Overtime Pay Calculation — Basic vs Gross Salary, Explained With Formula
Payroll teams get this wrong more often than you'd think — and it's an expensive mistake either way. Here's the correct legal basis for calculating overtime.
Overtime is legally calculated on the "ordinary rate of wages" — in practice, Basic Wages plus Dearness Allowance and certain fixed cash allowances the worker is regularly entitled to — NOT on gross salary or CTC. It specifically excludes bonus and overtime wages themselves. Using gross salary as the OT base is a common payroll error that significantly inflates costs and has no statutory basis.
The Legal Basis — Section 59, Factories Act 1948
Where a worker works more than 9 hours in a day or 48 hours in a week, Section 59(1) entitles them to double their ordinary rate of wages for the overtime hours. Section 59(2) defines "ordinary rate of wages" as basic wages plus allowances the worker is entitled to — explicitly excluding bonus and overtime wages. Standard payroll practice treats this base as Basic + DA, since HRA, conveyance, and similar allowances are conventionally excluded.
State Shops & Establishment Acts Vary Slightly
Karnataka's Shops Act provides OT at double "normal wages" once 9 hrs/day or 48 hrs/week is crossed, capped at 10 hrs/day and 50 hrs/quarter. Maharashtra's 2017 Shops Act uses the Payment of Wages Act definition, capped at 125 hrs/quarter. The Supreme Court, in Philips India Ltd. v. Labour Court, Madras and Indian Oxygen Ltd. v. Their Workmen, clarified that the mandatory 2x rate triggers on crossing the STATUTORY ceiling (8-9 hrs/day, 48 hrs/week) — even if a company sets a lower contractual limit.
Worked Example
Basic + DA = ₹15,600/month; 26 working days; 8 hours/day.
Ordinary hourly rate = ₹15,600 ÷ (26 × 8) = ₹75/hour
For 10 hours OT in the month: OT pay = ₹75 × 2 × 10 = ₹1,500
By contrast, using gross salary of ₹30,000/month incorrectly as the base would nearly double the OT pay to about ₹2,885 — almost double the legally correct amount.
What Changes Under the Code on Wages, 2019
Section 14 mandates OT at not less than twice the "normal wage rate." Section 2(y)'s wage definition applies the 50% cap rule — Wages = Basic + DA + Retaining Allowance, and if excluded allowances exceed 50% of total remuneration, the excess is added back into the wage base. This means many low-Basic salary structures will effectively see a higher OT calculation base going forward.
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Overtime is legally calculated on the "ordinary rate of wages" — in practice, Basic Wages plus Dearness Allowance and certain fixed cash allowances the worker is regularly entitled to — NOT on gross salary or CTC. It specifically excludes bonus and overtime wages themselves. Using gross salary as the OT base is a common payroll error that significantly inflates costs and has no statutory basis.
The Legal Basis — Section 59, Factories Act 1948
Where a worker works more than 9 hours in a day or 48 hours in a week, Section 59(1) entitles them to double their ordinary rate of wages for the overtime hours. Section 59(2) defines "ordinary rate of wages" as basic wages plus allowances the worker is entitled to — explicitly excluding bonus and overtime wages. Standard payroll practice treats this base as Basic + DA, since HRA, conveyance, and similar allowances are conventionally excluded.
State Shops & Establishment Acts Vary Slightly
Karnataka's Shops Act provides OT at double "normal wages" once 9 hrs/day or 48 hrs/week is crossed, capped at 10 hrs/day and 50 hrs/quarter. Maharashtra's 2017 Shops Act uses the Payment of Wages Act definition, capped at 125 hrs/quarter. The Supreme Court, in Philips India Ltd. v. Labour Court, Madras and Indian Oxygen Ltd. v. Their Workmen, clarified that the mandatory 2x rate triggers on crossing the STATUTORY ceiling (8-9 hrs/day, 48 hrs/week) — even if a company sets a lower contractual limit.
Worked Example
Basic + DA = ₹15,600/month; 26 working days; 8 hours/day.
Ordinary hourly rate = ₹15,600 ÷ (26 × 8) = ₹75/hour
For 10 hours OT in the month: OT pay = ₹75 × 2 × 10 = ₹1,500
By contrast, using gross salary of ₹30,000/month incorrectly as the base would nearly double the OT pay to about ₹2,885 — almost double the legally correct amount.
What Changes Under the Code on Wages, 2019
Section 14 mandates OT at not less than twice the "normal wage rate." Section 2(y)'s wage definition applies the 50% cap rule — Wages = Basic + DA + Retaining Allowance, and if excluded allowances exceed 50% of total remuneration, the excess is added back into the wage base. This means many low-Basic salary structures will effectively see a higher OT calculation base going forward.
Need Expert Help?
Find verified Payroll and Compensation Structuring Consultants on BusinessBazar — businessbazar.in/services/hr-consultant/ahmedabad
Need Help with Overtime and Payroll Compliance?
This article is for general informational and educational purposes only. It does not constitute legal advice. Overtime rules vary by state Shops & Establishment Act. Always verify against your applicable state law and consult a qualified payroll consultant. BusinessBazar accepts no liability for any errors, omissions, or outcomes arising from the use of this information.
Need a verified Payroll Consultant? Find one at businessbazar.in/services/hr-consultant/ahmedabad
Need a verified Payroll Consultant? Find one at businessbazar.in/services/hr-consultant/ahmedabad