Leave Policy and Holiday Treatment
If the leave availed is 'annual leave with wages' or privileged leave/earned leave as per the Factories Act, the holiday intervening two leaves shall not be counted as leave but should be marked as a holiday. However, in the case of casual leave (CL) or sick leave (SL), which are given in addition to the statutory leave under the Factories Act, they can be treated differently as per the leave policy or settlement with the employees. The same principle applies to Mines and Plantations as well.
In the case of establishments other than Factories, Mines, and Plantations, such as shops and commercial establishments, the state law will apply. Most of the Acts are silent regarding the treatment of holidays coming in between the leave days. Therefore, you have to cross-check with the state Act to clarify the matter.
Understanding Earned Leave
Earned leave is leave earned by working for a certain number of days in the preceding year. The number of earned leave (EL) or privileged leave (PL) also depends on the number of days the employee had worked (specifically, the number of days the employee had been physically present for work) in the preceding year. In such a scenario, it is a leave "earned" on the basis of physical working, and therefore, the employee has a right to use it judiciously. Therefore, holidays should be excluded from the leaves.
Casual and Sick Leave
At the same time, CL or SL is a certain number, say SL of 12 days for 12 months/per annum. It is given even if the employee works for a certain qualifying number of working days. Similarly, it is given during the first year of service as well. Moreover, an employee who falls sick on Saturday and Monday is presumed to be sick on Sunday also, and he cannot claim, "I was perfectly alright on Sunday!"