Compliance
Leave under the Labour Act 2074: what payroll has to track
The Act provides for several distinct leave types, each with its own accrual and carry-forward behaviour. Treating them as one pool is where leave management breaks.
Updated August 2026
Nepal’s Labour Act 2074 sets out the leave an employee is entitled to. The types are distinct from one another — they accrue differently, carry forward differently, and some can be encashed while others cannot.
This page covers what payroll and HR systems need to model. Entitlement figures change with amendments and are set out in the Act and its Rules, so confirm the current day counts against the legislation before configuring a policy.
The leave types the Act provides for
| Leave type | Typical behaviour |
|---|---|
| Home leave | Accrues in proportion to days worked; commonly carries forward and may be encashable |
| Sick leave | Annual entitlement; carry-forward and encashment rules differ from home leave |
| Public holidays | Fixed calendar days, with additional days provided for female employees |
| Mourning leave | Granted on a qualifying event rather than accrued |
| Maternity leave | Granted on a qualifying event, with a paid portion defined by the Act |
| Paternity leave | Granted on a qualifying event |
Accrual versus entitlement
Two different models appear in the same policy, and conflating them is the most common configuration error.
Home leave typically accrues — an employee earns it in proportion to time worked, so a new joiner has a small balance that grows. Sick leave is more often an annual entitlement — available from the start of the year rather than earned progressively.
A system that models everything as one annual grant will over-credit new joiners on accrual-based leave. A system that models everything as accrual will leave a new joiner unable to take sick leave they are entitled to.
Carry-forward and encashment
Carry-forward rules differ by leave type, and usually cap the balance that can be carried into the next year. Balances above the cap either lapse or are encashed, depending on the type and the policy.
Encashment is a payroll event, not just a leave event. When a balance is encashed the payment is salary income, so it enters the annual income projection and is taxed accordingly. Leave systems that sit apart from payroll tend to miss this.
- Apply the carry-forward cap at the year boundary, per leave type.
- Route encashment into payroll as taxable salary income.
- Settle outstanding balances on exit as part of final settlement.
- Keep the balance history, since an employee querying a balance is asking about a past period.
Configuring leave in an HR system
- 1Create each leave type separately, with its own accrual model, annual entitlement and carry-forward cap.
- 2Set the leave year to the Bikram Sambat fiscal year so it aligns with payroll and tax.
- 3Load the Nepali public holiday calendar, including additional days for female employees.
- 4Define approval chains that follow the reporting structure, so a request reaches the right manager.
- 5Expose balances to employees before they request, which removes most of the queries HR receives.
- 6Connect encashment and final settlement to payroll rather than handling them manually.
Why leave and attendance belong together
Unpaid leave reduces gross pay, which changes the tax projection. Approved paid leave does not. Attendance data that is not connected to leave approvals cannot tell the difference, so payroll ends up making a manual judgement each month.
Where leave, attendance and payroll share one employee record, an approved absence flows through to the payslip automatically and the evidence trail exists without anyone assembling it.
Frequently asked questions
Does leave encashment get taxed in Nepal?
Leave encashment is a payment made to the employee in respect of employment, so it is salary income in the year it is paid and enters the annual income projection used to compute TDS.
Should the leave year follow the Nepali or Gregorian calendar?
Align it with the Bikram Sambat fiscal year, so leave carry-forward, payroll accumulators and the tax year all reset on the same boundary. Different boundaries create reconciliation work every year.