HRMS and payroll software
Leave policy for small companies: a practical template for India
A practical leave policy template for small companies in India: leave types, accrual, carry-forward, encashment, approvals and holidays.
Many small companies run without a written leave policy. Leave is approved case by case, balances live in a spreadsheet or someone's memory, and disagreements come up at the worst moments: at year-end, or when someone resigns and asks for encashment.
A short, clear leave policy fixes this. It tells employees what they are entitled to, gives managers consistent rules, and makes payroll straightforward. Below is a practical structure you can adapt.
1. Who the policy covers
State who the policy applies to (for example, all permanent and probationary employees), and whether different rules apply to interns, contract staff or employees in different states.
2. The leave year
Choose a leave year, usually the calendar year (January–December) or the financial year (April–March). Balances, carry-forward and encashment are all calculated on this basis.
3. Leave types
A typical small-company policy includes:
| Leave type | Common purpose | Points to decide |
|---|---|---|
| Earned / privilege leave | Planned time off, holidays | Days per year, accrual, carry-forward, encashment |
| Casual leave | Short, unplanned personal needs | Days per year, maximum at a time, whether it lapses |
| Sick leave | Illness | Days per year, when a medical certificate is needed |
| Maternity leave | Before and after childbirth | As per law |
| Paternity leave | For new fathers | Days, if offered |
| Bereavement leave | Death of a close family member | Days, and which relatives are covered |
| Compensatory off | Working on a holiday or weekly off | How long it can be used for |
| Leave without pay | When other leave is exhausted | Approval rules |
4. How leave is earned
Decide whether leave is given in full at the start of the year, or accrues month by month, for example a fixed number of days credited each month. Accrual is fairer for people who join mid-year and simpler at exit. Also decide whether leave accrues during probation.
5. Applying and approval
- How far in advance planned leave must be requested
- Who approves (usually the reporting manager)
- How unplanned leave, such as sickness, must be reported (for example, informing the manager by a set time on the same day)
- What happens if leave is taken without approval
6. Sandwich rule
Decide whether weekends or holidays that fall between two leave days count as leave. Whatever you choose, state it clearly: this rule causes more arguments than almost any other.
7. Carry-forward and lapse
State which leave types can be carried into the next year, the maximum that can be carried, and what lapses. Earned leave is usually carried forward up to a limit; casual leave often lapses.
8. Encashment
Decide which leave can be encashed, when (only at exit, or also annually), any maximum, and the salary basis for calculating it. Encashment on exit feeds into the full and final settlement.
9. Holidays
Publish a holiday list at the start of each year, including national holidays and a number of festival holidays. Companies with staff in several states often publish location-wise lists, and some offer optional or floating holidays for employees to choose.
10. Leave during notice period
State whether leave can be taken during the notice period, and whether leave balances can be adjusted against notice.
A simple policy summary
Most employees never read a long policy document. Alongside the full policy, share a one-page summary like this:
| Question | Our rule |
|---|---|
| Leave year | January to December |
| Earned leave | [X] days a year, credited monthly; carry forward up to [Y] days |
| Casual leave | [X] days a year; lapses at year-end |
| Sick leave | [X] days a year; certificate needed for more than [Z] days |
| How to apply | Through the HR system, at least [N] days in advance for planned leave |
| Who approves | Your reporting manager |
| Sandwich rule | [Applies / does not apply] |
| Encashment | Earned leave encashed at exit, up to [Y] days |
| Holidays | As per the published holiday list for your location |
Making the policy work
A policy only helps if it is applied consistently. That is much easier when employees can see their balances at any time, leave is applied and approved in one place, and balances update automatically as leave is taken, accrued or carried forward.
Where People CODE fits
People CODE lets you set up your leave types and rules (accrual, carry-forward, encashment, sandwich rule and holiday calendars by location). Employees apply from their phones, managers approve, and balances flow straight into attendance and payroll. If you are still tracking leave in spreadsheets, see our Excel to payroll software checklist.
To see your leave policy set up in People CODE, book a free demo.
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