Carrying over and buying leave in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Carrying over unused leave and buying or selling it are governed by a mix of central labour law, state-specific Shops and Establishments Acts, and your own company policy. Neither practice is fully standardised across India, so employers need to understand what the law requires before designing any scheme.
What the law says about earned leave
Under the Factories Act 1948 and most state Shops and Establishments Acts, employees earn a certain number of days of paid annual leave for every set number of days worked. The exact ratio varies by state and by type of establishment, but the entitlement typically ranges from one day of earned leave (also called privilege leave) for every fifteen to twenty days of work.
Earned leave that is not taken in a calendar year can generally be carried forward, but the law caps how much can accumulate. Most statutes set the maximum carry-forward at thirty to forty-five days. Once an employee's leave balance hits that ceiling, additional unused leave either lapses or — in some establishments — must be encashed.
The four consolidated Labour Codes, which came into force in 2025, bring some standardisation. The Code on Social Security and the Occupational Safety, Health and Working Conditions Code update leave entitlements and encashment rules. Employers should review the specific rules in the Code that applies to their industry and state, since some states have notified their own rules under these Codes.
Carry-over: what the rules actually mean in practice
Carry-over means an employee's unused earned leave balance rolls into the next leave year rather than lapsing. The key things to know as an employer:
- You cannot unilaterally extinguish earned leave. If an employee has accrued leave, it does not simply disappear at year-end. Either it carries forward (up to the statutory ceiling) or it must be paid out.
- The cap is a ceiling, not a target. Just because the law allows carry-forward up to forty-five days does not mean you should encourage large balances to accumulate. Excessive leave liability is a real balance-sheet risk, and it often signals that employees are unable or unwilling to take rest.
- Sick leave and casual leave generally do not carry forward. Most state laws treat these as use-it-or-lose-it entitlements. Only earned leave typically has carry-forward and encashment rights.
Your HR policy can be more generous than the statute — allowing a higher cap, for instance — but it cannot be more restrictive.
Leave encashment: selling back unused leave
Leave encashment is the process by which an employee receives cash in lieu of unconsumed earned leave. It can happen in two situations:
At separation. When an employee resigns, retires or is terminated, any accumulated earned leave balance must be paid out. This is a statutory obligation and is not discretionary. The payout is calculated on the employee's basic salary (and, depending on the state rules, allowances). This amount is taxable as income in the year of receipt, though there are tax exemptions available for government employees and some other categories under the Income Tax Act.
During service. Some companies allow partial encashment while employment continues — often once a year, up to a maximum number of days. This is a policy choice, not a universal right. If you offer in-service encashment, set a clear cap and a fixed encashment date so the process is predictable and auditable.
Can employers let employees buy additional leave?
Buying leave — where an employee pays to take more days off than they have accrued — is not a concept found in Indian labour law. There is no statutory framework for it. A small number of companies, mostly large multinationals, have introduced voluntary leave purchase schemes as a benefit: the employee forgoes a portion of salary in exchange for additional paid leave days.
If you want to offer this, you need to be careful about a few things. Any reduction in salary requires written consent from the employee. The scheme must not bring the employee's salary below any applicable minimum wage. TDS implications apply because the deduction affects the taxable salary figure, and your payroll team needs to account for that correctly in Form 24Q filings. Given these complexities, any leave purchase scheme should be reviewed by a labour law advisor before you launch it.
Designing a leave policy that stays compliant
A sound leave policy does three things: it meets or exceeds the statutory floor for your state and industry, it clearly states the carry-forward cap and the encashment window, and it is applied consistently across the workforce.
Document your policy in writing, get employees to acknowledge it, and review it whenever you expand into a new state or when the rules under the Labour Codes are updated. Leave liabilities show up on your company's books, so your finance team should track accrued leave balances alongside payroll costs rather than treating leave as a purely administrative matter.
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