Few HR topics generate as much genuine disagreement among Indian HR professionals as unlimited leave. The idea is appealing: trust employees to manage their own time off, reduce administrative overhead, signal a progressive culture. But when practitioners who have actually implemented it in India talk through the details, the conversation gets complicated fast.
A recent discussion among HR leaders surfaced the core tension. One professional asked a straightforward question: how do companies with unlimited leave handle accruals and encashment under Indian law? What followed was a substantive back-and-forth between practitioners with implementation experience and a founder with a detailed reading of the Shops and Establishments Acts. Both sides raised points that any HR leader needs to understand before designing a leave policy in India for private companies.
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ToggleLeave Policy in India for Private Companies: The Statutory Foundation
Indian leave law is not one uniform framework. It is a patchwork: state-specific Shops and Establishments Acts, the Factories Act for manufacturing, and now the Occupational Safety, Health and Working Conditions Code (OSH Code 2020).
The OSH Code 2020 is the most consequential layer for this discussion. It sets earned leave (also called privilege leave) at 18 days per calendar year, accruing at 1.5 days per month. Carry-forward is capped at 30 days. Critically, it mandates annual leave encashment for earned leave that exceeds the carry-forward limit.
“It’s mentioned in OSH Code 2020, annual leaves section page 31, carry forward limit 30 and mandatory leave encashment every year. Only for privileged leave which is 18 per calendar year and 1.5 per month.” — Pooja, HR Professional
This is the statutory floor. Any leave policy in India for private companies must meet or exceed it. The legal complexity of unlimited leave sits exactly at the intersection of “unlimited” as a concept and the mandatory accrual and encashment obligations the law creates.
Earned Leave Encashment Rules in India: Where Unlimited Leave Hits a Wall
The central legal question: can a company offer “unlimited” leave without maintaining any accrual ledger, given that both the OSH Code and state-specific laws create earned leave entitlements that must be encashable?
If there is no ledger, how is final settlement computed when an employee exits? Under the Andhra Pradesh and Gujarat Shops and Establishments Acts, earned leave accrual and leave encashment provisions are explicit. These are statutory rights. Company policy cannot override them downward.
“IMO this isn’t allowed. Leave encashment at resignation is a legal right and is not an option. Company policy cannot usually override statutory earned leave obligations under applicable Shops and Establishments laws. That’s why many companies offering ‘unlimited PTO’ still maintain a backend statutory EL balance for compliance and FnF settlement purposes.” — Kartik Mandaville, Founder, Springworks
The counter-argument from practitioners who have implemented this: unlimited leave and leave accrual are two separate things. You can run an unlimited leave policy on the front end while still maintaining a backend statutory earned leave ledger that covers encashment on separation.
“Unlimited leaves and leave accrual/encashment are 2 different things. It would be useful to connect with a good legal firm in this case.” — Wristy, Global People Advisor
Both positions are largely correct. The disagreement is semantic: it depends on whether “unlimited leave” means no accrual at all, or simply no quota on how much employees can take.
How Companies Are Actually Implementing Unlimited Leave in India
Companies that have navigated this tend to land in the same place: the front-facing policy says unlimited leave, the backend HRMS maintains a statutory earned leave balance running alongside it. Employees never see the ledger. It exists solely for compliance and full-and-final settlement.
One HR professional shared a practical middle path that solves the problem cleanly:
“To have a leave accrual policy in the first place and unlimited negative leave balance. In case employees have a positive leave balance at resignation, they will get encashment, but employees with a negative leave balance will not face any deduction. This can be easily configured in the HRMS.” — Abhijeet, HR Professional
This approach preserves the cultural signal of unlimited leave while keeping the compliance structure legally defensible. The employee experience is genuinely unlimited. The infrastructure underneath is not.
Annual Leave Policy for Private Sector Employees: What a Compliant Policy Looks Like
For most private companies in India, particularly startups and mid-size tech firms, a generous fixed leave policy often delivers the same cultural signal as “unlimited” with far less legal exposure. Twenty-five to thirty days of annual leave, liberal sick leave, no questions asked: that communicates trust in practice. Most employees do not want unlimited leave. They want to know they will not be penalised for taking the time they need.
If you are still committed to an unlimited leave model, the compliant version requires:
- A legal opinion specific to your state’s Shops and Establishments Act, not a generic one
- A backend statutory EL ledger maintained in your HRMS, regardless of the front-facing policy
- Clear documentation in employment agreements of how the policy interacts with statutory minimums
- An HRMS configured to compute the separation payout correctly when an employee with accrued leave exits
Leave Encashment Policy in India: Private Company Obligations at Separation
Leave encashment at resignation is not a company benefit. It is a legal right under most state Shops and Establishments Acts and the OSH Code 2020. This is the point that most often trips up companies when implementing unlimited or flexible leave.
The specific obligation varies by state. Maharashtra, Karnataka, and Delhi each have their own Shops and Establishments Acts with different carry-forward limits and encashment triggers. The OSH Code sets a floor, but state laws can and do vary above it.
What is consistent across almost all frameworks: earned leave that has accrued must be paid out on separation. The only clean way to honor this under an unlimited leave model is the backend ledger approach: track the statutory entitlement even if employees are not aware of it day-to-day.
The Practical Takeaway for HR Teams
The leave policy conversation in India for private companies will only get more complex as OSH Code provisions work their way through courts and tribunals. Much of the established case law was built around the old framework. The new codes are still being interpreted.
Companies that handle this cleanly are the ones that involved legal counsel at the design stage, not after rolling out a policy and discovering a compliance gap at the first difficult FnF settlement.
If you are redesigning your leave policy whether for a hybrid unlimited model, a generous fixed policy, or simply getting statutory compliance in order: the starting point is understanding exactly which state laws apply to each location where you have employees, and building policy from that foundation rather than from a culture aspiration downward.
Frequently Asked Questions
Is unlimited leave legal in India?
Unlimited leave as a concept is not prohibited, but it must be structured to comply with statutory earned leave obligations under state Shops and Establishments Acts and the OSH Code 2020. A true “no accrual, no ledger” unlimited policy carries significant legal risk. The compliant version maintains a backend statutory EL balance while offering unlimited leave as the front-facing employee experience.
What is the minimum annual leave for private company employees in India?
The OSH Code 2020 sets earned leave (privilege leave) at 18 days per calendar year, accruing at 1.5 days per month. State-specific Shops and Establishments Acts may set higher minimums. Companies must comply with whichever standard is more generous in each state where they operate.
Is leave encashment mandatory in India for private companies?
Yes. The OSH Code 2020 mandates annual encashment of earned leave exceeding the 30-day carry-forward cap. Most state Shops and Establishments Acts also require encashment of accrued earned leave upon separation. This obligation applies regardless of whether the company runs an unlimited leave policy.
What happens to leave balance when an employee resigns from a private company in India?
Accrued earned leave must generally be encashed at the time of separation. The calculation basis (basic salary vs. gross salary) varies by state law. Under an unlimited leave model with a backend statutory ledger, employees with a positive EL balance receive encashment. What happens with a negative leave balance is a matter of company policy and state-specific legal advice.
Which law governs leave policy in India for private companies?
The primary national framework is the Occupational Safety, Health and Working Conditions Code (OSH Code 2020), which consolidates earlier legislation. However, state-specific Shops and Establishments Acts remain operative and may impose additional or stricter requirements. The Factories Act applies to manufacturing establishments. Companies with operations across multiple states must audit each state’s requirements separately.
