Designing a leave policy for Indian startups: earned, casual, sick and holiday rules
In many startups, leave is managed informally at first: ask your manager, take the day, and someone updates a spreadsheet. That works for a team of ten. By the time you have fifty people across two cities, informal leave creates disputes, payroll errors and a quiet sense of unfairness.
A good leave policy is short, clear and compliant. This guide explains which laws apply and the decisions you need to make.
Which laws apply to your leave policy
State Shops and Establishments Acts
Most startups run offices, so their minimum leave entitlements come from the Shops and Establishments Act of each state where they have employees. These set minimum earned leave, casual or sick leave, holidays and carry-forward limits, and they differ from state to state.
The OSH Code
For workers covered by the Occupational Safety, Health and Working Conditions Code, in force since November 2025, annual leave is earned after 180 days of work in a calendar year at the rate of one day for every 20 days worked. Unused leave can be carried forward up to 30 days, and leave above that must be encashed. Where a state law gives a more generous benefit, plan for the higher one.
Maternity benefit
Women employees are entitled to 26 weeks of paid maternity leave for the first two children and 12 weeks after that, with separate provisions for adoption and commissioning mothers. These provisions are now part of the Code on Social Security.
Holidays
Republic Day, Independence Day and Gandhi Jayanti are generally observed as national holidays, and states notify additional festival holidays. Many companies publish a fixed list plus a few optional holidays employees can choose.
The leave types to include
- Earned or privilege leave: planned time off that accrues through the year and can be carried forward
- Casual leave: short, unplanned absences for personal matters
- Sick leave: illness, usually with a medical certificate after a set number of days
- Public and optional holidays: a published calendar for the year
- Maternity leave: as required by law
- Paternity and adoption leave: not mandatory for most private employers, but increasingly common
- Compensatory off: for work on a holiday or weekly off
- Bereavement or special leave: optional, but valued by employees
Decisions you need to make
Accrual or upfront credit
Monthly accrual is easy to administer and fair to new joiners. Upfront credit at the start of the year is simpler for employees but can leave you with negative balances when people resign.
Leave during probation
Decide whether new joiners can use earned leave during probation or only casual and sick leave. State the rule clearly.
Carry-forward and encashment
Set a carry-forward cap and say when encashment happens, at year end, on exit or both. Make sure the cap is not lower than what the law requires.
Holidays between leave days
Decide how weekends and holidays falling between leave days are treated. For workers under the OSH Code, intervening holidays are not counted as leave.
Applying and approving
Specify notice periods for planned leave, who approves, and what happens if a manager does not respond. Automated approvals and escalation save a lot of follow-up.
Loss of pay
Explain when leave becomes loss of pay and how it is calculated, so payroll is consistent.
Leave on exit
Unused earned leave is usually encashed in the full and final settlement. Under the labour codes, wages owed on exit, including leave encashment for workers, must be paid within two working days. See our guide to full and final settlement.
Keep the policy short
Employees should be able to read the leave policy in five minutes. Use a table for entitlements, a few clear rules for approvals and carry-forward, and a contact for questions. Put the legal detail in an annexure if you need it.
Automate it from the start
A leave management system applies your rules consistently, shows employees their balances, routes approvals to the right manager and feeds approved leave and loss of pay straight into payroll.
How SimplyHR can help
SimplyHR's HR policy team drafts leave policies that meet state Shops and Establishments rules and the labour codes, and our startup HR services set up policies, payroll and compliance together.
This article is general information and not legal advice. Leave entitlements vary by state, so check the rules for each location.