Dear Sandeep,
I think the matter can be simplified by looking at each aspect separately and objectively, as below:
1. When an employer inserts a clause regarding notice period in the terms of employment, is it a legally valid provision? Yes. There is no law preventing an employer to impose reasonable time frame within which the employee should complete unfinished responsibilities, hand over charge to his/her successor and then proceed to get relieved.
2. To avoid confusion as to whether leave taken during notice period can be counted as part of 'notice period' also; or not; it is better to make a provision in the terms of employment requiring the employee to BE PRESENT ON DUTY for ... number of working days to complete the notice period. Depending on how important the position is, the notice period (of active & on-the job availability) could be determined. Say.. 25 days or more, as per requirement.
3. By doing this, mockery of the system will be avoided wherein an employee who is supposed to give one month's notice does so, but also proceeds on one month's leave at the same time. So practically he becomes unavailable to discharge the duties envisaged while making provision of one month's notice period. And then HR starts wondering whether the the actual period of absence (during notice period) can be counted as notice period as well as LEAVE. Once the requirement of notice period is defined in terms of physical presence on duty to discharge the work, the confusion on whether to allow leave during notice period or not, will stand answered. If leave is taken, the notice period would automatically stand extended.
I hope this answers your query.
By the way, when you say 'leave (unpaid)' what do you mean? Do you mean that it would be without pay? Or that the leave is in balance and it has not beeen paid for i.e. not en-cashed? Probably it is the latter.
Regards
Ravindra Pandit