October 13, 2026
For an adult employee, Section 15 provides annual leave with wages at the rate of:
The Occupational Safety, Health and Working Conditions Code, 2020 came into force on 21 November 2025. Section 32 provides annual leave with wages at 1 day for every 20 days worked, subject to the eligibility and other conditions in the Code. It uses 180 days worked in the calendar year as the threshold for entitlement.
1. Read more about new Labour Code here Introduction of New Labour Codes in India – Impact, Advisory and Compliance Insights
Earned/annual leave: 1 day for every 20 days worked.
Sickness/other reasonable cause leave: up to 12 days with wages during each 12-month period.
Carry-forward of earned leave: generally up to 30 days for an adult.
If the firm's employment contract or leave policy provides more favourable leave, the employee is entitled to the more favourable benefit.
Government Employees: For a Government employee, leave encashment received at the time of retirement or resignation is fully exempt from income tax under Section 10(10AA)(i)
The exemption is the least of:
The ₹25 lakh ceiling was notified with effect from 1 April 2023.
During Employment: Leave encashment received during the period of employment is generally fully taxable for both Government and private employees.
To Automate leave encashment calculations and other deductions, check this article Why Your Business Needs to Switch to Automated Payroll
The tax treatment of leave encashment depends on the employee's status. Government employees enjoy complete exemption on leave encashment received at retirement or resignation, whereas private and other non-Government employees receive exemption only up to the prescribed limits under Section 10(10AA)(ii), including the ₹25 lakh ceiling and other applicable conditions. Therefore, understanding the employee category and the applicable exemption limits is essential for correctly determining the taxable portion of leave encashment.
For more practical tax and payroll updates, visit our home page or Contact us for practical solutions for your HR and Payroll operations.
Find below the some other relevant newsletters:
2. The Cost of Payroll Data Breaches and How to Prevent Them
Author:Venu KS
Prepared On:13/10/2026
Recent Posts
Related Newsletters
Please Share:
Increase the rate of Tax Collection at Source (TCS) from 5% to 20% for remittance under...
Every GST registered taxpayer must file at least one or more designated GST returns ...
In the dynamic landscape of entrepreneurship, startups are the catalysts of innovation, job creation, and economic growth...
Copyright B.C Shetty & Co. © 2026. All Rights Reserved. Privacy Policy , Terms and Conditions