Earned leave, privilege leave and casual leave: what's the difference
Indian employment law recognises several distinct leave pools, and they behave very differently when it comes to carrying forward or…
Indian employment law recognises several distinct leave pools, and they behave very differently when it comes to carrying forward or encashing unused days:
| Leave type | What it's for | Carries forward? | Can be encashed? |
|---|---|---|---|
| Earned leave (EL) / Privilege leave (PL) | Accrues from days actually worked, for planned time off | Yes, up to a cap | Yes, usually at resignation/retirement, sometimes annually |
| Casual leave (CL) | Short-notice personal time off | Usually not | Usually not |
| Sick / medical leave (SL) | Illness or medical need | Varies by employer/state | Usually not |
"Earned leave" and "privilege leave" describe the same underlying entitlement. Which term applies to you depends on whether the Factories Act or your state's Shops and Establishments Act governs your workplace, and the exact wording that Act uses.
FAQ
How is earned leave calculated under the Factories Act?
Under Section 79 of the Factories Act 1948, an adult worker who has worked at least 240 days in a factory during a calendar year earns 1 day of leave with wages for every 20 days worked in that year, credited for use in the following calendar year. A child worker earns 1 day for every 15 days worked. A fraction of half a day or more is rounded up to a full day; less than half a day is dropped.
What counts toward the 240-day eligibility requirement?
Actual days worked count, and so do certain days you did not physically work: days of lay-off under an agreement or standing order, up to 12 weeks of maternity leave for a female worker, and earned leave availed in the previous year. These deemed days count toward reaching 240 days, but they do not themselves generate additional leave.
Can unused earned leave be carried forward?
Yes. Under the Factories Act, an adult worker can carry forward up to 30 days of unused earned leave into the next calendar year (40 days for a child worker). Leave you applied for and were refused by the employer can be carried forward without this limit.
Does the Factories Act apply to office and shop employees?
No. The Factories Act 1948 covers workers in factories as defined by the Act. Employees of shops, offices, hotels and other commercial establishments are instead covered by their state's own Shops and Establishments Act, which sets its own earned or privilege leave entitlement and eligibility rules that vary from state to state.
Is leave encashment taxable in India?
It depends who you work for. Leave encashment received by a Central or State government employee is fully exempt from tax under Section 10(10AA)(i) of the Income-tax Act. For a non-government employee, the exemption under Section 10(10AA)(ii) is capped at the least of four amounts, and anything above that least figure is taxed as salary.
What is the leave encashment tax exemption limit for private-sector employees?
For non-government employees, the exemption under Section 10(10AA)(ii) is the lowest of: the actual leave encashment amount received; 10 months' average salary (basic plus dearness allowance) before retirement or resignation; the cash equivalent of unused earned leave calculated at a maximum of 30 days for each completed year of service; and Rs 25,00,000. The Rs 25 lakh limit was set by CBDT Notification No. 31/2023 dated 24 May 2023, effective from 1 April 2023, up from the earlier Rs 3 lakh limit.
Is leave encashment while still employed taxed differently from encashment at retirement?
Leave encashed while you are still in service (for example, an annual encashment of unused days) is fully taxable as salary income for a non-government employee in the year you receive it, with no Section 10(10AA) exemption available. The exemption in Section 10(10AA) applies specifically to leave encashment received on retirement, resignation, or otherwise leaving service.
Is casual leave or sick leave the same as earned leave?
No. Earned leave (also called privilege leave) accrues based on days worked and can usually be carried forward and encashed. Casual leave and sick leave are separate, typically shorter-duration entitlements set by company policy or the applicable state Shops and Establishments Act, and they generally lapse if unused rather than carrying forward or being encashed.