New Labour Laws: Can You Now Cash Your Leaves Every Year? Here’s What You Must Know. |Techstudiz.in|

 

India’s new labour codes have officially come into effect from November 21, 2025, and they’re bringing one of the biggest changes to leave policies we’ve seen in decades. If you’ve ever felt frustrated watching your hard-earned leaves expire at the end of the year without any compensation, there’s good news. 

The short answer is yes, you can now cash out your excess leaves every year, but like everything in law, there are conditions and caveats you need to understand. 

Here’s your complete guide to leave encashment under the new labour codes. 

 

What Are the New Labour Codes? 

First, let’s get the basics right. The government has consolidated 29 separate central labour laws into four comprehensive codes: 

1. Code on Wages, 2019 

2. Industrial Relations Code, 2020 

3. Code on Social Security, 2020 

4. Occupational Safety, Health and Working Conditions Code (OSH&WC Code), 2020 (this is the one that deals with leaves) 

This is the most significant overhaul of employment laws since independence. And yes, they’re now officially in effect across the country. 

 

The Big Change: Annual Leave Encashment Is Here 

Under the old laws, leave encashment is typically available only when you leave your job — either by resignation, retirement, or termination. If you had unused leaves at the end of the year, many companies simply let them expire beyond a certain limit. You have nothing. 

That has changed. 

Under the new OSH&WC Code, workers can now encash their excess earned leaves on an annual basis — even while they’re still employed. 

Here’s how the system works: 

• You can carry forward up to 30 days of unused earned leave to the next year 

• Any accumulated leave exceeding 30 days must be encashed at the end of the calendar year 

• You also have the right to demand encashment of all accumulated leaves at the end of the calendar year 

A Quick Example 

Let’s say you end the year with 40 days of unused earned leave. 

Under the new rules: 

• 30 days can be carried forward to next year 

• The remaining 10 days will be encashed — you’ll receive money for them 

 

Who Is Covered? And Who Is Excluded? 

Here’s where it gets a bit tricky. 

The beneficial provisions — including annual leave encashment — apply primarily to “workers” as defined under the Code. This includes factory workers, contract labour, migrant workers, and certain categories of employees. 

However, these provisions do NOT apply to employees engaged in: 

• Managerial or administrative capacity 

• Supervisory capacity earning above ₹18,000 per month 

This is a significant limitation that many employees may not be aware of. 

 

How Many Leaves Do You Get? The Eligibility Has Changed 

The new codes have also reduced the eligibility period for earned leave. Previously, you needed to work 240 days a year to qualify for annual paid leave. Now, you qualify after just 180 days of continuous service within a calendar year. 

This is particularly beneficial for: 

• Contract workers 

• Gig workers 

• People who join mid-year 

• Those in project-based roles 

You start earning leaves much faster now. 

 

The Safeguard Clause: What If Your Employer Denies Leave? 

One of the smartest provisions in the new code is a protective clause for employees. 

If you apply for leave and your employer denies it for operational reasons, those refused leaves will be carried forward without any limit. 

This means: 

• You won’t lose your leave entitlement just because your employer says “not right now” 

• Your leave balance won’t be capped at 30 days if the denial was not your fault 

• This prevents companies from forcing leave forfeiture through operational constraints 

It’s a small but meaningful protection that wasn’t explicitly there before. 

 

How Is Leave Encashment Calculated? 

This is crucial to understand, because the calculation method has changed with the new definition of “wages”. 

Under the new codes, wages now include basic pay, dearness allowance, and retaining allowance, and 50% of total remuneration must be considered for calculating benefits like gratuity, pension, and leave encashment. 

Here’s the calculation formula for leave encashment: 

Leave Encashment Amount = (Unused Leave Days / 26) × Monthly Wages 
 

(26 is the average number of working days in a month) 

What Counts as “Wages”? 

This is where things get a bit dynamic. According to experts: 

• For annual encashment (while still employed), leave encashment will be considered as wages 

• For end-of-employment encashment, it’s typically treated as an end-of-tenure payment 

A clarification from the Ministry of Labour & Employment is still expected on some of these aspects. 

For employees, the bottom line is your leave encashment amount may be calculated on a larger salary base now, which means potentially higher payouts compared to the old system. 

 

Tax Implications: How Much Will You Actually Get? 

Now for the part everyone cares about — the tax. 

The tax treatment of leave encashment depends entirely on WHEN you receive it: 

During Employment (Annual Encashment) 

If you encash leave while you’re still working, the entire amount is fully taxable. It gets added to your “Income from Salary” and taxed at your applicable slab rate. 

At Retirement or Resignation 

If you encash leave at the end of your employment, partial or full exemption is available under Section 10(10AA) of the Income Tax Act. 

On Death of Employee 

If leave encashment is paid to legal heirs, the entire amount is 100% tax-free. 

The Exemption Calculation for Private Sector Employees 

For private sector employees (non-government), the tax-free portion is the lowest of these four amounts: 

1. Actual leave encashment received 

2. ₹25 lakh (the statutory lifetime limit — raised from just ₹3 lakh earlier!) 

