Leave carry forward at year end: caps, lapse and encashment

Leave carry forward is the year-end rule that decides how much unused leave moves into the next leave year. Each leave type needs three settings: the carry-forward cap, what happens to days above the cap (lapse or encashment), and the date the process runs. For workers covered by the OSH Code, up to 30 days of annual leave can be carried forward and the balance above that is encashed, so lapsing it is not an option for them.

This guide covers the year-end leave process end to end: choosing a leave year, setting caps, lapse and encashment, the Labour Codes position, a communication timeline and a checklist. For the tax treatment of encashment, see our guide to leave encashment tax exemption, and for designing accrual and leave types, see our leave management guide.

Calendar year or financial year: which leave year should you use?

Leave year	Pros	Cons
Calendar year (January to December)	Matches the OSH Code, which counts annual leave for workers by calendar year; holiday calendars run January to December	Year-end encashment lands in January, mid tax year
Financial year (April to March)	Encashment, liability and payroll close in the same financial year; finance prefers it	Does not match the OSH Code calendar-year basis for workers; festival season sits mid-year
Joining anniversary	Each employee's year runs from the date of joining	Every month is a year end for someone; hard to communicate and audit

For a company with workers covered by the OSH Code, the calendar year is the simplest and safest choice, at least for those workers' annual leave. Running workers on a calendar year and managers on a financial year is possible, but it doubles the year-end work. Most mid-sized companies pick one leave year for everyone.

What does the law say about carrying forward annual leave?

Workers under the OSH Code

The Occupational Safety, Health and Working Conditions Code, 2020, in force since 21 November 2025, covers annual leave for "workers" in factories and other covered establishments. A worker who has worked 180 days or more in a calendar year earns one day of annual leave for every 20 days worked. The worker can carry forward up to 30 days, and is entitled to encashment of leave above that at the end of the calendar year.

"Worker" excludes people employed mainly in managerial or administrative roles and supervisors drawing wages above the notified level. Classification follows actual duties, not the job title.

Three points still need care:

• State rules. The Code's rules are being notified by states progressively, and details such as the procedure and timing of encashment can differ. Check your state's rules.
• Refused leave. Under the old Factories Act, leave that a worker applied for and was refused could be carried forward beyond the normal limit. Check whether the rules under the OSH Code that apply to you carry a similar protection before you lapse or cap any refused leave.
• Wage base. Encashment under the Codes is generally computed on "wages" as the Codes define them, where excluded allowances above 50% of total remuneration are added back. Our guide to the 50% wage rule explains it.

Employees in shops and offices

For employees covered by a state Shops and Establishments Act, the state law sets the annual leave entitlement and often a maximum accumulation. The limits vary widely between states and some Acts have been amended recently, so build a location matrix rather than assuming one figure.

Everyone else

For employees outside the statutory definitions, such as senior managers, carry-forward, lapse and encashment are a matter of policy and contract. The policy is the floor you have promised; apply it consistently.

Carry forward, lapse or encash: rules by leave type

Leave type	Typical year-end rule	Watch out for
Earned or privilege leave	Carry forward up to a cap (often 30 to 45 days in total balance); excess encashed or lapsed	Workers under the OSH Code: excess above 30 encashed, not lapsed
Casual leave	Lapses at year end	Some state laws treat casual leave differently; check
Sick leave	Accumulates to a cap, such as 30 to 60 days; not encashed	Long-tenure employees may hit the cap
Comp off	Expires on its own validity date, not at year end	Do not let comp off roll into the next year by default
Restricted holidays	Lapse at year end	Not leave in the usual sense; never encashed
Maternity, paternity, bereavement	Event-based; no carry forward	Not part of the year-end run

Write the caps as a total balance cap (the balance after carry forward cannot exceed 30 days) or a carry-forward cap (no more than 15 days can move into the new year). The two give very different results for long-tenure employees, so pick one and use the same wording in the policy and the system.

Worked example: year-end carry forward and encashment

An employee covered by the OSH Code ends the calendar year 2026 with 38 days of earned leave. The policy carries forward 30 days and encashes the excess, using a daily rate of monthly wages ÷ 26. Her wages for encashment are ₹52,000 a month.

• Carried forward to 1 January 2027: 30 days.
• Excess: 38 - 30 = 8 days.
• Daily rate: ₹52,000 ÷ 26 = ₹2,000.
• Encashment: 8 × ₹2,000 = ₹16,000, paid in January 2027 payroll.

On a 30-day divisor, the daily rate would be ₹52,000 ÷ 30 = ₹1,733.33 and the encashment ₹13,867. The divisor is a real decision worth ₹2,133 for this one employee; write it into the policy and use the same one in year-end encashment and full and final settlement. Our leave encashment calculator runs the numbers.

