## Basis of pay calculation – Part I

When an employee works for a part of a month – in their first or last month of employment — on what basis should their pay for that month be calculated? Should the pay be calculated on the basis of the total number of calendar days in the month, or should it be on the basis of a fixed number of days such as 26 or 30? As a payroll service provider, we receive this question quite often from organizations.

Organizations in India follow a variety of methods for pay calculation.

**1. Calendar day basis**

The monthly pay is calculated as total number of pay days multiplied by pay per day. In a calendar month, the per day pay is calculated as the total compensation for the month divided by the total number of calendar days.

For example, if the total monthly compensation of an employee is Rs 30,000, and if the employee joins the organization on June 21, they would be paid Rs 10,000 for the 10 days in June. Since June is a 30 day month, the per day pay is calculated as Rs 30,000/30 = Rs 1,000.

In the calendar day method, an employee — depending on whether they join or leave the organization in a 30 day or a 31 day month — will receive different pay amounts for the same number of pay days. In the above example, if the same employee joins the organization on July 22 (instead of June 21), even though they work for 10 days in July, they would receive only Rs 9,677 (after rounding off) in July. Since July is a 31 day month, the per day pay is calculated as Rs 30,000/31 = Rs 967.74.

**2. ****Calendar days adjusted for Sundays**

The monthly pay is calculated as total number of pay days multiplied by pay per day. In this method, pay per day is calculated as the total compensation for the month divided by the total number of calendar days minus Sundays.

Let us assume that an employee joins work in June which happens to have 4 Sundays. If the employee’s total monthly compensation is Rs 26,000, and if the employee joins on June 21, they would be paid Rs 10,000 for the 10 days in June. Since June has 26 pay days (30 minus 4 Sundays), the per day pay is calculated as Rs 26,000/26 = Rs 1,000.

Some organizations add public holidays to the total number of Sundays in order to arrive at the total pay days for the month.

In this method, the total number of pay days each month varies from one month to another depending on the number of calendar days, Sundays, and other holidays.

**3. ****Fixed number of days, such as 26 or 30**

The monthly pay is calculated as total number of pay days multiplied by pay per day. In this method, pay per day is calculated as the total compensation for the month divided by 26 or 30, as specified by the organization.

If an organization uses 26 as the fixed number of pay days each month, an employee who joins on June 21 and whose total monthly compensation is Rs 26,000, will get paid Rs 10,000 for the 10 days in June; the per day pay is calculated as Rs 26,000/26 = Rs 1,000.

In the fixed days method, an employee whether they join or leave the organization in a 30 day or a 31 day month, will get the same pay amount for the same number of pay days. In the above example, if the same employee joins the organization on July 22 (instead of June 21), he would be paid the same amount of Rs 10,000 (for 10 pay days) since both July and June are 26 day months from a payroll perspective.

Of course, the discussion on the method of pay calculation is relevant only for employees who have to be paid for less than a month – due to loss of pay or in their first or last month of service. For employees who have to be paid full salary for the month, the method of pay calculation is of no consequence.

**Which is the best method?**

Given the many methods of pay calculation that are being followed, is there is a particular method which stands out as the best?

From a statutory standpoint, labor laws in India do not seem to mandate the method which should be used by organizations; this is evident from the different methods that are in vogue. However, from the standpoint of logic, we recommend the use of calendar day logic or its variant, instead of the fixed day logic. The use of a fixed number of days such as 26 or 30 each month leads to inconsistencies in pay calculation and organizations should consider not using the method.

We will present our views on why the fixed day logic should not be used for pay calculation, in the next post.

Folks@Tibbs – Trust all’s great. Look forward to the literature.

Best,

Baidik.

Good beginning, keep them coming.

You guys should try to elaborate on “Flexipay” many Cos are adopting now.

Thanks/Tram

Thanks for the suggestion. A post on flexipay would be quite timely. We will try to create one.

Good one quite informative !!! Looking for more over the period !!!

There seems to be some discrepancy in method 3.

Although, per day pay is calculated keeping in mind the fixed working days.

On the other hand , when an employee has joined in June 21 and worked till June 30th , 1 or 2 sundays might have fallen in between.

So, on hand employee’s per day pay is being calculated on basis of fixed working day but he is being paid for calendar days

Many organizations follow method 3, and when doing so they simply ignore holidays such as Sunday. Whether this is logical or not is debatable. We are just describing a practice which is in vogue.