unused earned leave, typically on exit or at year end, and it is usually allowed only on earned or privilege leave, not casual or sick leave.
Does the Shops and Establishments Act decide leave rules?
For most office-based companies, yes. Leave entitlements for private sector employees are governed by the Shops and Establishments Act of the State where the establishment is registered, so the exact number of earned, sick and casual leave days, and rules on carry-forward and encashment, depend on that State Act. Factory workers are instead covered by the Factories Act 1948. Your leave policy should match whichever law applies to you.
Is there a free leave policy template for India?
Yes. CFOmatrix offers a free, editable leave policy template in Word, built for Indian companies. It covers all the standard leave types, statutory leave such as maternity, and the operating rules for accrual, carry-forward and encashment, with placeholders you fill in for your own quotas and State. You should still have it reviewed against your State Shops and Establishments Act before rolling it out.
Leave entitlements vary by State and by the law that applies to your establishment. This is general information, not legal advice. Verify the current Shops and Establishments Act, Maternity Benefit Act and other applicable laws for your situation, and speak to a qualified adviser before finalising your policy.
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AS | Founder, CFOmatrix | Finance Strategy & Equity Compliance CFOmatrix is a knowledge platform focused on how finance actually works inside growing companies. Every insight is shaped by real operating experience across startups and growth-stage companies, including cross-border setups. |