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All-in-one HR platform · v2.0
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All-in-one HR platform · v2.0
14-day free trial · No credit cardhello@HrMagix.com
The leave year end is where a leave policy turns into money. Every balance either travels into the next year, lapses or is paid out, and each of those outcomes is decided by rules that were written months ago and are now applied to every employee on the same day.
This guide covers the run-up, the close itself and the opening of the new year. It assumes your leave policy already states the carry-forward cap, encashment rules and cut-off date; if it does not, the guide on writing a leave policy covers those decisions.
01
Re-read the policy at least a month before the close. Check the carry-forward cap for each leave type, whether carried days can later be encashed, the wage base for encashment, and whether any leave type lapses entirely.
Check that the system is configured to match. A rule changed in the policy during the year but not in the system will be applied wrongly to everyone.
Watch for itSome state Shops and Establishments and factory laws set their own rules on carrying forward and encashing earned leave, and these vary by state. Check that your policy does not fall below what applies at each location.
02
Send each employee whose balance exceeds the carry-forward cap a notice in good time, stating how many days will lapse and by when they must be used or applied for. Copy the manager, who has to approve the leave.
This is partly courtesy and partly practical. The days most likely to be disputed are the ones that lapsed without warning, and a manager who refused leave in the last month will be asked why.
03
Set a cut-off after which no applications for the closing year are accepted, and clear every pending approval before it. Unapproved applications sitting in a queue at year end leave balances uncertain, and the close cannot be done on an uncertain balance.
Regularise any attendance gaps in the closing year at the same time, since unresolved absences may become loss-of-pay or leave and change the closing balance.
04
Once balances are final, the close splits each one according to the rules. The order matters, because encashment and carry-forward often draw on the same balance.
05
Encashment is computed on the wage base the policy names, usually basic or gross per day, multiplied by the days encashed. Pay it in a stated payroll month as a separate earning line, so the employee can see the days and the rate.
Encashment during service is generally part of taxable salary; encashment at retirement or exit can be treated differently under the Income Tax Act, subject to limits. Treat the tax side as a payroll question to confirm against the current rules rather than an HR assumption.
06
Credit the new year's entitlement under your accrual rule, add the carried balance and publish balances to employees. Then sample a handful of employees, including one who joined mid-year and one on long leave, and check the opening balance by hand.
Keep a year-end report of closing balance, encashed, carried and lapsed per employee. It is the record you will need when someone asks, at exit, what happened to their leave two years ago.
Every guide ends here rather than in a summary. If a line below is not true yet, that is the next thing to do.
It depends on the policy and on any state law that applies. Typically some is carried forward up to a cap, some may be encashed, and the rest lapses. The rules should be written in the leave policy before the year starts.
Yes. A notice stating how many days will lapse and by when gives the employee a chance to use them and avoids disputes later.
Encashment during service is generally taxable as salary. Encashment at retirement or on leaving can be treated differently under the Income Tax Act within limits. Confirm the current treatment before paying.
Yes. Many companies use the calendar year or an anniversary-based year. Whatever you choose, state it in the policy and configure it in the system.
The checklist above is generic by necessity. Bring your own structures, states and rota and we will tell you which lines are already true and which are not.
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