The Complete Breakdown of Employee Leave Rules in India and Accounting Tips

The Basics: No One-Size-Fits-All Approach

There is no centralised or independent law mandating employee leave except for maternity leave. Instead, the Shop and Establishment Act governs this, varying by state.

Each state has its own Shop and Establishment Act with different provisions for leave. In addition to leave, the Act covers payment of wages, working hours, rest intervals, opening and closing hours, holidays, overtime, and employment conditions.

Employees are generally entitled to several days of leave per year, holidays, and days off. The Shops and Establishments Act typically outlines three types of leave: Privilege, Sick, and Casual Leave. These entitlements vary by state, meaning the number of leave days an employee can take depends on the establishment’s location.

It’s crucial that an establishment’s leave policy aligns with the respective state’s Shops and Establishments Act, ensuring it is not less beneficial than the state’s mandated provisions.

Sample leave policy table format

Based on the above, it is essential to note the items

  • The organisation should have a leave policy based on location.
  • Setup holiday calendar before starting of the calendar year
  • Granting employees leave as per applicable law
  • Handling leave applications
  • Track unused leave balances
  • Handle leave encashment cases

Accounting of leave accumulation and encashment

Leave accumulation and encashment refer to the policies regarding the accumulation of unused leave and the subsequent payment for that unused leave. The Indian Accounting Standard, Employee Benefits, guides the accounting treatment as follows.

Leave Accumulation

  1. Recognition of Liability: A liability for leave benefits must be recognised when employees render services that increase their entitlement to future leave benefits.
  2. Measurement of Liability: The liability should be measured based on the expected cost to the employer of the leave that has accumulated up to the reporting date. This involves considering the salary rates at which the leave is expected to be paid and the probability of the leave being taken or encashed.
  3. Actuarial Valuation: Actuarial valuation might be required to measure the liability for accumulating leave, especially for long-term employee benefits.

Leave Encashment

  1. Recognition of Expense: The expense related to leave encashment should be recognised when the employee renders the service that entitles them to leave encashment.
  2. Measurement of Expense: The expense should be measured at the present value of the obligation, considering factors such as expected salary increases and the probability of employees availing of leave or opting for encashment.

Accounting Entries

Accumulation of Leave: At the time of accruing leave:

Employee Benefits Expense Dr

To Leave Encashment Liability

When the employee takes the leave:

Leave Encashment Liability Dr

To Cash/Bank (if encashed)

To Salary Payable (if availed)

Encashment of Leave: At the time of encashment:

Leave Encashment Liability Dr

To Cash/Bank

Disclosure

  1. Notes to Accounts: The financial statements should include disclosures about the accounting policies for employee benefits, the amount of expenses recognised, and a description of the funding arrangements.
  2. Actuarial Assumptions: Disclosure of the significant actuarial assumptions used for determining the leave encashment liability.

These steps ensure that the leave benefits are accounted for accurately and transparently in the financial statements, aligning with the requirements of the Accounting Standards.

Summary/Takeaway Notes:

Remember: Happy employees = productive employees. A well-thought-out leave policy isn’t just compliance – it’s a retention tool.

About Biztree Outsourcing Private Limited

Biztree Outsourcing Private Limited specialises in payroll management and creating custom leave policies tailored to state-specific requirements. Our expertise extends to policy drafting, implementation, and seamless integration with payroll systems, ensuring compliance with statutory regulations. Contact for more information at +91 9699214195 or email at sales@biztreeacccounting.com