In many small businesses, leave works on the owner's goodwill. A staff member asks, the owner agrees or does not, and nobody keeps count. It feels flexible until two people want the same week before Diwali, or someone who has taken twenty days claims they have had none.
A written leave policy, one or two pages, fixes this. It tells staff what they are entitled to, how to ask, and what happens to unused leave. It also helps you meet the law.
The position below is as of October 2026, and it is general information and not legal advice. Leave is governed by the Occupational Safety, Health and Working Conditions Code, 2020 and by your state's shops and establishments law, and where a state law is more favourable to the employee, the employee gets the better terms.
01Annual leave with wages under the OSH Code
Under the OSH Code, a worker who has worked for 180 days or more in a calendar year is entitled to leave with wages, earned at the rate of one day for every 20 days of work. The earlier threshold under older laws was 240 days.
As the Ministry's FAQs explain:
- Carry forward
- a worker can carry forward up to 30 days of leave to the next calendar year. Leave that was applied for and refused can be carried forward without that limit.
- Encashment
- leave above 30 days that was applied for and not granted can be encashed at the end of the calendar year, and at separation the worker can encash the leave to their credit.
- Who it covers
- these provisions apply to workers, including sales promotion employees, and to supervisors earning up to ₹18,000 a month. They do not cover managers and supervisors above that wage under the Code.
An example
A Nagpur printing press worker works 264 days in 2026. Leave earned: 264 ÷ 20 = 13 days, rounding down. If they took 8 days during the year, 5 days carry forward to 2027.
02A simple policy structure
Most small businesses can work with four types of leave plus holidays.
| Type | Typical entitlement | Notes |
|---|---|---|
| Earned or annual leave | As per the OSH Code or state law, whichever is more favourable | Planned in advance |
| Sick leave | As per state law | Medical certificate after 2 or 3 days |
| Casual leave | As per state law | Short notice, for personal needs |
| Unpaid leave | At the employer's discretion | When paid leave is used up |
| National and festival holidays | As per state law | Usually a fixed list each year |
The entitlements for sick and casual leave, and for holidays, come from your state's shops and establishments law and rules, which differ from state to state. Check your state's current law before you fix the numbers, and never set them below it.
03Maternity benefit
Under the Code on Social Security, a woman employee who has worked for at least 80 days in the 12 months before her expected delivery is entitled to 26 weeks of maternity benefit. Other provisions include:
- Six weeks in case of miscarriage or medical termination of pregnancy
- A medical bonus of ₹3,500
- Two nursing breaks a day after return to work, until the child is 15 months old
- No dismissal during maternity leave
- A crèche facility, own or shared, in establishments with 50 or more employees
Women covered by ESI receive maternity benefit through ESI.
04What the policy should say
- Leave year: the calendar year is simplest, since the OSH Code counts by calendar year.
- Entitlements by type, as above.
- How to apply: to whom, how far ahead, and in what form (a message or a form).
- Approval: who approves, and how fast they reply.
- Busy periods: for example, no earned leave in the two weeks before Diwali for a sweet shop, or in March for a CA firm, with exceptions for emergencies.
- Sick leave proof: when a certificate is needed.
- Carry forward and encashment: in line with the law.
- Unauthorised absence: how it is treated and recorded.
- Holidays: the list for the year, published in January.
05Keeping track
Record every day of leave against the person, with its type, and keep a running balance. Let staff see their own balance. Most leave disputes are about numbers that only the owner can see. See staff attendance.
06Examples by business
A Chennai boutique with four staff
A one-page policy: earned leave as per the OSH Code or Tamil Nadu law, sick and casual leave as per the state's shops and establishments rules, a holiday list, a rule that leave in the wedding season needs two weeks' notice, and a register of leave by person.
An Ahmedabad CA firm with 12 staff
The same structure, plus a blackout period around key return deadlines, leave applied through a shared form, approval by the partner within two working days, and balances shown on each person's monthly slip.
A Pune auto parts unit with 80 workers on shifts
Leave planned by shift supervisors against a minimum manning level for each line, a monthly leave calendar, and encashment worked out at year end for workers covered by the OSH Code.
07Fair, written, followed
A modest policy that is written down, explained to staff and followed is worth more than a generous one applied by mood. Review it once a year, and after any change in your state's law.
In MatruOS, you mark attendance for each staff member, which gives you the record of days worked and absences that leave balances depend on.