3. Average salary of last 10 months (basic + DA, if applicable) 

4. Cash equivalent of unused leaves (maximum 30 days per year of service) 

Important Points to Remember 

• Salary for this calculation means only Basic + Dearness Allowance — HRA, bonuses, and other allowances are excluded 

• The ₹25 lakh limit is a LIFETIME cap across all employers. If you’ve claimed ₹5 lakh exemption from a previous job, you only have ₹20 lakh left for future claims 

• This exemption is available under BOTH the Old Tax Regime and the New Tax Regime 

A Quick Example 

Suppose you retire after 20 years with: 

• Average monthly basic salary + DA: ₹1,00,000 

• Unused leave: 300 days 

• Leave encashment received: ₹15,00,000 

Your exemption will be the lowest of: 

Factor	Amount
Actual received	₹15,00,000
Statutory limit	₹25,00,000
10 months’ average salary	₹10,00,000
Leave cash equivalent (300/26 × ₹1,00,000)	~₹11,53,846

Exemption allowed: ₹10,00,000 

Taxable amount: ₹5,00,000 

Pro tip: For government employees, leave encashment at retirement is fully tax-free with no upper limit. 

 

What About Gratuity? A Quick Note 

Gratuity has also seen changes. Fixed-term employees are now eligible for gratuity after completing just one year of service (compared to the earlier requirement of five years). 

The calculation formula remains the same: 

Gratuity = (Basic + DA) × 15 × Years of service / 26 
 

But since “wages” is now defined more broadly, the base for calculation has expanded — which may increase your gratuity payout. 

 

What Hasn’t Changed? Let’s Be Clear 

Not everything is different. Some things remain the same: 

• The gratuity formula itself hasn’t changed — only the definition of “wages” has 

• PF contributions still continue at 12% of basic salary, with the ₹15,000 threshold intact (for now) 

• Employers can still structure salary components as long as they comply with the 50% wage rule 

 

What Should You Do Now? 

Here’s a practical checklist for every employee: 

Step 1: Check if You’re Covered 

First, understand whether these provisions apply to you. If you’re in a managerial or supervisory role earning above ₹18,000/month, the annual encashment benefit may not apply automatically. Check with your HR department. 

Step 2: Review Your Company’s Leave Policy 

Many companies are still updating their policies to align with the new codes. Ask your HR these questions: 

• “Has our leave encashment policy been updated as per the new codes?” 

• “Will excess leaves beyond 30 days be automatically encashed at year-end?” 

• “Can I request encashment on demand?” 

Step 3: Track Your Leave Balance 

With the 30-day carry-forward limit, you need to be strategic. Don’t let leaves pile up unnecessarily — either use them or ensure they get encashed. 

Step 4: Understand Your Tax Liability 

If you’re planning to encash leaves annually, remember it’s fully taxable. Plan your taxes accordingly. If you’re approaching retirement, consult a tax advisor to maximize your Section 10(10AA) exemption. 

Step 5: Keep Documentation 

Maintain proper records of: 

• Leave balance statements 

• Salary slips 

• Any communication regarding leave denials (remember the safeguard clause!) 

• Form 16 for tax purposes 

 

Important Caveats and Reality Check 

Before you get too excited, here are a few things you need to know: 

1. State Rules May Still Apply 

While the central codes are in effect, state-specific provisions may still apply where relevant. Some states have their own variations of labour laws, and those may take precedence in certain situations. 

2. Not All States Have Notified the Rules Yet 

The codes came into effect on November 21, 2025, but several states have not yet notified the supporting rules. Your employer may not have implemented all provisions yet. Check the status of your state. 

3. Managerial and Supervisory Staff Are Excluded 

This is the biggest limitation. If you’re in a managerial or supervisory role with monthly earnings above ₹18,000, the annual encashment benefit may not apply to you automatically. 

4. The ₹25 Lakh Cap Is a Lifetime Limit 

Many people miss this. The ₹25 lakh exemption limit for private sector employees is not per employer — it’s a lifetime aggregate limit across all your employment. 

5. “Salary” for Tax Calculation Is Limited 

For tax exemption purposes, only Basic Salary + Dearness Allowance is considered. If your salary structure has a large component of allowances, your taxable portion may be higher than you expect. 

6. Some Rules Are Still Awaiting Clarification 

The government has indicated that certain clarifications — especially around what exactly counts as “wages” for leave encashment — are still expected from the Ministry of Labour & Employment. 

 

The Bottom Line 

So, can you now cash your leaves every year? Yes, if you’re a “worker” as defined under the new code. But there are nuances. 

The new labour codes are undoubtedly a step forward for employee rights in India. The introduction of annual leave encashment is a game-changer, especially for people in demanding roles where taking time off is genuinely difficult. 

However, the system isn’t perfect. The exclusion of managerial and supervisory staff, pending state-level notifications, and complex tax treatment mean you need to be informed and proactive. 

My advice: Don’t wait for your employer to tell you. Ask questions. Read your appointment letter. Understand your leave policy. And if you’re approaching retirement, definitely sit down with a tax advisor to make the most of the ₹25 lakh exemption limit. 

What’s your experience with the new leave rules? Have you seen your company update its policies yet? Drop your questions in the comments — I read every single one.