Most growing companies only think about a leave policy for a small company in India when the first argument happens: two people want the same week off, someone asks whether unused leave lapses, or a new joiner wants to know if they can take leave during probation. A written leave policy settles these questions before they become disputes. It also keeps you on the right side of your state Shops and Establishments Act, which sets minimum leave and holiday entitlements for most offices, shops and service businesses. This guide walks you through building a leave policy from scratch, with entitlement tables, sample clauses and the mistakes we see small companies make most often.
Why a Small Company Needs a Written Leave Policy
In a 15 person company, leave is often handled on WhatsApp. The founder says yes or no, nobody tracks balances, and everyone assumes the system is fair. It works until it does not. The moment you cross 25 or 30 people, or hire your first manager who is not a founder, informal leave becomes inconsistent leave. Inconsistency is what employees remember.
A written leave policy does four practical jobs:
- It sets expectations at hiring. Candidates compare leave the way they compare salary. A clear entitlement table in your offer pack signals a professional employer.
- It protects managers. A manager who says no to leave can point to a rule rather than personal judgement.
- It supports compliance. Your state Shops and Establishments Act and, for factories and certain establishments, the Occupational Safety, Health and Working Conditions Code, set minimum leave. Your policy is the evidence that you meet them.
- It feeds payroll correctly. Loss of pay, encashment and final settlement all depend on accurate leave balances.
Step 1: Check the Legal Floor in Your State
Before you decide how generous to be, find out the minimum you must offer. In India, leave for offices, shops and most service businesses is governed by the Shops and Establishments Act of the state where the employee works. Each state sets its own numbers for earned leave, casual leave, sick leave, festival holidays and the waiting period before leave can be availed. Factories and some other establishments are covered by the leave provisions of the OSH Code, which came into force on 21 November 2025 along with the other three Labour Codes.
Practical steps:
- List every state where you have employees, including remote employees working from home in another state.
- Download the current Shops and Establishments Act and rules for each state from the state labour department website.
- Note the minimum annual leave, casual and sick leave, national and festival holidays, and any rule on carry forward or encashment.
- Use the most generous state minimum as your company-wide floor if you want one simple policy, or build state-specific annexures.
Maternity benefit is national. Eligible women employees are entitled to 26 weeks of paid maternity leave for the first two children, under the Social Security Code which carried forward the earlier Maternity Benefit Act provisions. Your leave policy should reference this rather than restate every rule, and you should confirm details with counsel when a case is unusual.
Step 2: Choose Your Leave Types
Small companies tend to either copy a 12 leave type policy from a large corporate or collapse everything into one bucket. Neither works well. Start with the types that solve real problems.
| Leave type | Purpose | Typical range in small Indian companies |
|---|---|---|
| Earned or privilege leave (EL/PL) | Planned vacations, long breaks | 12 to 18 days per year |
| Casual leave (CL) | Short unplanned personal needs | 6 to 8 days per year |
| Sick leave (SL) | Illness, medical appointments | 6 to 12 days per year |
| Maternity leave | Childbirth, as per law | 26 weeks for first two children |
| Paternity leave | Support after childbirth | 5 to 10 working days (company choice) |
| Bereavement leave | Death of immediate family member | 3 to 5 days |
| Compensatory off | Working on a weekly off or holiday | 1 day per day worked, with expiry |
| Loss of pay (LOP) | Leave beyond available balance | Unpaid, deducted from salary |
The ranges above are common practice, not law. Always check them against your state minimums from Step 1.
Some companies merge casual and sick leave into a single "paid time off" pool. That is simpler to administer but can push sick employees to come to work so they save leave for holidays. If you merge them, keep a separate allowance for documented long illness.
Step 3: Decide How Leave Is Credited and Accrued
Accrual is how leave becomes available. There are three common approaches.
Annual upfront credit
The full year of leave is credited on 1 January or 1 April. It is simple and employees like it, but if someone takes 15 days in May and resigns in June, you either recover the excess from final settlement or absorb it.
Monthly accrual
Leave is credited every month, for example 1.25 days of earned leave per month for a 15 day annual entitlement. This is fair and protects the company, and it is the default most HR systems handle well.
Accrual based on days worked
Leave is earned per days actually worked, such as one day for every 20 days worked. This mirrors the statutory approach in factory settings and suits shop floor and shift-based teams.
For joiners in the middle of the year, prorate. A worked example: an employee joins on 16 August in a company with 12 days of earned leave per calendar year credited monthly at 1 day per month. If your rule credits a month only when the employee joins on or before the 15th, they get credit from September onward, so 4 days for the year.
Step 4: Write the Rules for Applying and Approving Leave
This section causes most friction, so be specific. Cover notice periods, approvers, documentation and what happens when a request is not answered.
