Calculation of loss of pay – Part I
The basis of calculation of loss of pay for employees is fairly well established, yet, we come across many instances of incorrect calculation of loss of pay in organizations. The mistakes we are talking about here are not calculation errors but those on account of organizations adopting an incorrect basis for calculation of loss of pay.
Let us look at a common mistake committed by payroll managers while calculating loss of pay on employee salary.
Loss of pay amount as a deduction in payroll
Some payroll managers view loss of pay as a deduction in payroll instead of a reduction in pay. For example, an employee receives a monthly Basic salary of Rs. 10,000 in April and is entitled to no other head of pay. The Provident Fund (PF) contribution is Rs. 1,200 per month (12% of Rs. 10,000). The company in which the employee works follows the calendar day basis for pay calculation. If the employee has no loss of pay in April, his salary statement will read as follows.
| Earning | ||
| Basic Salary | : | Rs. 10,000 |
| Deduction | ||
| Provident Fund | : | Rs. 1,200 |
| Net Pay | : | Rs. 8,800 |
If the employee has 15 days loss of pay for April, the company calculates the loss of pay to be Rs. 5,000 for April, shows this as a deduction, and calculates the net pay as follows.
| Earning | ||
| Basic Salary | : | Rs. 10,000 |
| Deduction | ||
| Provident Fund | : | Rs. 1,200 |
| Loss of Pay Deduction | : | Rs. 5,000 |
| Net Pay | : | Rs. 3,800 |
The above method is wrong since PF is calculated on “fixed” Basic instead of “earned” Basic for the month. Instead of presenting the loss of pay amount as a deduction, the company should reduce the pay to arrive at the net pay. For the above example, the net pay should be calculated as follows.
| Earning | ||
| Basic Salary | : | Rs. 5,000 |
| Deduction | ||
| Provident Fund | : | Rs. 600 |
| Net Pay | : | Rs. 4,400 |
In the above example, the company ends up paying a lower net salary — Rs. 3,800 instead of Rs. 4,400 for the month — on account of incorrect loss of pay calculation.
Specifying loss of pay as a deduction in payroll leads to incorrect income tax, PF, and Employee State Insurance (ESI) deduction calculation.
When loss of pay is stated as a deduction, the income tax, if the employee has taxable income, is calculated on full pay and hence the employee ends up paying income tax on salary he doesn’t receive. While for PF and ESI, both employer contribution and employee deduction are overstated.
Presenting loss of pay as a deduction (instead of reduction in pay) may look like a silly mistake. But you would be surprised to know that there are many companies that commit this silly mistake while processing payroll each month.
We will examine some more issues pertaining to loss of pay calculation in the next post.
TIBS Blog 
Is it possible for a organisation to to have two PF deduction policies?
– deduct 12% of Basic for some employees
– for rest of employees deduct 12% on Restricted basic
Yes.
it is serving the purpose. for eg. if leave postn. is 15-10-10 as on 01-01-01 and leave is dedctd. for 5 days (due to excess avail of leave-20) then it will be 15-10-10 and LOP of 5 days (cy) is made is it justifiable.
thanks.
I have a doubt whether to deduct loss working Hour , During one month she hv accumulate time loss for (73mins) do I need to deduct 1hr 13mins or only 1hr , from the Gross salary or from the basic pay? what is the correct way to do the calculation , please clarify , formula and advise. Thanks.
Your company’s business policy will determine how loss of pay should be calculated. If you are tracking time to the last minute, I would expect the loss of pay to be calculated for 73 minutes instead of 60 minutes. Loss of pay is typically calculated on all fixed heads of pay. Variable heads of pay such as performance incentive are left out for the calculation of loss of pay.
I dnt knw