Leave Policy for Small Businesses in India: Template, Sandwich Rule, Comp-Off and Encashment
How to design a simple leave policy for an Indian SMB: casual, sick and earned leave, accrual and carry forward, sandwich leave, comp-off, encashment and what your state’s law requires.
pagar karo Payroll Desk· Published 8 Aug 2026· Updated 28 Oct 2026· 3 min readA simple SMB leave policy has three types — casual (around 7–12 days), sick (around 7 days) and earned or privilege leave (often 12–18 days, accrued monthly and partly carried forward) — plus public holidays, comp-off for work on holidays and clear rules on sandwich leave and encashment. Minimum entitlements come from your state’s Shops and Establishments Act or, for factories, the OSH Code, so check those first.
- Statutory minimums depend on the state (shops) or the OSH Code (factories).
- Accrue earned leave monthly so new joiners are handled automatically.
- Decide sandwich leave in writing — it is a policy choice, not a law.
- Show balances to staff before they apply; most leave disputes disappear.
Start with what the law requires
Leave in India is governed by state law for shops and offices (each state’s Shops and Establishments Act) and by the OSH Code for factories. They set minimum earned leave, holidays and carry-forward limits. Your policy can be more generous, never less.
For factories, the OSH Code gives one day of earned leave for every 20 days worked once a worker has worked 180 days in the year.
A simple template
| Leave type | Days / year | Credit | Carry forward | Encash |
|---|---|---|---|---|
| Casual (CL) | 8 | Yearly, pro-rated for joiners | No — lapses 31 Mar | No |
| Sick (SL) | 7 | Yearly | Up to 14 | No |
| Earned (EL/PL) | 15 | 1.25 per month | Up to 30 | Above 30, at year end |
| Comp-off | As earned | On approved holiday work | Use within 60 days | No |
Add public holidays per location (national holidays plus state and festival holidays), and optional holidays if you want staff to choose 1–2 of their own.
Probation and new joiners
- Pro-rate yearly credits by joining month.
- Monthly accrual handles joiners automatically.
- Optionally block earned leave during probation but allow casual and sick.
Sandwich leave: decide and write it down
Example: leave on Friday and Monday. Without a sandwich rule, that is 2 days. With it, Saturday and Sunday count too — 4 days. Many employers apply it only when leave is on both sides of the off-day, and only for casual leave. Whatever you choose, the app should show the sandwich days before the request is submitted.
Comp-off
When someone works on a weekly off or holiday, give either overtime pay or a comp-off — not both. Comp-off should expire (30–90 days) so it doesn’t pile up.
Encashment
Decide the base (gross or Basic + DA) and when it happens (year end, exit). Encashed leave flows into payroll as an earning.
Approvals and visibility
- One or two approval levels; a substitute when the manager is on leave.
- Staff see the balance and the result (days, sandwich days, balance after) before applying.
- Approved leave updates attendance and payroll automatically.
In pagar karo all of this is a leave template: set it once, assign it by location or department, and the leave ledger keeps every credit, debit and lapse.
Frequently asked questions
What is sandwich leave?
If an employee takes leave on Friday and Monday, the weekend in between is “sandwiched”. Under a sandwich rule those days also count as leave. It is a company policy, not a legal requirement — apply it consistently and say so in writing.
How many earned leaves does a factory worker get?
Under the OSH Code, a worker who has worked at least 180 days in a calendar year earns one day of leave for every 20 days worked. State rules can add details.
Is leave encashment taxable?
Encashment during service is taxable as salary. Encashment at retirement or resignation has tax exemptions within limits — check with your CA.
This guide is general information for employers in India, checked against the sources above on 28 Oct 2026. Rules and rates change — confirm with your CA or the official notification before acting.