Leave Rules Under the Labour Codes: EL, CL, SL and Encashment
How earned leave, casual leave, sick leave and leave encashment work under India's Labour Codes, and what employers must track as states roll out rules.
Leave entitlements in India - earned leave, casual leave and sick leave - are governed by state-level shops and establishments or factories laws, and are now being reshaped by the national Labour Codes as states notify their own rules.
Key facts at a glance
- Earned leave (EL) typically accrues at roughly one day for every 20 days worked under most state laws.
- Casual leave (CL) covers short unplanned absences and usually cannot be carried forward to the next year.
- Sick leave (SL) entitlements and carry-forward rules vary significantly by state and by establishment type.
- Unused earned leave must generally be encashed and paid out at the time of resignation, termination, or retirement.
- The Occupational Safety, Health and Working Conditions (OSH) Code, in force nationally since 21 November 2025, sets a reduced eligibility threshold for earned leave at the central level.
- As of mid-2026, most states have not yet fully notified their own Labour Code rules, so existing state leave laws still govern in practice.
Earned leave (EL)
Earned leave, also called privilege leave in some states, accrues based on the number of days actually worked. Most state laws use a ratio of about one day of EL for every 20 days worked, subject to a minimum number of days worked in the year to qualify (commonly 240 days under several state factory laws).
EL can usually be carried forward to subsequent years up to a maximum accumulation cap set by the state law, and is encashable - either annually if the employer's policy allows, or mandatorily at the time of exit.
Casual leave (CL)
Casual leave is meant for short, often unplanned absences - a family emergency, a personal errand, a sudden illness that does not need a doctor's certificate. It typically ranges from 7 to 12 days per year depending on the state and company policy.
Unlike EL, CL generally lapses at year-end if unused and is not carried forward or encashed. Employers should state this clearly in the leave policy to avoid disputes.
Sick leave (SL)
Sick leave entitlements vary the most across states, both in the number of days granted and in whether a medical certificate is required beyond a certain number of consecutive days. Some states allow limited carry-forward of sick leave; others do not.
How leave types compare
| Leave type | Typical annual entitlement | Carry-forward | Encashable |
|---|---|---|---|
| Earned leave (EL) | ~1 day per 20 days worked | Yes, up to a state cap | Yes, generally at exit |
| Casual leave (CL) | 7 to 12 days | No, usually lapses | No |
| Sick leave (SL) | Varies by state, often 7 to 12 days | Sometimes, state-dependent | Rarely |
What the Labour Codes change
The OSH Code, 2020, one of the four Labour Codes that came into force nationally on 21 November 2025, sets out a central framework for leave that reduces the qualifying period for earned leave eligibility from 240 days to 180 days worked in a year, and allows leave encashment at the end of a calendar year in certain cases. Central rules were pre-published in draft form on 30-31 December 2025, with final Central rules expected around April 2026.
Because labour remains a concurrent subject, each state government must separately notify its own rules to bring these changes into force in that state. As of mid-2026, most states have not yet fully notified their rules, meaning the Codes are legally in force nationally but operationally uneven from state to state. Employers should continue applying their existing state shops and establishments or factories law leave provisions and track their specific state's notification status rather than assuming the new central thresholds already apply.
Leave encashment on exit
Regardless of which specific leave rules apply, accrued and unused earned leave must generally be paid out when an employee leaves the organisation, whether through resignation, termination, or retirement. This payout is calculated using the employee's last drawn basic salary plus dearness allowance, multiplied by the number of unused EL days. Getting this wrong is a common trigger for full-and-final settlement disputes.
If you are not sure whether your leave policy is aligned with your state's current rules or the incoming Labour Code framework, ComplianceCheck's labour code readiness assessment gives you a clear picture in a few minutes.
Sources
- Ministry of Labour and Employment - labour.gov.in
- Respective state labour department websites
- Income Tax Department - incometax.gov.in (for leave encashment taxation)
This guide is general information, not legal advice. Requirements vary by state, sector and headcount - confirm specifics with a compliance professional or the relevant authority.
Frequently Asked Questions
- What is the difference between EL, CL and SL?
- Earned leave (EL) accrues based on days worked and can usually be carried forward or encashed, casual leave (CL) covers short unplanned absences and typically cannot be carried forward, and sick leave (SL) covers medical absence and rules on carry-forward vary by state and establishment.
- How much earned leave must an employer give?
- Most state shops and establishment or factory laws require roughly one day of earned leave for every 20 days worked, though the exact ratio and eligibility conditions vary by state.
- Is leave encashment mandatory at the time of resignation?
- Yes, accrued and unused earned leave must generally be encashed and paid out at the time of an employee's exit, calculated on the last drawn basic salary plus dearness allowance.
- Do the Labour Codes change leave entitlements?
- The Occupational Safety, Health and Working Conditions Code sets a national framework for leave, including a reduced eligibility threshold for earned leave, but each state must notify its own rules before the changes take full effect there.
- Can unused casual leave be carried forward to the next year?
- Generally no. Casual leave is designed for short-term unplanned needs and typically lapses at the end of the year if unused, unlike earned leave which usually can be carried forward up to a cap.
- Is leave encashment taxable?
- Leave encashment received during employment is fully taxable; leave encashment received on retirement or resignation has partial tax exemption limits under the Income Tax Act, subject to conditions.
- What happens if a state has not yet notified Labour Code rules?
- Until a state notifies its own rules under the new Labour Codes, employers in that state should continue following the existing state shops and establishments or factories law leave provisions.
Check your status
Labour Code Readiness
Readiness assessment for India's 4 new Labour Codes (Wages, Social Security, OSH, Industrial Relations), with implementation cost estimates.