Sample policy wording you can adapt:
- "Earned leave of up to 3 days must be applied for at least 7 calendar days in advance. Earned leave of more than 3 days must be applied for at least 21 calendar days in advance."
- "Casual leave may be applied for on the same day, but the employee must inform the reporting manager before the start of their shift."
- "Sick leave of more than 2 consecutive days must be supported by a medical certificate from a registered medical practitioner, submitted within 3 working days of returning."
- "Leave requests not acted upon by the reporting manager within 3 working days will be escalated to the department head."
- "Approved leave may be cancelled by the company only in exceptional business circumstances, with written reasons, and any non-refundable travel cost incurred by the employee will be reviewed for reimbursement."
Define who approves leave when the manager is themselves on leave. In a small company, the founder or HR is usually the fallback approver.
Step 5: Set Carry Forward, Lapse and Encashment Rules
Decide, for each leave type, what happens to unused balance at year end. A common small company pattern looks like this:
| Leave type | Carry forward | Maximum accumulation | Encashment |
|---|---|---|---|
| Earned leave | Yes | 30 to 45 days | At exit, or above the cap at year end |
| Casual leave | No, lapses | Not applicable | No |
| Sick leave | Yes, limited | 15 to 30 days | No |
| Comp off | No | Expires in 30 to 90 days | No |
Your state law may require carry forward or encashment of earned leave up to a limit, so read your Act before you allow it to lapse. We cover the design choices in more depth in our guide to leave carry forward and encashment policy design.
Step 6: Handle Probation, Holidays and Sandwich Rules
Three smaller decisions round out the policy.
Leave during probation
Many small companies let probationers accrue leave from day one but restrict use of earned leave until confirmation, while allowing casual and sick leave. That is fairer than a blanket ban and avoids people coming to work ill.
Holiday calendar
Publish the holiday list before the year starts. Include the three national holidays (Republic Day, Independence Day and Gandhi Jayanti) and the festival holidays required or customary in each state. Some companies offer two or three floating or restricted holidays so employees can pick festivals that matter to them.
Sandwich rule
Decide whether weekends or holidays between two leave days count as leave. Whatever you choose, state it clearly with an example. Our explainer on the sandwich leave policy covers the variations.
Common Mistakes Small Companies Make
- Copying a large company policy. A 40 page policy with 11 leave types will not be read. Keep it to what you will actually administer.
- Ignoring remote employees in other states. The applicable state law follows the place of work, not the head office.
- No rule for negative balance. Decide whether advance leave is allowed and how it is recovered at exit.
- Unwritten exceptions. If the founder approves extra leave for one person, either make it a documented exception or change the policy.
- Not linking leave to payroll. Unapproved absence must flow to loss of pay in the same month, or you end up recovering salary later, which damages trust.
- Never reviewing it. Review the policy each year and whenever you open in a new state.
Leave Policy Checklist Before You Publish
- State minimums verified for every work location.
- Leave types, entitlements and accrual method defined.
- Proration rules for joiners and leavers written with an example.
- Application notice periods, approvers and escalation set.
- Documentation rules for sick leave stated.
- Carry forward, lapse and encashment rules per leave type.
- Probation, holiday calendar and sandwich rule covered.
- Maternity and other statutory leave referenced.
- Policy shared in writing and acknowledged by every employee.
- Leave balances set up in your HR system or tracker.
Frequently Asked Questions
How many days of leave should a small company in India give?
There is no single national number for offices and shops. Your state Shops and Establishments Act sets the minimum. Many small companies offer 12 to 18 days of earned leave plus 6 to 8 casual and 6 to 12 sick days, plus public holidays, but you must check your state rules first.
Can a company refuse leave?
A company can decline or reschedule planned leave for genuine business reasons, as long as the policy allows it and the employee can still use their entitlement within the year or carry it forward. Refusing medical or statutory leave is a different matter and should be avoided.
Should leave be credited monthly or yearly?
Monthly accrual is fairer for small companies because it matches leave to service. Upfront annual credit is simpler but creates recovery issues when someone leaves early in the year.
Do employees on probation get leave?
Usually yes. Most companies let probationers accrue leave and use casual and sick leave, while restricting earned leave until confirmation. Check that your state law does not set a different rule.
Do we need a lawyer to write a leave policy?
Not for a standard policy, but a quick review by employment counsel is worth it if you operate in several states or plan unusual rules such as unlimited leave.
Manage Your Leave Policy in Fininvo HRMS
Once your policy is written, the hard part is running it consistently. Fininvo HRMS lets you configure leave policies, track balances, route approvals and apply carry forward and encashment rules at year end, with holiday lists per location. See the leave management features, explore the Fininvo HRMS overview, or check pricing for your team size.
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