A Ministry of Labour & Employment report found that over 68% of labour violations at registered establishments in India involve incorrect wage calculation - with overtime being one of the most frequently miscalculated components. The reasons are systemic: different laws for factories vs commercial establishments, state-specific variations, confusion about which salary components form the overtime base, and the rounding rules that most payroll systems do not correctly implement.
With the OSH Code 2020 now in effect (replacing 13 old labour laws including the Factories Act), overtime rules have been standardised across all establishments for the first time. The rate is 2× the ordinary wages. The trigger is any work beyond 8 hours per day or 48 hours per week. The quarterly cap is 125 hours. And the calculation base is the "ordinary rate of wages" - basic + DA - which has increased for most employees because of the 50% wage rule.
This guide covers the complete overtime framework under the new Labour Codes, the step-by-step calculation formula with worked examples, the rounding rules, who is eligible and who is excluded, the quarterly cap, employer record-keeping obligations, and the penalties for non-compliance.
What Is Overtime and Why Does It Matter?
Overtime is any work performed by an employee beyond the prescribed standard working hours. Under Indian labour law, standard working hours are 8 hours per day and 48 hours per week. Any work beyond this limit is overtime and must be compensated at 2× (double) the ordinary rate of wages.
The overtime obligation is absolute - the employer cannot avoid it by calling extra hours "voluntary" or by structuring compensation as a fixed monthly overtime allowance that does not reflect actual hours worked. Every hour of overtime must be tracked, calculated at the correct rate, and paid within the wage period.
Employers using payroll processing and management must configure their attendance and payroll systems to automatically flag overtime hours, calculate the correct rate, apply rounding rules, and generate compliant overtime registers - all of which are subject to inspection by the Inspector-cum-Facilitator under the OSH Code.
Key Terms You Should Know
- Ordinary Rate of Wages: The per-hour wage rate used for overtime calculation. Computed as (Basic + DA per month) ÷ (working days per month × hours per day). Excludes HRA, bonus, commission, overtime allowance itself, and other non-wage components.
- Spread-Over: The total time between the start and end of a work period, including intervals for rest or meals. Under the OSH Code, spread-over should not exceed 12 hours in a day. This means even if an employee works 8 hours, the total period from clock-in to clock-out cannot exceed 12 hours.
- 125-Hour Quarterly Cap: The proposed maximum overtime limit under the draft Central Rules - a worker cannot be asked to work more than 125 hours of overtime in any quarter (3-month period). This replaces the old Factories Act limit of 50 hours per quarter.
- Rounding Rules: Under the OSH Code, extra time between 15 and 30 minutes is rounded to 30 minutes. Extra time beyond 30 minutes is rounded to 1 full hour. Time less than 15 minutes is ignored. This standardises overtime computation across all establishments.
- Consent-Based Overtime: Under the new Codes, overtime work must be with the worker's consent. Forced overtime is not permissible. The employer must obtain the worker's agreement, particularly for extended shifts and night work.
Who Is Eligible for Overtime Pay?
Overtime pay is mandatory for all "workers" as defined under the OSH Code. However, certain categories of employees may be excluded depending on the establishment type and state rules.
- Factory workers - covered under the OSH Code (which replaces the Factories Act) for overtime at 2× wages
- Commercial establishment employees - covered under state Shops & Establishments Acts and now the OSH Code
- IT and ITES sector employees - covered under Shops & Establishments Acts; overtime applies for hours beyond 48/week
- Construction and plantation workers - covered under the OSH Code with specific overtime provisions
- Contract and fixed-term workers - entitled to overtime at the same rate as permanent workers
- Managerial and supervisory employees - may be excluded from overtime provisions in certain states; check state-specific Shops & Establishments Act exclusions
- Employees earning above a prescribed salary threshold - some state Acts exempt employees above certain salary levels (varies by state)
Employers managing payroll compliance services must correctly classify each employee as eligible or exempt for overtime based on their designation, salary level, and the applicable state law - misclassification creates significant underpayment liability.
