Leave encashment is mandatory?

Hi Members,

Need suggestions on leave encashment policy.

We have had no leave encashment policy. Pandemic and WFH has got us more complaints that a lot of leaves are getting unused and putting us in a tough policy situation.

Will changing the policy to include encashment be better process for future?
Also, Is encashment of leaves at the time of employee exit mandatory under law? (resignation, termination etc)


Yes, Leave encashment should be included in the policy as it is mandatory in 2 scenarios:

  1. Once more than 45 leaves gets accumulated
  2. At the time of exit

You can fix the maximum no of leaves that can be carried forward as 30. Any more than that will be expired at the end of the year if unused. This will be reimbursed when they leave.
Reimbursement is mandatory if they have leaves pending when they resign.
Thank you.


The Karnataka government amended the carry forward limit for annual leave from the earlier 30 days to 45 days now under the Shops & Commercial Establishments Act.

The State Government of Karnataka vide its notification dated 19 February 2021, passed an Amendment to the existing provision under section 15 under sub-section (7) first proviso, the total annual leave that may be carried forward to the succeeding year shall not exceed forty-five days. i.e., an employee can carry forward the accumulated earned leaves up to a maximum of forty-five days to the following year. Any earned leave accumulated more than 45 days will lapse.

The accumulated leave encashment will be based on the prevailing rates of wages as on the date of encashment. The employers have to make the required changes in their internal leave policy. If an employer is already providing a better leave accumulation policy, there is no restriction.

Jagadeesh R


How is this for Maharashtra?

Regards,Ashish Shenoy
Head Of Human Resources.

Please advice for TN…

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Please advise for Delhi and Uttar Pradesh.

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In Tamil Nadu, it is 30 days that can be carry forwarded to the next financial year in the case of an adult. for the purpose of computation of the period of 240 days or more. 1 day for every 20 working days so by considering 25 days working in a month we are giving 1.25days / month and 15 days per year. if not utilized need to encashed based on his request or at the time of resignation.



I think most legislations are silent on encashment other than upon events like exit, failed to avail leave because of refusal of leave by the employer, and discharging an employee before utilizing the leave balance. For leave accumulation, states have made specific rules.

Anytime leave encashment is not mandatory within the scope of labor legislations. I am leaving it to other experts for their comments.

Regarding leave encashment, first of all, the organization has to come up with a policy. The primary objective of earned leave is not to make money but certainly to manage the work-life balance and is an earned benefit for an employee to take a vacation for some time once working for a continuous period (maybe that is why most states specify continuous service of 12 months for the eligibility to have earned leave). So encourage employees to avail leaves in a balanced manner and discourage more accumulation. This may avoid additional burden for the organization (particularly at difficult time like Covid 19) to find cash to pay for leave. So try to put the right kind of checks and balances to encourage utilization of leaves without affecting productivity.

Refer model Policies, Forms. Guides, and Templates here


As per Maharashtra Shops & Establishments Act:


(1) Every worker shall be allowed a weekly holiday with wages.

(2) Every worker shall be entitled to eight days casual leave with wages in every calendar year which shall be credited into the account of the worker on a quarterly basis, but shall lapse if unavailed at the end of the year.

(3) Every worker who has worked for a period of two hundred and forty days or more in an establishment during a calendar year shall be allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of one day for every twenty days of work performed by him during the previous calendar year.

(4) Subject to the provision of clause (3) every worker, who has been employed for not less than three months in any year, shall for every sixty days on which he has worked during the year be allowed leave, consecutive or otherwise, for a period of not more than five days.

(5) Every worker shall be permitted to accumulate earned leave upto a maximum of forty-five days.

(6) Where the employer refuses to sanction the leave under sub-section (3) which is due when applied fifteen days in advance, then the worker shall have a right to encash leave in excess of forty-five days:

Provided that, if a worker is entitled to leave other than causal and festival leave under this section, is discharged by his employer before he has been allowed the leave, or if, having applied for and having been refused the leave, he quits his employment on account of retirement, resignation, death or permanent disability, the employer shall pay him full wages for the period of leave due to him.

(7) A worker shall be entitled to eight paid festival holidays in a calendar year, namely, 26th January, 1st May, 15th August and 2nd October and four such other festival holidays as may be agreed to between the employer and the workers as per the nature of business, before the commencement of the year. For holiday on these days, he shall be paid wages at a rate equivalent to the daily average of his wages (excluding overtime), which he earns during the month in which such compulsory holidays falls:

Provided that, the employer may require any worker to work in the establishment on all or any of these days, subject to the conditions that for such work the worker shall be paid double the amount of the daily average wages and also leave on any other day in lieu of the compulsory holiday.

(8) For the purpose of sub-section (3),—

(a) any days of lay-off, by agreement or contract or as permissible under the model standing orders or standing order certified under Industrial Employment (Standing Orders) Act, 1946;

(b) in the case of a woman worker, maternity leave as provided for in the Maternity Benefits Act, 1961;

(c) the leave earned in the year prior to that in which the leave is availed; or

(d) the worker has been absent due to temporary disablement caused by accident arising out of and in the course of his employment,

shall be deemed to be days on which the worker has worked in any establishment for the purpose of computation of the period of two hundred and forty days or more, but shall not earn leave for these days.

(9) The leave admissible under this section shall be exclusive of all holidays whether occurring during or either at the end of the period of leave.

(10) Every worker shall be paid for the period of his leave earned under sub-sections (3) and (4) at a rate equivalent to the daily average of his wages for the days on which he actually worked during the preceding three months, exclusive of any earnings in respect of overtime.


Leave encashment policy for nonwokmen - supervisory and above levels can be devised as per company policy and made integral part of employment contract. Need not exactly aligned with the shops and establishments act

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