Confused About Salary Calculations? How Does the 26th to 25th Month Work?

Understanding Company Attendance and Salary Calculations

Respected intelligentsia, please clarify this for me. I am presenting regarding staff attendance maintained by companies in recent times. Usually, a month is defined as 30 or 31 days for everyone, but in companies, there is a special formula. The current trend suggests that from the 26th of this month to the 25th of the next month is considered a month. How is this acceptable? Workers may miss government-declared holidays, leading to a lot of confusion when calculating the received salary for the month.

Challenges in Salary Calculation

Suppose a worker is paid on or before the 7th of the month for the last worked month, which is the correct calculation. However, if the payment period spans from the 25th to the 24th of the consecutive month, confusion arises about which month's salary the worker was paid for. Elders, HR professionals, and auditors, please clarify this for me.

Submitted.

Just assume that you are paying 4 days (27 to 30/31) salary advance to the employees. When they leave the job, they will receive the salary for the days they worked.

Dear Gannahope, it's common practice in many establishments to close attendance on any day in a calendar month, not necessarily on the 30th or 31st. What's important here is to account for the attendance of employees for a full month. This situation arises when verifying the attendance of all units and teams located in far-flung or remote areas, especially in project sites. There are practical difficulties in closing the attendance at the end of the month, such as on the 28th/29th, 30th, or 31st, and then reaching the data in time for the payroll processor located in the central office. This is crucial for the preparation of payrolls and arranging remittances to the employees' bank accounts to meet the stipulated 7th or 10th day of the calendar month.

To streamline this process, a solution is to consider a day like the 15th or 19th (or similar) as the start of the payroll cycle, which would end or close on the 14th or 18th, depending on the scenario. In this method, all leave taken, absences, official tours, and holiday data are recorded on the respective days. This approach ensures there are no missing links or errors leading to underpayments or overpayments. This method is expected to eliminate any hassles. I have firsthand experience with this approach from managing over 14,000 employees across 29 sites scattered throughout India, spanning from J&K/UP to Kerala. If you have any specific concerns, I am happy to provide clarification.

Dear Gannahope, "Month" is not defined anywhere as a calendar month, and therefore many establishments count the days for computing attendance for salary purposes beginning from any administratively set date, generally from the 25th, 26th, or 27th, etc. There is nothing wrong with this practice per se, but you are required to make the payment on the 7th or 10th day, as applicable, at the end of the wage period. The wage period cannot exceed one month. I need not remind you of these details since you hold the position of Dy. Commissioner of Labour.

However, having the wage period not aligned with the calendar month creates various issues. Individuals joining or leaving in the middle of the month cause many complications. It also poses problems when submitting the ECR under PF.

Proposed Solution

Therefore, I suggest the following:

1. Have a fixed cut-off date.
2. Presume full attendance after the fixed cut-off date.
3. You can set a different cut-off date for each month.
4. If an employee remains absent on loss of pay after the fixed cut-off date, that absence should be adjusted in the next month.
5. By following these steps, the wage period will align with the calendar month, eliminating all confusions.

I hope you will appreciate my proposed solution.

Dear Mr. Gannahope, this is in continuation of what Mr. Kumar has said about the interesting issue you raised.

Understanding Calendar Days in a Month

The days of a month generally differ according to the calendar to which it belongs. Of course, every calendar year invariably has 12 months only. However, the average number of days per month differs depending on whether the calendar is based on the Earth's movement around the Sun, i.e., Solar Year, or the Moon's movement, i.e., Lunar Year. Thus, in a regular Solar year, a month comprises 30.42 days (365/12), and in a leap year, 30.50 days (366/12). The Gregorian Calendar adopted by Great Britain and its colonies is based on the Moon, where the number of days in a month alternates between 30 and 29 days (365.2425/12 = 30.44 days). Therefore, for ease of calculation, a calendar month is generally taken to be 30 days. An example is the conversion of the monthly rate of statutory minimum wage to that of the daily rate and vice versa.