Legal Framework: OSH Code 2020 and Overtime Provisions
| Provision | OSH Code 2020 / Code on Wages | Old Factories Act 1948 |
|---|---|---|
| Standard working hours | 8 hours/day, 48 hours/week | 9 hours/day, 48 hours/week |
| Spread-over limit | 12 hours including intervals | 10.5 hours (factories) |
| Overtime rate | 2× ordinary rate of wages | 2× ordinary rate of wages |
| Quarterly overtime cap | 125 hours per quarter (draft rules) | 50 hours per quarter (Factories Act) |
| Weekly overtime limit | Total hours should not exceed 60/week | Total hours should not exceed 60/week |
| Rounding rules | 15-30 min = 30 min; >30 min = 1 hour | Similar but state-specific variations |
| Applicability | All establishments (factories, shops, offices, construction, mines, plantations) | Only factories and manufacturing units |
| Overtime register | Mandatory - digital records accepted | Mandatory - physical register |
| Overtime payment timing | Within the wage period (by 7th of following month) | Within the wage period |
| Consent | Overtime requires worker consent | Not explicitly consent-based |
The MoLE FAQ dated 16 March 2026 confirmed that overtime allowance payment forms a part of the 50% wage calculation under Code on Wages Section 2(y). This means that overtime pay received by the employee is included when testing whether excluded components exceed 50% of total remuneration - a detail many employers overlook.
How to Calculate Overtime Pay: Step-by-Step
1. Determine the ordinary rate of wages per hour.Ordinary rate = (Monthly Basic + DA) ÷ (working days per month × hours per day). For most employees: (Basic + DA) ÷ (26 × 8) = hourly rate. Under the 50% wage rule, basic + DA must be at least 50% of total remuneration - so the overtime base has increased for most employees. Employers using tax planning services can help ensure the overtime calculation base is correctly set under the new wage definition - using the wrong base (gross instead of basic + DA) is the most common overtime calculation error.
2. Identify the overtime hours. Track actual hours worked beyond 8 hours per day or 48 hours per week. Use biometric attendance or digital time-tracking systems. Apply the rounding rules: extra time of 15-30 minutes = 30 minutes; extra time above 30 minutes = 1 full hour; extra time below 15 minutes = ignored.
3. Calculate overtime pay. Overtime pay = Overtime hours × Ordinary hourly rate × 2. Example: Basic + DA = Rs 30,000/month. Hourly rate = Rs 30,000 ÷ (26 × 8) = Rs 144.23. Employee works 10 extra hours in the month. Overtime pay = 10 × Rs 144.23 × 2 = Rs 2,884.60.
4. Verify against the quarterly cap. Ensure total overtime does not exceed 125 hours per quarter. If approaching the cap, redistribute work or hire additional staff. Exceeding the cap is a compliance violation regardless of overtime payment.
5. Record in the overtime register and process payment. Maintain a detailed overtime register showing date, employee name, normal hours, overtime hours (with rounding applied), hourly rate, and overtime amount. Process overtime payment within the wage period - by the 7th of the following month. Include overtime as a separate line item in the payslip.
