Holiday pay calculations in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Holiday pay in India is not a single uniform entitlement. The amount an employee receives for a public holiday or earned leave encashment depends on which wages are included in the calculation — and that definition has shifted under the Labour Codes.
What counts as "holiday pay"
India does not use the term "holiday pay" in the way that, say, UK or US employment law does. Instead, there are three distinct situations where an employee is paid for time not worked:
- Public and national holidays — employees receive their normal wages for gazetted holidays without any deduction.
- Earned leave (EL) taken — employees are paid their normal wages while on approved leave.
- Leave encashment — when earned leave is cashed out (on resignation, retirement, or sometimes annually), the employee receives a lump sum based on their daily wage rate.
Each of these uses a wage calculation, but the base figure used is not always the same.
Which wages form the base for calculation
This is where most payroll errors happen. Under the older Factories Act and Shops & Establishments Acts, "wages" for leave purposes often excluded allowances such as house rent allowance (HRA), conveyance or special pay. Many employers used basic salary alone.
The four consolidated Labour Codes — now in force from 2025 — redefine "wages" more broadly. The Code on Wages, 2019 sets out that wages must include basic pay, dearness allowance (DA) and retaining allowance, but may exclude certain items such as HRA, overtime, gratuity and retrenchment compensation, provided those exclusions do not together exceed 50% of total remuneration. In practice, this means a larger portion of the pay packet now flows into the wage base for statutory calculations than was common before.
For most employers, the working rule is:
1. Identify the employee's monthly "wages" under the Code on Wages definition.
2. Divide by 26 (the standard number of working days in a month used for daily-wage calculations) to get a daily wage rate.
3. Multiply by the number of holiday or leave days to arrive at the payment due.
Some state-level rules or older awards may specify 30 days as the divisor. Check the applicable state Shops & Establishments Act or the relevant industry award if you are unsure.
Earned leave and encashment rules
Under the Occupational Safety, Health and Working Conditions (OSH) Code, adult workers in factories are entitled to earned leave at a rate of one day for every 20 days worked. For other establishments, the applicable state Shops & Establishments Act governs the accrual rate — commonly one day per 15 or 20 days worked.
Leave encashment at the time of leaving employment is taxable in the hands of the employee, though there is a statutory exemption up to a prescribed limit for non-government employees. The employer deducts TDS on any taxable encashment amount, and this appears in Form 16 and is reported through Form 24Q, filed quarterly.
Encashment while still in service is fully taxable with no exemption.
How public holidays work in practice
India has three national holidays that every employer must observe: Republic Day (26 January), Independence Day (15 August) and Gandhi Jayanti (2 October). Beyond these, the number and choice of public holidays depends on the state government's official holiday list, the applicable Negotiable Instruments Act (NI Act) list, and sometimes the employer's own certified standing orders or service rules.
If an employee works on a public holiday, most state laws require either a compensatory day off or payment at twice the ordinary wage rate (double wages). The exact multiplier varies by state and industry, so verify against the relevant state rule.
Payroll processing steps for employers
Getting holiday pay right in payroll means:
1. Define the wage base correctly — apply the Code on Wages definition and verify whether your payroll software has been updated to reflect the 2025 Labour Code provisions.
2. Maintain an accurate leave register — the OSH Code requires employers to maintain records of leave accrual, leave taken and leave balance for each employee.
3. Calculate encashment using the correct divisor — 26 days is the most widely applied figure, but confirm against any applicable award or state rule.
4. Deduct TDS on encashment — treat taxable leave encashment as salary income, apply the employee's applicable slab rate under the new tax regime (up to 30% plus 4% health and education cess), and report it in Form 24Q.
5. Issue Form 16 — encashment paid during the year must be reflected clearly so the employee can file their return accurately.
Employers running multi-state payrolls face the added complexity of different state holiday lists and varying leave accrual rates. Maintaining a state-by-state compliance calendar, rather than applying a single national rule, is the only reliable approach.
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