How to Write a Leave Policy for an Indian Company (With Template)

Start with the statutory floor

Every Indian establishment is covered by one leave statute. Factories come under the Factories Act, 1948, which gives a worker who has worked 240 days in a calendar year annual leave with wages in the following year at one day for every 20 days worked, with up to 30 days carried forward. The Occupational Safety, Health and Working Conditions Code, 2020 keeps the one-in-20 rate but reduces the qualifying period to 180 days and lets the worker encash leave above the carry-forward limit at year end.

Offices, shops, hospitals and everything else come under the state Shops and Establishments Act, and those differ. Delhi gives 15 days of privilege leave and 12 days of casual and sick leave; Maharashtra gives earned leave at one day per 20 worked, eight days of casual leave and eight paid festival holidays; Tamil Nadu gives 12 days each of earned, casual and sick leave. Your policy can be more generous than the Act that applies to you; it cannot be less.

The leave types and how to define each

Earned leave (also called privilege leave)

The leave that accrues with work and carries value. State the annual quantum (15 to 24 days is usual in offices, and 18 is common), the accrual, the carry-forward cap and the encashment rule. Earned leave is the only type most companies allow to accumulate and pay out.

Casual leave

For short, unplanned absences of a day or two. Typically 6 to 12 days a year, credited annually, not carried forward and not encashable. Say whether it can be clubbed with earned leave; most policies say no, to stop it becoming a second earned-leave pool.

Sick leave

Typically 6 to 12 days, with a medical certificate beyond two or three consecutive days. Employees covered by ESI get sickness benefit from the ESI Corporation at about 70% of wages for certified sickness, so some companies give fewer paid sick days to that group. Decide whether unused sick leave carries forward; many policies let it accumulate to a cap for long illness.

Compensatory off

Earned by working on a weekly off or a holiday, on the manager’s approval. Give it an expiry, usually 30 to 90 days, and say whether a half day of work earns a half day off. Comp-off is not encashable.

Maternity leave

Governed by the Maternity Benefit Act, 1961, for establishments with ten or more employees: 26 weeks of paid leave for the first two children, of which up to eight weeks can be taken before the expected delivery, and 12 weeks from the third child. A woman who adopts a child under three months old, or has a child through surrogacy, gets 12 weeks. Eligibility is 80 days of work in the 12 months before the expected date. Women covered by ESI receive the benefit from ESIC instead of the employer. The policy should state this plainly rather than paraphrase it.

Paternity, bereavement and marriage leave

None of these is required by statute for private employers. Paternity leave of 5 to 15 days, bereavement leave of 3 to 5 days for an immediate family member, and marriage leave of 3 to 5 days once in service are common. Each needs a definition of who qualifies and whether it can be split.

Loss of pay

Any absence with no balance to set against it. Say how a day is valued: monthly gross divided by the calendar days of the month is the most common basis, and it must match how the leave module and payroll compute it, or every such payslip will be disputed.

Accrual: monthly credit or annual credit

Annual credit puts the full year’s leave in the balance on 1 January or 1 April. It is simple to explain and simple to administer, but someone who leaves in June with 18 days used has taken 9 days more than they earned, and the recovery from the final settlement is unpleasant. Monthly credit adds 1.5 days a month for an 18-day entitlement, so the balance is always earned.

The common compromise is monthly accrual for earned leave, and annual credit for casual and sick leave with pro-rata for joiners. Whatever you choose, state the joiner rule (from the date of joining, or from the first of the following month) and whether leave accrues during loss-of-pay periods and maternity leave.

Carry-forward, lapse and encashment

Earned leave carries forward up to a cap; the balance above the cap either lapses or is encashed at year end. Casual leave lapses. Sick leave lapses or accumulates, as you decide. Put the cap in the policy as a number, not a formula.

Encashment on exit is paid on the earned-leave balance at the last drawn basic (or basic plus dearness allowance), usually divided by 30 for a day’s value; some companies use 26. In-service encashment, if allowed, is usually limited to once a year and to the balance above a minimum. For tax, leave encashment received on retirement or resignation is exempt up to ₹25 lakh for non-government employees; encashment while in service is fully taxable as salary.

Probation, notice periods and the sandwich rule

Probationers usually accrue earned leave but cannot take it until confirmation; casual and sick leave are available from joining. Notice periods for leave are practical rather than statutory: a week’s notice for three or more days of earned leave, a day for casual leave, and same-day intimation for sickness with a certificate to follow.

The sandwich rule says that when leave is taken on both sides of a holiday or weekly off, the holiday is counted as leave too. It is a policy choice, not a legal requirement, and it is the rule employees most often feel cheated by. If you apply it, apply it only to earned leave, say so in one sentence with an example, and let the software apply it identically to everyone.

Holiday calendars per state

Republic Day, Independence Day and Gandhi Jayanti are compulsory holidays almost everywhere. Beyond those, each state notifies its own list, and state Acts prescribe how many paid festival holidays an establishment must give. A company with branches in three states needs three calendars, published before the year starts, with employees mapped to the calendar of the branch they work in.

Restricted or optional holidays, where the employee chooses two or three from a longer list, are a fair way to cover every community without adding days. The policy should say how many, and by when they must be chosen.

Approval workflow and who signs off

• The reporting manager approves leave up to a limit (say five days); longer leave, or leave during a declared blackout period, goes to the department head.
• HR is informed rather than asked, and steps in only for maternity, long sick leave and loss of pay beyond a limit.
• A request unanswered for a set number of days is escalated or auto-approved; say which.
• Sick leave can be applied for after the absence, within two days of return, with the certificate attached.
• Approvers see the team calendar before they say yes, so two people in a three-person team are never off together by accident.

A sample policy in one table

The leave policy template on this site follows this structure, with the sample table above filled in and the state-specific clauses marked for you to complete. Once it is written, load it into your HRMS so the balances employees see are the policy, not an interpretation of it. If attendance is the other half of the problem, the biometric versus mobile guide covers where the punches come from.