Payroll processing in India is a critical function that goes beyond issuing salary slips. It involves calculating earnings, deducting taxes, handling benefits, and ensuring compliance with a range of labor laws and tax regulations. Done right, it strengthens employee trust and protects the organisation from legal penalties. But if mismanaged, it can lead to errors, delays, and compliance risks.
Here's a simplified guide for Indian businesses to streamline payroll processing and stay accurate and compliant.
Step 1: Capture Employee Information
The payroll process begins with accurate employee data collection, including:
PAN and Aadhaar numbers
Bank details
Designation and salary structure
Tax declarations and investment proofs
Attendance and leave records
Storing this information in an HRMS (Human Resource Management System) or cloud-based payroll software improves data accessibility and security.
Step 2: Define Salary Structure
Break down each employee’s compensation into:
Basic Salary
House Rent Allowance (HRA)
Dearness Allowance (DA)
Conveyance and Special Allowance
Bonuses or Variable Pay
Ensure the structure is tax-optimised and aligns with statutory requirements like minimum wages and equal pay regulations.
Step 3: Track Attendance and Leave
Employee attendance, holidays, and approved leaves directly impact monthly salaries. Integrate a biometric or app-based attendance system with payroll to automate Leave Without Pay (LWP) deductions and overtime calculations.
Step 4: Calculate Payroll
This step includes:
Gross salary calculation
Deduction of PF, ESI, professional tax, and income tax (TDS)
Reimbursement processing
Calculation of bonuses or incentives
Automated payroll tools can minimise human errors and ensure consistent calculations.
Step 5: Deduct Statutory Contributions
Statutory deductions in India include:
Provident Fund (PF): 12% from employee and employer
Employee State Insurance (ESI): For applicable salaries
Professional Tax: As per state law
TDS: Based on employee’s investment declarations and applicable tax slab
Stay updated with the latest rates and thresholds to remain compliant.
Step 6: Generate Payslips and Reports
After finalizing the payroll, generate salary slips and share them with employees through email or HR portals. Also prepare reports for:
Finance reconciliation
Audit records
Tax filings
Step 7: Pay Salaries and File Returns
Transfer salaries on time, typically by the end of the month or on a fixed payday. File TDS returns (Form 24Q), PF returns (Form 12A, 5, 10), and ESI returns as per schedule. Late filings attract penalties and damage reputation.
