Annual leave in India is rarely called “annual leave” inside a payroll register. Most policies refer to it as earned leave (EL) or privilege leave (PL), and the rules that govern it depend on whether your employee works in a factory or in a shop, office, or commercial establishment. The Factories Act 1948 governs the first group; a different state-specific Shops and Establishments Act governs the second — and each state writes its own version.
This guide explains the statutory entitlement under both regimes, who qualifies, how accrual and encashment work, and the compliance pitfalls that catch out multi-state employers.
Key takeaways
- Factories Act 1948: One day of earned leave for every 20 days worked in the previous calendar year (15 days for adolescents). Eligibility kicks in after 240 days of work in a calendar year.
- State Shops and Establishments Acts: Typically 12–21 days of earned leave per year — Karnataka 18, Maharashtra 21, Delhi 15.
- Accumulation cap: Commonly 30 or 45 days, depending on state.
- Encashment: Leave above the carry-over ceiling and all accrued leave on separation must be encashed at basic + dearness allowance (DA).
- Wages in advance: Under the Factories Act, leave wages must be paid in advance for any leave of four or more days.
The legal framework
Earned leave in India sits across two statutes and one set of new labour codes that are still being notified state by state.
The Factories Act 1948 (sections 78–84) covers workers in registered factories. The state Shops and Establishments Acts cover the bulk of office, retail, hospitality, and service-sector employees — every state has its own. The Code on Wages 2019 and the Occupational Safety, Health and Working Conditions Code 2020 consolidate and modernise these rules, but until your state notifies them and frames the rules, the older Acts continue to apply.
The practical implication: a single employer with a Bengaluru office, a Pune software hub, and a Chennai factory will sit under three different leave regimes simultaneously. Treating them as one is the most common compliance error in Indian leave administration.
Statutory entitlement under the Factories Act
Section 79 sets the formula. An adult worker who has completed at least 240 days of work in a calendar year is entitled, in the following calendar year, to one day of earned leave for every 20 days worked. Adolescent workers receive one day for every 15 days worked.
Days that count as “worked” for this calculation include:
- Days actually worked
- Days of lay-off
- Maternity leave (up to 12 weeks)
- Authorised leave taken in the year
A full-year adult worker who hits the 240-day threshold therefore accrues roughly 15 days of earned leave for the next year. An adolescent on the same pattern accrues around 20.
Wages payable on leave
Leave wages must be paid at the rate of basic wages plus dearness allowance, plus the cash equivalent of any food or other concession the worker normally receives. For any period of four or more days of leave, the wages must be paid in advance — not at the next regular pay cycle. This advance-payment rule is one of the most frequently missed Factories Act obligations.
Statutory entitlement under state Shops Acts
Every state writes its own Shops and Establishments Act, and the headline numbers differ:
| State | Earned leave per year | Notes |
|---|---|---|
| Karnataka | 18 days | After 12 months of continuous service |
| Maharashtra | 21 days | After completion of 240 days in a year |
| Delhi | 15 days | Plus 12 days casual/sick combined |
| Tamil Nadu | 12 days | Plus 12 days sick leave |
| West Bengal | 14 days | After 12 months of service |
These numbers move as states amend their rules, so always confirm against the current notified Act for the state where the establishment is registered. Most state Acts also provide separate quotas for casual leave and sick leave on top of earned leave — typically 7–12 days of casual leave and 7–14 days of sick leave, both usually non-accumulating.
If you operate across multiple states, your leave policy needs to honour the most generous applicable entitlement in each location. A single national leave policy that grants 12 days of EL fails compliance in Karnataka, Maharashtra, Delhi, and several other states.
Eligibility and the 240-day rule
Both the Factories Act and most state Shops Acts use a service threshold before earned leave becomes available. Under the Factories Act, a worker must complete 240 days of work in a calendar year to qualify for paid earned leave the following year. Most state Shops Acts have similar — though not identical — service thresholds, often expressed as 240 days in a year or 12 months of continuous service.
For new joiners, this means earned leave typically does not become available until the second calendar year of employment. Employers commonly bridge this gap with a pro-rata casual or privilege leave allowance during the first year, but that is a contractual benefit, not a statutory one.
Accumulation, carry-over, and encashment
Under the Factories Act, an adult worker can carry forward up to 30 days of unavailed earned leave to the next year (40 days for adolescents). State Shops Acts commonly set the cap at 30 or 45 days. Anything above the statutory cap that the employee has not been able to take must be encashed, not forfeited.
On resignation, retirement, or termination, all accrued earned leave must be paid out in cash at the latest drawn basic plus dearness allowance. There is no exception for misconduct dismissal — the encashment obligation runs with the leave balance, not with the reason for separation.
