Insights on Salary Calculation Methods and Deductions: Labor Laws, Allowances, and More

Hi all,

I am working in a corporate office where we calculate salary on a gross basis. For example, if an employee takes 2 days of leave, we deduct it from their gross salary using the formula (gross salary / 30 * 28 days).

On the other hand, one of my friends works in a factory where they deduct from Basic+DA only, excluding components like HRA and Conveyance. For instance, if an employee takes 2 days of leave, they deduct 2 days' salary from Basic+DA, without affecting HRA and Conveyance.

I would like to know if this approach is correct or incorrect. Kindly provide instructions.

Regards,
Kanaka

Dear Kanaka,

The deduction should be done on Gross Salary only, and the formula is as follows: Gross Salary/26 (Four days weekly off) * No. of days present. As for your friend's case, let me tell you I feel they are doing the same thing you people are doing because usually almost all allowances are connected to attendance in a factory. For example, you have a Canteen Allowance of Rs. 15/- (say). A person absents himself for two days; hence his canteen allowance will be = 15 X 24 = 360. Now when you are deducting his wage for the absence, you need not go in for the Gross Wage method because you have already not paid the same. Hence, Basic + DA is deducted in some cases.

Hope I have been able to clarify myself.

Warm Regards, SC

Mr. SC,

Thank you for your reply. However, I still do not understand your information. I am asking about HRA and CON. Could you please provide one more example?

Regards,
Kanaka

Dear Kanaka,

You are both right. There are three types of employments, namely:

- Daily Rated
- Monthly Rated
- Contract Rated

It is clear that in the case of daily rated employees, wages are to be paid based on the days on which they performed or attended work.

In the case of a contract, the amount is to be paid as per the terms of the contract, i.e., on a monthly, fortnightly, or completion-of-work basis.

For monthly rated employees, the salary is for the full month, i.e., for 30 or 31 days.

Now, in the case of Leave Without Pay (LWP) under the Payment of Wages Act or Minimum Wages Act, to calculate the daily rate of salary, the gross salary is to be divided by the number of days in the month. It is not explicitly stated under any law that it has to be calculated only for the total number of working days in the month.

If we assume working days as the basis and a holiday falls during the month (as declared under national and festival holidays), then we cannot change the base by further reducing the number of working days.

Under the Payment of Wages Act, the objective was to create a rational base. One rest day after every six working days is a guideline under the law, and the payment for this is to be adjusted in the monthly rated base. There is a rationale behind this practice.

Regarding factories not considering allowances for the deduction of salary/wages for LWP, they may have introduced a policy to that effect. Many organizations are adopting this policy and are also paying leave encashments based on 26 working days. If there is a violation, it is when deductions are higher than prescribed or based on a calculation resulting in less than the normal deduction.

Both methods are correct and do not violate any legal provisions. The issue of the correct basis has been brought to court numerous times. Judges also hold the view that there should be a rational basis of 30 or 31 days in a month for monthly rated employees. In the case of bifurcated salary, further bases for deductions can be assumed, but for consolidated salaries, the amount should be considered as a single component. Ultimately, the management decides and adopts the basis as per their convenience.

I hope this clarifies your doubts.

Regards,

Anil Anand

Dear Anil Anand,

We usually follow 26 days because:
(i) there is no holiday as such under the Factories Act.
(ii) Usually, employees who are absent from their duties get penalized as a higher wage cut takes place when we replace 30 with 26 days.
(iii) The employees have a higher rate of pay and, as a result, get higher benefits.
(iv) We calculate the Minimum Wages for our Contract Labour by dividing by 26 and not by the number of days in the month. The circular that comes out from the Labour Secretariat every six months regarding the rate of pay under Minimum Wages also states the same.

Warm Regards, SC

Dear Kanaka,

All salaries/wages are calculated on the basis of days worked and not on the basis of days of absence. Let me elucidate: If a person works for 20 days, we calculate as follows: (i) Basic + DA for the total number of days attended (in case of absenteeism). The rate of BASIC+DA is calculated by dividing the Monthly Basic+DA by 26. (ii) Add allowances and other payments depending on the basic salary. For example, if you pay HRA at 15% of the Basic pay as per (i). (iii) Multiply other daily allowances like Conveyance, Tiffin, etc., by the total number of days present (in this case, 20).

Hence, based on the above calculation, if the wage comes to 2000 for 20 days, his HRA would be 15% of 2000, and his Conveyance (20/- per day, let's say) would be 20 * 20 = 400.

I hope I have cleared your queries.

Warm Regards,
SC

Hi Kanaka,

Regarding your query, I would like to tell you about the present industry trends and work procedures. The deduction in salary for absenteeism is always made on the gross salary and not just on basic + DA.

Hi,

Can anyone please tell me how the basic salary and HRA of an employee are decided? I was told to prepare a breakup of an employee and was instructed to structure it in a way that his take-home should be 35000/-. Additionally, I also want to know what the rules are for getting registered for PF.