Encashment during service is fully taxable salary, so TDS on the January payroll will rise. Tell employees in advance, and see our leave encashment tax exemption guide for the exemption that applies only on retirement or resignation.

The CFO's view: leave liability

Encashable leave is a liability every month, not only at year end. A company of 1,200 employees with an average encashable balance of 20 days and an average daily rate of ₹1,800 carries a liability of 1,200 × 20 × ₹1,800 = ₹4,32,00,000. Finance will want this valued monthly, and the year-end run is when the estimate meets reality.

Should you push employees to use leave before year end?

Encouraging people to take leave is good for health and reduces the encashment bill. Forcing it needs care.

• Encourage, don't block. A reminder in October with each employee's projected lapse or encashment gets most people to plan.
• Plan coverage early. If everyone tries to use leave in the last two weeks of December, operations suffer. Spread it with team leave calendars from September.
• Don't refuse leave and then lapse it. Refusing an application for business reasons and then lapsing the same days is the fastest way to a grievance, and for workers it may conflict with the statutory protection on refused leave.
• Company-wide shutdowns (for example, the week between Christmas and New Year at an IT centre, or an annual maintenance shutdown at a plant) are a legitimate way to schedule leave, if announced in advance and consistent with the applicable law.

Year-end leave communication timeline

For a January to December leave year:

When	Action	Owner
September	Remind managers to plan Q4 leave coverage	HR
1 October	Send each employee a statement: balance, projected carry forward, lapse and encashment	HR system
November	Second reminder to those with projected lapse	HR
Early December	Freeze leave policy changes for next year; publish next year's holiday calendar	HR
15 December	Final date for leave applications in the current year	HR
31 December	Last day for approvals; payroll and HR review a preview of the run	HR and payroll
1 January	Run year-end: carry forward, lapse, encashment; credit new year's leave	HR system
January payroll	Pay encashment, with TDS	Payroll
By end January	Resolve disputes and corrections; lock the year	HR

The holiday calendar for the new year belongs in the same timeline; our guide to the holiday list for companies in India covers publishing it.

Year-end leave checklist

1. Confirm the leave year and the date the year-end process runs.
2. Confirm caps, lapse and encashment rules per leave type and per location, including OSH Code workers.
3. Confirm the encashment wage base and divisor.
4. Clear pending leave applications and regularisations before the run.
5. Review special cases: employees on notice, on long leave, on maternity leave, transferred between states, or rehired.
6. Run a preview: carry forward, lapse and encashment for every employee, and review it with payroll.
7. Check for refused leave that may need to be protected rather than lapsed.
8. Run the process and keep a ledger entry for every carry forward, lapse and encashment.
9. Credit the new year's entitlement and publish new balances to employees.
10. Pay encashment in payroll and update the leave liability for finance.

Common mistakes

• Lapsing annual leave of OSH Code workers above the 30-day limit instead of encashing it.
• Running the year end without a preview, then fixing errors employee by employee.
• Using a different divisor for year-end encashment and for full and final settlement.
• Ambiguous cap wording, so the total balance cap and the carry-forward cap get mixed up.
• Refusing leave in December and lapsing it in January.
• Surprising employees with higher TDS on January encashment.
• Adjusting balances by overwriting numbers instead of posting ledger entries that can be audited.

FAQs

How much leave can be carried forward in India? For workers under the OSH Code, up to 30 days of annual leave, with the balance above that encashed at year end. For other employees it depends on the state Shops and Establishments Act and the company policy.

Can unused earned leave lapse? For workers under the OSH Code, leave above the 30-day limit is encashed, not lapsed. For other employees, lapse is permitted if the applicable state law and your policy allow it.

Is year-end leave encashment taxable? Yes. Encashment while in service is fully taxable salary. The exemption applies only to encashment on retirement or resignation, up to the lifetime limit.

Should the leave year be calendar or financial? A calendar year matches the OSH Code basis for workers and the holiday calendar. A financial year suits finance. Most companies pick one for everyone to keep the year end simple.

What happens to casual leave at year end? In most policies it lapses and is not encashed. Check whether your state law says anything different for the employees concerned.

Is leave encashment calculated on Basic or gross? It depends on the policy and the law that applies. Under the Labour Codes, encashment is generally computed on the defined "wages", which can be higher than Basic plus DA for some salary structures.

How NeevHR helps

NeevHR leave configures carry-forward caps and encashment per leave type, enforces state statutory carry-forward floors, and records every accrual, lapse and encashment in the balance ledger, with a leave balance and liability report and an encashment and lapse report. Encashment is included in full and final settlement, and the reports builder can slice leave data by team and location. To walk through a year-end run on your own policies, book a demo.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 27 Oct 2026.