Many employers also offer in-service encashment as a benefit, allowing workers to convert a portion of accumulated leave to cash each year. This is contractual rather than statutory, and the tax treatment differs from termination encashment.
For a deeper look at how this fits into broader Indian leave administration, see our guide to leave management in India.
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Employer obligations checklist
Across both regimes, employers running a compliant earned leave policy in India should:
- Apply the right Act to each establishment (factory vs shop/office) and the right state’s rules.
- Track the 240-day eligibility test per worker, per calendar year.
- Accrue earned leave at the statutory rate — including credit for lay-off, maternity, and authorised leave.
- Pay leave wages at basic + DA, plus the cash equivalent of admissible concessions.
- Pay leave wages in advance for any Factories Act leave of four or more days.
- Permit encashment of leave above the carry-over ceiling and on separation.
- Maintain leave registers as prescribed by the applicable Act — Form 15 under the Factories Rules and the equivalent register under each state Shops Act.
Common pitfalls
The errors that show up most often in Indian labour inspections and tribunal cases are predictable:
Applying the wrong Act
A retail chain with a registered warehouse may sit under the Factories Act for warehouse staff and the state Shops Act for store associates. Treating both populations under a single policy — usually the more generous one in headline terms but missing technical rules elsewhere — is a recurring source of disputes.
Ignoring inter-state variation
Karnataka’s 18 days, Maharashtra’s 21 days, and Delhi’s 15 days are not interchangeable. A pan-India HRIS configured to “India = 15 days EL” will under-pay in several states.
Skipping advance payment
Section 81 of the Factories Act requires leave wages to be paid in advance for leave of four or more days. Many payroll systems pay all wages in arrears and do not flag this case at all.
Capping carry-over without encashment
Some employers enforce a hard cap — for example “maximum 30 days carried” — and silently lapse anything above. The statute generally requires the excess to be encashed, not forfeited. Forfeiture clauses in employment contracts are not enforceable for statutory leave.
Miscounting “worked days”
Lay-off, authorised leave, and maternity leave (up to 12 weeks) count as worked days for the 240-day eligibility test. Excluding them — particularly maternity leave — is both unlawful and discriminatory.
For the related question of how to handle these balances at the end of employment, our annual leave on termination discussion in the UK context covers similar mechanics, though the Indian rules differ in detail.
Frequently asked questions
How is earned leave calculated in India?
Under the Factories Act, employees earn one day of leave for every 20 days worked in the previous calendar year (15 days for adolescents). Under most state Shops and Establishments Acts, employees receive a fixed annual quota of 12 to 21 days of earned leave, prorated for partial years of service.
Is leave encashment compulsory in India?
Yes for two situations: (1) leave accumulated above the statutory carry-over cap, and (2) all unused earned leave on resignation, retirement, or termination. In-service encashment beyond these statutory triggers is a common employer benefit but is contractual, not mandatory.
Do casual leave and sick leave count separately from earned leave?
Yes. Most state Shops Acts provide separate quotas for earned leave, casual leave, and sick leave. Casual and sick leave are generally non-accumulating and lapse at the end of the year, while earned leave accumulates up to the statutory cap.
Who qualifies for earned leave under the Factories Act?
Workers who have completed 240 days of work in the previous calendar year. Days lost to lay-off, maternity leave (up to 12 weeks), and authorised leave count as worked days for this test, so eligibility is rarely lost purely because of approved absences.
Can earned leave be denied for performance or conduct reasons?
No. Earned leave is a statutory entitlement that accrues with service. An employer can refuse a specific request on operational grounds with reasonable notice, but cannot deny the entitlement itself. On termination — including for misconduct — accrued earned leave must still be paid out.
Where Leave Balance fits
Tracking earned leave correctly across multiple Indian states — with different annual quotas, different carry-over caps, and the Factories Act’s 240-day eligibility test — is one of the messier corners of HR administration. Leave Balance lets you configure unlimited leave policies, so each office, factory, or state can run on its own statutory rules without forcing you into a one-size-fits-all national policy. Leave requests and approvals happen in Slack or Microsoft Teams, accruals run automatically, and reporting is built around the registers Indian inspectors actually ask for.
For broader context on how to structure a multi-state Indian leave policy, see our leave management in India guide and the annual leave entitlements in Australia post for a comparison of how a more centralised regime works.
Sources
- Ministry of Labour and Employment — The Factories Act 1948 (sections 78–84)
- Government of Karnataka — Karnataka Shops and Commercial Establishments Act
- Ministry of Labour and Employment — Code on Wages, 2019
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