Records and Registers Required for Overtime Compliance
- Overtime register - mandatory under OSH Code; must record date, employee name, normal hours worked, overtime hours (with rounding), overtime rate, and amount paid
- Daily attendance register - showing actual clock-in and clock-out times for each worker
- Overtime authorisation records - written consent or approval before overtime is worked
- Wage payment records - showing overtime as a separate line item in the payslip
- Quarterly overtime summary - total overtime hours per employee per quarter to track against the 125-hour cap
- Medical fitness certificates - for workers on extended shifts or night work
- Night shift records (for women workers) - consent documentation, transport arrangement, and safety measures
- Inspection-ready digital records - stored for the prescribed retention period and accessible through SHRAM Suvidha Portal if required
Overtime Calculation: Worked Examples at Different Salary Levels
| Parameter | Employee A (Factory) | Employee B (IT/Office) | Employee C (Retail Shift) |
|---|---|---|---|
| Monthly Basic + DA | Rs 18,000 | Rs 40,000 | Rs 12,000 |
| Working days/month | 26 | 22 | 24 |
| Hours/day | 8 | 8 | 9 |
| Hourly rate | Rs 18,000 ÷ (26×8) = Rs 86.54 | Rs 40,000 ÷ (22×8) = Rs 227.27 | Rs 12,000 ÷ (24×9) = Rs 55.56 |
| Overtime hours in month | 15 hours | 8 hours | 12 hours |
| Overtime rate (2×) | Rs 86.54 × 2 = Rs 173.08/hr | Rs 227.27 × 2 = Rs 454.55/hr | Rs 55.56 × 2 = Rs 111.11/hr |
| Total overtime pay | 15 × Rs 173.08 = Rs 2,596 | 8 × Rs 454.55 = Rs 3,636 | 12 × Rs 111.11 = Rs 1,333 |
| Quarterly check (if same monthly pattern) | 45 hrs/quarter (within 125 cap) | 24 hrs/quarter (within 125 cap) | 36 hrs/quarter (within 125 cap) |
Note: Under the old salary structure (basic at 35% of CTC), Employee B's basic + DA might have been Rs 24,000 instead of Rs 40,000. The overtime hourly rate would have been Rs 136.36 × 2 = Rs 272.73 - significantly lower. The 50% wage rule has increased the overtime calculation base by approximately 67% for this employee, raising the monthly overtime cost from Rs 2,182 to Rs 3,636. Employers must budget for this increase.
Common Mistakes to Avoid in Overtime Compliance
Mistake 1: Calculating overtime on gross salary or CTC instead of basic + DA. The ordinary rate of wages for overtime is basic + DA only. HRA, special allowance, bonus, and other components are excluded. Many payroll systems default to gross salary for overtime - this overpays overtime and creates PF/ESI complications. Conversely, using an artificially low base underpays overtime and triggers inspection liability.
Mistake 2: Paying a fixed "overtime allowance" instead of actual overtime. A fixed monthly overtime allowance (e.g., Rs 2,000 for all employees regardless of hours worked) is not compliant. Overtime must be calculated based on actual hours worked at 2× the ordinary rate. A fixed allowance may underpay some employees and overpay others - both create compliance risk.
Mistake 3: Not applying the rounding rules correctly. Under the OSH Code: 15-30 minutes extra = round to 30 minutes of overtime; above 30 minutes = round to 1 full hour; below 15 minutes = ignored. Many employers either ignore rounding (underpaying) or round everything up to 1 hour (overpaying). Employers should ensure their ESIC registration and PF calculations are both affected if overtime is miscalculated - since overtime allowance is included in the 50% wage test per MoLE FAQ.
Mistake 4: Not tracking overtime against the quarterly 125-hour cap. Even if overtime is paid correctly, exceeding the quarterly cap is a separate violation. An employee working 50 overtime hours per month (150 hours per quarter) exceeds the cap - regardless of payment. The employer must monitor cumulative overtime and redistribute work when approaching the limit.
Mistake 5: Excluding IT/services employees from overtime provisions. Under the OSH Code, overtime provisions apply to all establishments - not just factories. IT companies, BPOs, retail, and commercial offices are covered. The only exclusions are for managerial/supervisory employees as defined under the applicable state Shops & Establishments Act.
Penalties for Overtime Non-Compliance
Overtime violations carry penalties under both the OSH Code and the Code on Wages.
Under the OSH Code 2020, failure to comply with working hour and overtime provisions attracts a fine up to Rs 2,00,000 for the first offence. For repeat offences, the penalty escalates to Rs 5,00,000 and/or imprisonment up to 6 months.
Under the Code on Wages Section 54, non-payment or underpayment of overtime wages is treated as a wage violation - fine up to Rs 50,000 for the first offence, Rs 1,00,000 plus imprisonment up to 3 months for repeat offences. Additionally, Section 45 allows compensation up to 10× the underpaid amount to the employee.
