The Labour Act 2074 (2017) is the primary legislation governing employment and leave in Nepal. It applies to all establishments employing one or more workers — from a five-person startup in Kathmandu to a 500-employee manufacturing company in Biratnagar. Getting leave entitlements wrong is not just an administrative inconvenience. It creates legal liability, employee grievances, and potential penalties during labour inspections.
This guide covers every statutory leave type under the Act, the accumulation and encashment rules that make Nepal’s system uniquely complex, and the overtime and termination provisions that directly affect leave calculations. Whether you are an HR manager, a company founder managing leave in a spreadsheet, or an accountant handling payroll, this is the reference you need.
All leave entitlements described here are statutory minimums. Companies can offer more generous policies, but they cannot offer less.
The Eight Statutory Leave Types
The Labour Act 2074 establishes eight distinct leave categories. Each has different accrual rules, accumulation caps, and encashment provisions.
1. Home Leave (Annual Leave)
Home leave is Nepal’s equivalent of annual leave, but the accrual method is unique.
- Entitlement: 1 day of home leave for every 20 days worked
- Annual total: Approximately 18 days per year (based on a standard working year)
- Paid/unpaid: Fully paid
- Accumulation cap: Maximum 90 days
The encashment rule: This is where home leave gets complex. Accumulated home leave can build up to 90 days. Any balance exceeding 90 days at the end of the fiscal year must be encashed — the employer is legally required to pay the employee for the excess days at the basic salary rate.
This means if an employee has accumulated 95 days of home leave by Ashad end (fiscal year end), the employer must cash out 5 days at the basic salary rate. The remaining 90 days carry forward.
Why this matters for tracking: Manual spreadsheet tracking frequently gets this wrong. You need to track accrual by days worked (not a fixed annual grant), monitor the 90-day cap, and calculate encashment at the correct rate (basic salary, not gross salary). Errors compound over years and create significant liability at termination.
2. Sick Leave
- Entitlement: 12 days per year
- Paid/unpaid: Fully paid
- Accumulation cap: Maximum 45 days
- Medical evidence: A medical certificate from a registered medical practitioner is required for absences exceeding 3 consecutive days
The encashment rule: Similar to home leave, sick leave accumulates up to 45 days. Any balance exceeding 45 days at fiscal year end must be encashed at the basic salary rate.
An employee who rarely takes sick leave will hit the 45-day cap within 4 years. At that point, annual encashment becomes a recurring payroll event.
3. Maternity Leave
- Entitlement: 14 weeks (98 days)
- Paid/unpaid: 60 days fully paid by the employer; remainder unpaid
- Timing: At least 2 weeks must be taken before the expected delivery date; at least 6 weeks must be taken after delivery
- Accumulation: Does not accumulate — each pregnancy generates a new entitlement
The mandatory pre-delivery and post-delivery periods are legal requirements, not suggestions. An employee cannot waive the 6-week post-delivery rest period even if she wishes to return earlier.
4. Paternity Leave
- Entitlement: 15 days
- Paid/unpaid: Fully paid
- Timing: During the wife’s confinement period
- Accumulation: Does not accumulate
5. Mourning Leave
- Entitlement: 13 days
- Paid/unpaid: Fully paid
- Eligibility: On the death of a spouse. For married women: also on the death of parents or parents-in-law
- Accumulation: Does not accumulate
6. Study Leave
- Entitlement: 10 days per year
- Paid/unpaid: Paid
- Purpose: For annual examinations
- Accumulation: Does not accumulate — unused study leave expires at year end
7. Public Holidays
- Entitlement: 13 days per year (14 for women, with the additional day for Women’s Day)
- Paid/unpaid: Fully paid
- Selection: Must include May Day (1 Baisakh); remaining holidays are gazetted annually by the government
Nepal’s public holidays are heavily influenced by the lunar calendar. Major festivals like Dashain (5-6 days in Ashwin/Kartik) and Tihar (3-5 days in Kartik/Mangsir) shift dates every year. The government publishes the official holiday calendar annually, typically around Baisakh.
8. Special Leave
- Entitlement: 1 day per year
- Paid/unpaid: Paid
- Purpose: Discretionary — can be used for any purpose
- Accumulation: Does not accumulate
Encashment Rules — The Most Complex Part
Leave encashment is what makes Nepal’s leave system significantly more complex than most countries. Two leave types — home leave and sick leave — have mandatory encashment provisions.
How Encashment Works
| Leave Type | Cap | What Happens at Cap | Calculation Basis |
|---|---|---|---|
| Home Leave | 90 days | Excess over 90 days must be encashed | Basic salary rate |
| Sick Leave | 45 days | Excess over 45 days must be encashed | Basic salary rate |
Basic salary rate means the base component of the employee’s salary — excluding allowances, bonuses, overtime pay, and other supplements. This distinction matters. If an employee’s gross salary is NPR 50,000 but their basic salary is NPR 30,000, the encashment rate is based on NPR 30,000.
Encashment Calculation Example
An employee has the following home leave balance at fiscal year end (Ashad end):
- Accumulated balance: 102 days
- Cap: 90 days
- Excess: 12 days
- Basic monthly salary: NPR 40,000
- Daily rate: NPR 40,000 ÷ 30 = NPR 1,333
- Encashment amount: 12 × NPR 1,333 = NPR 16,000
This NPR 16,000 must be paid to the employee and the balance resets to 90 days.
Now consider the same employee also has 50 days of accumulated sick leave:
- Excess over 45-day cap: 5 days
- Sick leave encashment: 5 × NPR 1,333 = NPR 6,667
Total annual encashment obligation: NPR 22,667
For a company with 50 employees, annual leave encashment can easily reach NPR 500,000-1,000,000. This is a significant payroll line item that many companies fail to budget for because they are tracking leave in spreadsheets.
