Leave policy basics for Indian SMBs: accrual, carry-forward and half days

5 November 2026 · 7 min read

Most small companies start with "tell your manager on WhatsApp" and a spreadsheet HR updates on Fridays. It works until the team passes 15 or 20 people. Then balances drift, approvals get lost and every year-end turns into an argument. A short, clear leave policy fixes most of that. Here's how to write one.

A note before we start: leave entitlements in India depend on your state's Shops and Establishments Act and, for some workplaces, central laws. This guide covers how to structure a policy, not the legal minimums. Check those for your state and industry with your HR or legal advisor.

1. Decide your leave types

Keep the list short. Most growing companies need four or five types:

Some companies merge casual and sick leave into one "personal leave" bucket. That's simpler to run and people don't have to pretend to be ill. Either works; pick one and write it down.

2. Accrual: given up front, or earned each month?

There are two common ways to hand out leave:

• Up front: the full year's balance appears on 1 January (or the start of your leave year). It's simple, but someone who joins in November gets a full year's leave, and someone who leaves in February may have used more than they earned.
• Monthly accrual: the yearly amount is divided by 12 and added each month. For example, 18 days of earned leave a year becomes 1.5 days a month. It's fairer and handles joiners and leavers automatically.

A common middle ground: casual and sick leave up front (they're needed unpredictably), earned leave accrued monthly. For people who join mid-year, prorate from their joining date so nobody has to calculate it by hand.

3. Carry-forward and encashment

At year-end, unused leave has three possible fates. Your policy should say which applies to each type:

1. Lapses: it's gone. Common for casual leave, so people use it during the year.
2. Carries forward, with a cap: for example, up to 10 days of earned leave moves to next year and anything above that lapses. Caps stop balances growing for years and turning into a large liability.
3. Encashed: paid out, usually at year-end or when someone leaves. If you do this, say how the daily amount is calculated.

Whatever you choose, run year-end on a fixed date and show people their new balance the same day.

4. Half days

Allow them. A doctor's appointment or a bank visit shouldn't cost a full day. Define the two halves, for example first half until lunch and second half after, and deduct 0.5 days. Half days also cut down on "working from home but not really working" days.

5. Weekends, holidays and sandwich rules

Three things to settle in writing:

• Your working week: Monday to Friday, or Monday to Saturday, or alternate Saturdays. Leave should only count working days.
• Your holiday calendar: the national holidays (Republic Day, Independence Day and Gandhi Jayanti) plus the festival and state holidays you observe. Publish it in December for the next year.
• Sandwich rule: if someone takes Friday and Monday off, does the weekend count as leave? Many companies say no. Some say yes to discourage long weekends. Decide, and state it clearly, because it's the most argued-about rule in most offices.

6. Applying and approving

• Notice: for example, earned leave three working days ahead and longer leave two weeks ahead. Sick leave can be applied for on the day or after.
• Who approves: the direct manager, with HR as a second step for long leave if you want it. Name a backup approver for when the manager is away.
• Response time: approvals that sit for a week are as bad as refusals. Ask managers to respond within two working days.
• Cancelling: people should be able to withdraw a request, and get the days back, before the leave starts.

7. Make balances visible

Most leave disputes are really about balances nobody could see. Each person should be able to check, at any time, how many days of each type they have, what's pending and what's been taken. Managers should see a team calendar, so they don't approve three people off in the same week by accident.

A one-page policy template

1. Leave year: January to December.
2. Leave types and yearly amounts: earned __ days (accrues monthly), casual __ days, sick __ days.
3. Joiners: leave is prorated from the joining date.
4. Carry-forward: up to __ days of earned leave; casual and sick leave lapse.
5. Half days: allowed for all types, counted as 0.5 days.
6. Working week: ____. Holidays: as per the published calendar. Sandwich rule: ____.
7. Notice: earned leave __ working days ahead; sick leave can be applied for on the day.
8. Approval: by the reporting manager within two working days; HR for leave longer than __ days.

Fill in the blanks, share it with the team, and you've solved most of next year's leave arguments in advance.