Labor laws in India are complex, with both central and state laws influencing paid leave policies. However, understanding and successfully navigating these mandates is critical for ensuring compliance. Paid leave also supports employee well-being by providing them with adequate time off to rest and recharge.
For international companies hiring remote Indian talent, it’s essential to understand the various paid leave entitlements, including the different types of leave available, such as advance notice, casual, and privilege leave.
Overview of Indian Labour Law
Indian labor laws were created to protect workers’ rights and promote social justice, reflecting the country’s commitment to both since joining the International Labour Organization (ILO) in 1922.
These laws ensure fair treatment and safety for India’s workforce and cover industrial relations, workplace health, and employment standards. They govern general holidays, annual leave, working hours, unfair dismissals, minimum wage, and severance pay.
Both central and state governments have a role in setting labor law compliance — creating a complex legal system for international employers to navigate.
Main Labour Law Acts
Employers in India must adhere to leave provisions that vary by state and industry. Two key acts govern employee leave and working hours: The Factories Act, 1948 and the Shops and Establishment Act.
The Factories Act, 1948
The Factories Act, 1948 regulates leave entitlements for workers in manufacturing.
Leave provisions include:
- Annual leave with wages: Workers who have worked at least 240 days in a factory during the year are entitled to annual leave. Adults earn one day for every 20 days worked, while employees under 18 earn one day for every 15.
- Accumulation of leave: Unused leave can be carried forward to the next year, up to 30 days for adults and 40 days for those under age 18.
- Payment in lieu of leave: If employment ends, workers must be paid for unused leave by the next payday or within two working days.
- Notice for leave: Workers must give 15 days’ notice for leave, which extends to 30 days for those in public utility services.
Shops and Establishment Act
The Shops and Establishment Act provides detailed guidelines on leave entitlements for employees working in commercial establishments such as shops, offices, and restaurants. The provisions are different from state to state, but generally include:
- Privilege leave: Also known as earned leave, employees accrue one day of paid privilege leave for every 20 days worked, typically 15 days for every 240 days worked.
- Sick leave: Employees usually receive 12 days of paid sick leave per year, which can’t be carried over to the following year.
- Casual Leave: Employees are entitled to up to 12 days of casual leave per year to use for urgent or unforeseen personal matters. Casual leave can’t be carried forward or accumulated.
Vacation Leave
Earned, or privilege leave, is accrued. Indian employees usually earn 15 days of privilege leave per year, which can depend on the state and industry.
Employees can carry forward unused leave for up to 45 days and cash in any accumulated leave upon resignation or termination.
Leave Encashment
Leave encashment allows employees to receive monetary compensation for their unused leave days. Employees can use this benefit during employment, retirement, or termination. Leave encashment while employed is taxable under Section 89 of the Income Tax Act, 1961, with specific exemptions. Upon separation, the maximum exemption limit is INR 25,00,000.
The calculation includes the leave encashment amount, exemption limit, and average monthly salary multiplied by the number of months. For non-government employees, the tax exemption on leave encashment is limited to whichever has the lowest value — unused leave, ten times the average monthly salary, or INR 300,000.
Advance Notice
Any absence that extends beyond a week is known as advance notice or long leave. Since a lengthy absence from work can disrupt ongoing projects and impact deadlines, employees must give their employer plenty of notice before taking long leave.
Typically, this means alerting employers of their intention to take leave at least 15 days to a month in advance.
Carryover
Employees can carry over all unused eligible leave days into the following year (excluding sick and casual leaves). This is limited to 30 days in most cases, but employees covered by the Shops and Establishments Act can carry over between 45 to 60 days, depending on the region. Some states allow leave carryover for up to three years. When accrued leave exceeds this limit, it’s automatically converted into cash.
Casual Leave
Casual leave is intended for urgent, unforeseen personal matters and employees are typically entitled to up to six days per year. Casual leave requires management approval and can’t be:
- Carried over to the next year
- Cashed out upon leaving
- Combined with earned or sick leave
Casual leave is granted for at least half a day, with up to a maximum of three days per month.
Maternity Leave & Paternity Leave
The Maternity Benefit Act regulates maternity leave in India. Female employees receive 26 weeks of paid leave for their first two children and 12 weeks for any subsequent children. The leave period can begin up to eight weeks before the expected delivery date. Employers must pay 100% of the employee’s average daily wage during this period.
Paternity leave is less standardized in India. It’s provided primarily to government employees, who are entitled to 15 days of paid leave within six months of childbirth or adoption.
Paternity leave is not mandated for the private sector in India; however, companies are free to create their own paternity leave policies.
Sick Leave
In India, sick leave provisions vary by state, however, employees generally receive up to 12 days of paid sick leave annually. The employee must provide a medical certificate if the leave exceeds two or three days. Sick leave cannot be carried over to the next year or cashed out upon termination.
Public Holidays
There are only three national holidays in India: Republic Day, Independence Day, and Gandhi Jayanti. There are an additional 14 mandatory holidays, 12 optional holidays, and 33 restricted holidays which differ by state and organization.
Hire Global Talent in India
Keeping track of employment laws, like paid leave in India, can be tricky for international businesses. Partnering with an Employer of Record (EOR) like Remofirst simplifies this process.
Remofirst handles global payroll, tax compliance, and ensuring adherence to local labor laws so your company is compliant.
Book a demo with Remofirst to learn how we can help streamline your hiring process in India and over 180 countries.