Overtime and Public Holiday Compensation
Overtime Rules
The Labour Act 2074 sets clear boundaries on overtime work:
- Maximum overtime: 24 hours per week
- Overtime rate: 150% of the regular hourly wage (1.5x)
- Consent: Overtime work requires the employee’s consent
- Record-keeping: Employers must maintain overtime records
An employee earning NPR 40,000/month with a standard 48-hour work week has an hourly rate of approximately NPR 208. Overtime pay would be NPR 312 per hour (150% of NPR 208).
Public Holiday Work
When an employee works on a public holiday, the compensation is generous:
- Pay rate: 200% of the regular wage (double rate) for the hours worked
- Compensatory leave: Additionally, the employer must grant a compensatory leave day within 21 days
- Both apply: The employee receives double pay AND a compensatory day — it is not one or the other
This means working on a public holiday effectively costs the employer 3x the normal daily rate (2x in wages plus 1 day of future leave).
Termination and Leave Settlement
When employment ends — whether through resignation, termination, or retirement — all accumulated leave must be settled.
Mandatory Payout at Termination
| Leave Type | Maximum Payout | Rate |
|---|---|---|
| Home Leave | Up to 90 days of accumulated balance | Basic salary rate |
| Sick Leave | Up to 45 days of accumulated balance | Basic salary rate |
An employee who has worked for 10 years and accumulated the maximum balance would receive:
- Home leave: 90 days × daily basic rate
- Sick leave: 45 days × daily basic rate
- Total: 135 days of basic salary
For an employee with a basic salary of NPR 60,000/month (daily rate NPR 2,000), this is NPR 270,000 — nearly 5 months of basic salary. This liability exists on your books whether you track it or not. Companies that discover this at termination time often face painful cash flow surprises.
Gratuity
In addition to leave encashment, the Labour Act provides for gratuity based on continuous years of service. Gratuity is a separate entitlement that compounds the financial obligation at termination.
Probation Period
The Labour Act allows a maximum probation period of 6 months. During probation:
- Leave entitlements accrue proportionately
- An employee who completes 3 months of probation has accrued roughly half of their annual entitlements
- All leave types except maternity and paternity are subject to proportional accrual during probation
Bikram Sambat Calendar Considerations
Nepal officially uses the Bikram Sambat (BS) calendar, which is approximately 57 years ahead of the Gregorian (AD) calendar. The year 2026 AD corresponds to 2082/2083 BS.
Why this complicates leave tracking:
- BS months have irregular lengths (29-32 days) that change year to year
- There is no simple algorithmic formula to convert between AD and BS — conversion requires lookup tables
- The fiscal year runs Shrawan 1 to Ashad end (approximately mid-July to mid-July)
- Leave accrual, encashment, and carry-over must align with the BS fiscal year
- Government documents, legal filings, and tax returns use BS dates
Any leave management tool used in Nepal must support BS dates natively — not as a cosmetic overlay, but in the core date calculation engine. Leave accrual based on “days worked” requires knowing the exact number of working days in each BS month, accounting for the irregular month lengths.
What This Means for Your Company
If you are tracking leave in a spreadsheet, you are managing one of Nepal’s most complex leave systems with the simplest possible tool. The risks are real:
- Encashment errors — Miscalculating the 90-day home leave cap or 45-day sick leave cap means either overpaying or underpaying employees. Both create problems.
- Termination liability — Not tracking accumulated leave balances means the termination payout is a surprise. For long-tenured employees, it can exceed NPR 200,000.
- Overtime violations — Exceeding the 24-hour weekly cap without proper records exposes the company to labour inspection penalties.
- Fiscal year alignment — Encashment must happen at fiscal year end (Ashad end). If your spreadsheet is on a January-December cycle, your calculations are wrong.
- BS date conversion — Manual conversion between AD and BS dates introduces errors. A one-day error in a month with 29 days (vs 30 or 31) compounds across accrual calculations.
How Leave Balance Handles Nepal Compliance
Leave Balance is built with native support for Nepal’s leave requirements:
- Bikram Sambat calendar with automatic AD↔BS conversion throughout the application
- Nepali fiscal year alignment (Shrawan-Ashad) for leave cycles, carry-over, and encashment
- Pre-configured Labour Act 2074 leave templates — all eight statutory leave types with correct entitlements, caps, and rules
- Automatic encashment tracking at fiscal year end with cap enforcement
- SSF and Provident Fund integration in the payroll module
- Nepal income tax calculation with historical brackets from FY 2070/71 through 2081/82
- Slack and Teams integration — submit leave requests, approve them, and get daily absence notifications without leaving your chat tool
- Flat-rate pricing at NPR 1,490/month for leave management or NPR 2,490/month for leave + payroll — unlimited employees
leave emails? Track your employee's leave with Leave Balance
Summary Table
| Leave Type | Days/Year | Paid | Accumulates | Cap | Encashment |
|---|---|---|---|---|---|
| Home Leave | ~18 | Yes | Yes | 90 days | Mandatory (basic salary) |
| Sick Leave | 12 | Yes | Yes | 45 days | Mandatory (basic salary) |
| Maternity | 98 | 60 days paid | No | — | — |
| Paternity | 15 | Yes | No | — | — |
| Mourning | 13 | Yes | No | — | — |
| Study | 10 | Yes | No | — | — |
| Public Holidays | 13-14 | Yes | No | — | — |
| Special | 1 | Yes | No | — | — |
This guide reflects the Labour Act 2074 (2017) as of Chaitra 2082 BS (April 2026 AD). Labour law can change — always verify current requirements with a qualified legal advisor for your specific situation.