Wage Period and Payment Regulations

However, when we analyze the general practice followed in some industrial establishments within the statutory backdrop, I am not able to find any anomaly as you referred to. Both the Payment of Wages Act, 1936 (Sec.4(2)) and the Code on Wages, 2019 (Sec.16) prescribe the wage period not exceeding a month, though the term 'month' has not been defined. Besides, both laws prescribe the time limit for payment in case of a monthly wage period only as the 7th day of the succeeding month and not as the succeeding calendar month. Therefore, if the wage period is fixed as starting from the 25th day of the current calendar month to the 24th of the following calendar month, the wages should be disbursed on or before the 7th day from the 24th of the following calendar month. The month covering more days in the wage period/payroll cycle can be mentioned as the month.

Proposed Changes and Practical Considerations

When the Government of India is considering changing "the assessment year" under the Income Tax Act from the financial year to the calendar year for the sake of easy understanding of the taxpayers, the change you suggested is a welcome one. However, the practical difficulties pointed out by Mr. Kumar are also worthy of consideration.

Payroll Calculation Practices in Large Companies

Payroll calculation is done based on the leave period from the 26th of the last month to the 25th of the current month in big companies where the employee force is on the higher side. This practice is still followed in many reputable companies, as I am aware. While this practice may not be appreciated in companies where the employee force is 100/200 or below, it is a good practice for companies employing more than 500 or 1000 staff.

The reason for this method of calculation is to scrutinize and regularize the leave details of all employees by the Time Office department and advise the pay of all employees (by regulating their credit and debit of leaves) to Accounts by the 30th or 31st. They will have five days to complete this process. After receiving advice from the Time Office, the Accounts department processes the payslip and initiates the fund transfer to the bank for crediting to employees' accounts.

Thus, if any employee takes leave in the current month after the 25th, it will be considered for regularization/LOP in the next month's salary.

Yes, thanks to all for your kind contributions and opinions. I believe it is true for big companies with a larger employee following that the above is comfortable for them (management). However, I disagree as it is not useful for daily contract laborers and employees in the last cadre such as housekeeping and other small-scale positions.

The National Festival and Other Holidays Act of 1986

There is one act, the National Festival and Other Holidays Act of 1986. For instance, in January, the 13th, 14th, or 15th are festivals like Bhogi, Sankranthi, and Kanuma, and the 26th is Republic Day. Daily laborers miss out on these holidays. Additionally, whether the worker was given the NFOH holiday in a particular month cannot be confirmed by the worker. For example, if we ask him in January, he might not have received the NFOH holiday because it fell in February, according to the calculation that considers the period from the 25th to the 24th of the next month as a month. The calculation of enhanced Variable Dearness Allowance (VDA) is also confusing.

Therefore, the Central Government should consider and implement a universally recognized calendar month and year. Please consider this. 

Billing and Salary Date Patterns

I came across the issue of billing dates for clients or salary payments made by contractors on the 25th of each month, following a pattern from the 26th to the 25th of the next month. This is often requested by company CAs to ensure timely reconciliation and closure of monthly transactions, enabling them to manage returns on time as per IT department requirements.

However, it is not mandatory to follow such a pattern if accounting and finance procedures are prompt and punctual. Another aspect of following the 26/25 pattern is that during business operations, payment transactions may get delayed or, for accounting purposes, change from one party to another.

Having said this, I believe that if a system is adopted for the betterment of employees and smooth business operations, there is no harm in implementing it in good faith.

Hi Bijay, so far as I know, no auditor will interfere or insist on what your salary cycle should be. It has nothing to do with the filing of IT returns either. I have worked in payrolls, finance & accounts, audit, and HR for a very big CPSU, state & central government departments, about 4-5 private sector companies, and autonomous institutions during my 44 years of service, and nothing of that sort has happened.

The only legal stipulation is that every establishment should disburse salary to their employees on or before the 7th or 10th of every month for the previous month (once a month). To suit this date of disbursement, establishments can decide to follow the cycle convenient to them, considering the constraints. All that auditors should ensure is that the Profit and Loss account of the establishment has been debited with one full year of employees' salary, whether paid before 31st March or subsequently (as provision for accrued expenses). There is an accounting standard relating to this (AS 15 - Employees Benefits), which deals with all forms of employee benefits and stipulates the mandatory provisions to be followed to this effect.

The entire sequence is very simple and hassle-free if planned, and the flow of data is clear, adequate, and timely. There’s no need to stress upon good faith, etc.