Dear Experts,

I have a doubt. Till now, in my experience, we have been considering 30/31/28 days as the basis for salary computation, whereas the actual wage should be for 26 days only. Even when we calculate gratuity, it is based on 26 days only. My doubt is, when calculating loss of pay (LOP) and net salary, which method should be followed, and is there any rule or act to refer to in this regard?

1. Earned Salary = Actual Gross / Number of total days in a month * Actual working days.
or
2. Earned Salary = Actual Gross / 26 * Actual Working Days.

Which is the correct method? I have been asked by the management that since we are paying for 26 days (gratuity), why can't we calculate for 26 days for payroll as well instead of 30/31 days...?

Please clarify.

Balaram
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Dear Sir/Madam,

This is in reference to the email where I need an experience letter format for finance background people. Kindly do the needful.

With kind regards,

Ramesh Khetawat
Pune
9764224294

Hi,

Basically, experience letters are the same for all fields, and there is no specialization for any specific field.

Dear Experts,

I have a doubt. Till now, in my experience, we have been considering 30/31/28 days as the basis for salary computation, whereas the actual wage should be for 26 days only, even when we calculate gratuity based on 26 days.

My doubt is, while calculating LOP and net salary, which method should be followed and is there any rule or act to refer to? Should we use:

1. Earned Salary = Actual Gross / No. of total days in a month * Actual working days
or
2. Earned Salary = Actual Gross / 26 * Actual Working Days

Which is the correct method? The management has asked why we can't calculate payroll for 26 days, similar to how we calculate gratuity, instead of using 30/31 days?

Please clarify.

Balaram

[IMG]https://www.citehr.com/misc.php?do=email_dev&email=cnZiczJAeWFob2 8uY29t[/IMG]

The salary deductions are always done on gross salary along with the allowances of Rs. 15,000 per month (30 days). When an employee is absent for 2 days, he will receive (15,000/30) * 28 = Rs. 14,000.00. If the calculation is done for 26 days, then (15,000/26) * 24 = Rs. 13,846.15.

So, which option do you think would benefit the employee more? All the acts are formulated to safeguard the interests of the employees and workers.

Dear friends,

Please excuse me if I appear too naive. We, three managers, are working in a private limited joint venture company owned by a single owner who is the Managing Director (MD) holding 60% share. We have worked for about 10 years with the hope and assurance that the multinational corporation (MNC) partner will one day reward us with good remuneration, which, so far, we are not fully satisfied with. There are 16 employees consisting of 3 in Accounts, 2 service engineers, 1 assistant manager, 2 engineers, support staff, etc. We, the three managers, bring in most of the business from different regions, totaling approximately 16 crore rupees.

There is no manufacturing involved, only the import and sales of engineering equipment. Each of us receives about Rs. 32,000/- lump sum per month (inclusive of medical claim premium, conveyance allowance of Rs. 2500, Rs. 1200 cellphone bill, 2 weeks leave, 12 casual leave, and approximately 10-15% sales incentive on salary). Above us is the MD who pays himself approximately Rs. 3.8 lakh per month as salary only, along with all other perks and, of course, profit and financial benefits of being the MD.

Could anyone advise if, by any standard, this is justified? He claims he is paying us among the best, but would any private company of this size pay its MD more than 10 times its next-level employees who are bringing in the business?

Regards,
PK

Hi Seniors,

Why isn't anyone answering Balaram's query? I am facing the same problem. Can anyone reply to this? What should one consider when calculating the number of days if there are 31 days in a month? Should it be taken as 26 days or the total number of days in the month?

Please reply.

RAHUL Mhatre
influxrahul@gmail.com

Hi to all,

Can anybody solve this salary calculation problem?

Example:
Basic = 3000.00
Number of Days = 31
Leave Taken = 2 days (Loss of Pay)
Present Days = 25 + 4 Week Holidays = 29 days

Please help me with the above salary calculation. How much do we have to pay the above employee?

It all depends upon the company policy. But as far as PF goes, we should not deduct full LOP in Basic & DA. You know why? Because we calculate PF from these two components only. If, suppose, it will be nil in such a case, how can we calculate it? So, deduct from gross only.

Dear All,

I have gone through all the posts minutely and find that there is ambiguity in the opinions. Rightly so, as every organization has its own way to calculate salary.

If all allowances are pro-rata, then IT IS ADVISABLE TO WORK STRAIGHT FROM THE GROSS PAY.

IF SOME ALLOWANCES ARE NOT PRO-RATA BUT FIXED ON A MONTHLY BASIS:

Some organizations may have their own peculiar salary plan. For example, if an employee is present even for a week, he gets FULL Meal Allowance for the month; or irrespective of the number of attendances, he gets FULL Medical Allowance; Or, to be eligible to get Transport allowance pro-rata, he must be present for at least 5 days in a month.

In such cases, for easy calculation, remove these components from the Gross Pay; work out the salary for days payable, and then ADD each payable component after calculating its quantum and APPLICABILITY separately.

Warm regards.