Overtime Pay calculation is one of the most typical and complex calculation, and most of the HR managers struggles with that. And when the overtime pays calculated wrong, a HR manager caught with multiple quires and issues.
In this article I will explain which law applies to which employee, which salary components go into the base rate, and what the quarterly cap actually means. So, let’s check this out.
Which Overtime Pay Law Applies to Your Employees?
This is the question most HR managers skip. And it’s the most important one. India doesn’t have a single national overtime law. Two different frameworks apply depending on the nature of your establishment.
Factories Act, 1948 covers manufacturing units — any registered factory with power and 10+ workers, or without power and 20+ workers. Under Section 59, overtime kicks in when a worker works beyond 9 hours in a day or 48 hours in a week. The rate is double — 2× the ordinary rate of wages. No exceptions, no discretion.
Shops and Commercial Establishments Acts cover offices, retail stores, IT companies, restaurants, hospitals, and service businesses. These are state-specific laws. Most states prescribe 1.5× to 2× for overtime. The trigger is typically 8-9 hours per day or 48 hours per week — depending on the state.
So your factory floor workers and your office admin staff may be under completely different overtime regimes — even though they sit in the same compound.
The New Overtime Pay Rule
Before I get to the formula, this ruling matters and most companies still haven’t caught up with it.
On January 19, 2026, the Supreme Court of India ruled that the “ordinary rate of wages” under Section 59 of the Factories Act includes basic wages plus all allowances — not just basic and DA. The only exclusions are bonus and overtime wages themselves.
What does this mean in practice? If your payroll was calculating overtime on basic + DA alone — which is what most companies have been doing for years — you are now potentially underpaying overtime to factory workers. The ruling is binding across all factories covered by the Act. For office and commercial establishment employees, the position varies by state — but this ruling has triggered a broader conversation about what should form the overtime base.
Overtime Pay Calculation Formula
For Factory Workers (Factories Act — 2×)
Overtime Pay = (Monthly Basic + DA + Allowances) ÷ 26 ÷ 8 × 2 × Overtime Hours
For Office/Commercial Employees (Shops Act — typically 1.5×)
Overtime Pay = (Monthly Basic + DA) ÷ 26 ÷ 8 × 1.5 × Overtime Hours
The divisors — 26 for days and 8 for hours — convert the monthly salary into an hourly rate. Some companies use 30 days or actual working days. Whatever your policy, keep it consistent.
Examples of Overtime Pay Calculation
Example 1 — Factory Worker
Suresh works in a manufacturing unit in Pune. His monthly salary:
- Basic: ₹18,000
- DA: ₹2,000
- Conveyance: ₹1,600
- Special Allowance: ₹3,000
Post the January 2026 SC ruling, overtime base includes Basic + DA + Allowances = ₹24,600
He worked 12 hours of overtime this month.
Hourly rate = ₹24,600 ÷ 26 ÷ 8 = ₹118.27 Overtime Pay = ₹118.27 × 2 × 12 = ₹2,838
If your payroll was calculating on Basic + DA only (₹20,000), the overtime would have come to ₹2,307 — a difference of ₹531 per employee per month. Across a factory floor of 50 workers, that’s ₹26,550 per month in potential underpayment exposure.
Example 2 — Office Employee (Maharashtra)
Priya works in a commercial office in Mumbai. Her Basic + DA = ₹25,000. She worked 8 hours of overtime this month under the Maharashtra Shops Act (1.5×).
Hourly rate = ₹25,000 ÷ 26 ÷ 8 = ₹120.19 Overtime Pay = ₹120.19 × 1.5 × 8 = ₹1,442
Can Comp-Off Replace Overtime Pay?
This is a very common question — and the honest answer is: it depends on the law that applies.
Under the Factories Act, overtime must be paid in cash. Comp-off cannot legally replace the statutory overtime payment. You can give comp-off in addition to overtime wages, but not instead of them. Under most state Shops Acts, comp-off is generally allowed as an alternative to overtime payment — but only if it’s agreed upon with the employee and properly documented. A verbal agreement is not enough.
I’d always recommend paying overtime in cash and documenting it clearly. Comp-off creates ambiguity — especially when an employee leaves and claims unpaid overtime as part of their Full and Final Settlement.
Is Overtime Pay Taxable?
Yes — fully. Tax-wise, overtime is just salary. It gets added to the employee’s gross for that month, shows up in Form 130 at year end, and TDS gets deducted at whatever slab rate applies to them. No special treatment, no exemption — just regular income tax.
How Runtime HRMS Handles Overtime Pay Calculation
Tracking overtime manually — cross-checking attendance registers, calculating hourly rates, applying the right multiplier for each employee category, staying within the quarterly cap — is where errors happen.
But with Runtime HRMS, attendance data feeds directly into payroll. Shift data comes in, overtime hours get picked up automatically, the right multiplier applies based on whether the employee falls under the Factories Act or a Shops Act, and when someone is getting close to their quarterly cap — the system flags it before it becomes a problem. No manual cross-checking, no formula errors, no compliance surprises.
Quick Summary
- Factory workers — overtime at 2× for hours beyond 9/day or 48/week under Factories Act
- Office/commercial employees — typically 1.5× to 2× under state Shops Acts
- January 2026 SC ruling — overtime base for factory workers now includes all allowances, not just basic+DA
- Quarterly cap — 50 hours under Factories Act (higher with state permission)
- Comp-off cannot replace overtime under Factories Act — cash payment is mandatory
- Overtime is fully taxable as salary income
For more information check with: Ministry of Labour
Frequently Asked Questions
Is overtime mandatory to pay in India?
Yes, and it is legal right of an employee. Once an employee works beyond the statutory daily or weekly hours, overtime payment becomes a legal obligation.
What is the overtime rate for office employees in India?
It depends on the state. Most state Shops and Commercial Establishments Acts prescribe 1.5× to 2× the ordinary rate for hours beyond the daily or weekly limit.
Is there a limit on how many overtime hours an employee can work?
Under the Factories Act, the quarterly limit is 50 hours — extendable to 75 hours or higher with state government permission.
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