The compound effect is significant: a factory with 100 workers, each working 10 hours of unreported overtime per month at Rs 150/hour ordinary rate, faces an underpayment of Rs 3,00,000 per month. At 10× compensation, the exposure is Rs 30 lakh per month - plus fines, plus back-payment.
How Overtime Connects with Other Provisions
Overtime is calculated on the "ordinary rate of wages" which is derived from the same wage definition under Section 2(y) of the Code on Wages. Employers maintaining PF registration should note that overtime wages are excluded from PF calculation - PF is computed on basic + DA only, not on overtime pay. However, overtime allowance is included in the 50% wage test (total remuneration denominator) per MoLE FAQ 16.03.2026.
For ESI calculation, overtime wages are included in gross salary if the employee's total earnings (including overtime) are below the Rs 21,000/month ESI threshold. This means that a borderline employee earning Rs 20,000 regular salary could become ESI-eligible when overtime is added.
From an income tax perspective, overtime pay is fully taxable as salary income. There is no exemption or special treatment for overtime - it is included in the employee's gross salary for TDS computation. Employers must include overtime in the projected annual income for TDS calculation under Section 192.
Old Law vs New Code: Overtime Rules Comparison
| Feature | Old Laws (Factories Act + S&E Acts) | New Labour Codes (OSH Code + Code on Wages) |
|---|---|---|
| Standard working hours | 9 hrs/day (Factories); 8-9 hrs (S&E) | 8 hrs/day standard; 48 hrs/week |
| Overtime rate | 2× ordinary rate | 2× ordinary rate (unchanged) |
| Quarterly cap | 50 hours (Factories Act) | 125 hours (proposed draft rules) |
| Applicability | Factories only for Section 59; state S&E for others | All establishments - universal coverage under OSH Code |
| Rounding rules | State-specific variations | Standardised: 15-30 min = 30 min; >30 min = 1 hour |
| Overtime calculation base | Basic + DA (varied definitions) | Basic + DA under uniform wage definition (Section 2(y), 50% rule) |
| Consent | Not explicitly required | Overtime requires worker consent |
| Night shift for women | Prohibited in most old laws | Permitted with consent and prescribed safeguards |
| Digital records | Not mandated | Accepted; SHRAM Suvidha Portal integration |
| Penalties | Rs 500-10,000 range | Rs 50,000-5,00,000 range; 10× compensation |
Key Takeaways
Under the OSH Code 2020 and Code on Wages 2019, overtime pay is mandatory at 2× the ordinary rate of wages for any work beyond 8 hours per day or 48 hours per week - applicable to all establishments including IT, services, retail, and commercial offices, not just factories.
The overtime calculation base is the ordinary rate of wages (basic + DA per hour), which has increased for most employees due to the 50% wage rule under the Code on Wages. Employers must recalculate overtime rates on the restructured basic + DA to avoid underpayment.
The OSH Code introduces standardised rounding rules (15-30 minutes = 30 minutes; above 30 minutes = 1 hour) and a proposed quarterly cap of 125 hours (up from 50 hours under the old Factories Act), with overtime requiring the worker's consent.
MoLE FAQ dated 16 March 2026 confirmed that overtime allowance payment is included in the 50% wage calculation under Section 2(y). This means overtime earnings are counted in the total remuneration denominator when testing whether excluded components exceed 50%.
Penalties for overtime violations have been increased dramatically - up to Rs 5,00,000 fine under the OSH Code, Rs 1,00,000 plus imprisonment under the Code on Wages for repeat offences, and up to 10× compensation to underpaid workers. Maintaining accurate overtime registers, applying correct rounding rules, and tracking hours against the quarterly cap are essential compliance requirements.
Need Help with Overtime Compliance?
Configuring payroll for correct overtime calculation - with the new wage base, rounding rules, quarterly cap tracking, and compliant register maintenance - requires integrated attendance and payroll systems that automatically compute overtime as per the OSH Code.
Explore our payroll processing and management services for end-to-end overtime compliance - from attendance tracking and overtime calculation to register maintenance, quarterly cap monitoring, and compliant payslip generation.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
