Payroll Processing in India

The Payroll system forms the backbone of any given organization. Payroll refers to a relationship between an employee and the organization compensating in terms of wages, salaries, bonuses, and other benefits provided to the employees.

It is a record of all transactions that take place in payouts regarding employees. Payroll processing is a formal process of arriving at the net pay of an employee, considering his salary structure, allowances, taxes, and other deductions.

This can be quite intricate, considering that there exist many regulatory requirements in India, such as income tax, provident fund contribution, employee state insurance, and professional tax. A well-organized payroll system contributes to adherence to the law, timely payment, and in general, employees’ satisfaction.

What is the Payroll?

Payroll refers to the number of staff working in an organization who are qualified for the payment. It also means the total amount an individual employee deserves to receive as remuneration for hours worked or the completion of tasks assigned.

In short, Payroll can also refer to a company’s records about all financial payables to its employees, including wages, salaries, bonuses, and other incentives in monetary form.

What is Payroll Processing?

Payroll processing is a process by which the total pay for every employee is calculated. The payroll process mainly consists of seven to eight steps that include setting up the salary structure, collecting information about employees, deducing allowances, calculating other adjustments like taxes, and more. After considering all the policies of the company, the total salary is computed. At the end, the payroll cycle also includes activities related to the disbursement of salary, filing, reporting, and issuance of payslips to employees.

In other words, payroll is the amount an employer pays to an employee in total. Apart from that, payroll processing is the methodology to correctly calculate an employee’s net pay in adherence to the statutory requirements and rules of an organization.

How to Calculate Payroll in India?

The most important payroll calculation process for any organization is how much money employees draw during their offering of a service in a company during a particular period as salary, wage, bonus, and other benefits. Thus, the calculation may be quite complicated and complex in India because the tax and regulatory requirements vary within different parts of the country.

• Tax on Income: The income tax is paid by the employees on their earnings and allowances. Employers need to deduct TDS every month from their salaries and deposit it with the government.
• Provident Fund: Employers must pay into an employee’s provident fund, EPF, a contributory retirement benefit plan. Normally, it contributes at the rate of 12% of the basic salary of the employee, and that is equally contributed by the employer.
• ESI (Employee State Insurance): ESI refers to the social security scheme provided for the staff in respect of medical and financial benefits. Every company with more than 10 employees has to register under the ESI Act and make a payment of 4.75 percent of the salary of the employee, whereas the employee themselves pay 1.75 percent.
• Professional Tax: Many Indian states charge a professional tax from their employees, which is deducted from the employee’s salary. The rate varies for different states.
• Leave Encashment: There is an option for employees to encash their unused leave at the end of the year, whose amount depends upon the salary and days of leave.

Key Components of Salary Structure in India

The main components of a salary structure are given below:

• Cost to Company (CTC)
• Net Salary
• Gross Salary
• Prerequisites
• Allowances
• Deductions
• Form16
• Payslip
• Reimbursement
• Ad hoc components
• Bonus/Incentives/Onetime payment
• Signatory and Bank Detail
• Company Details (like TAN, PAN, PT, PF, ESI, LWF)
• Previous Salary Details
• Employee Financial Details
• Declarations of Investments
• CTC/Gross Annual for all employees

Elements Involved in Payroll Computation in India

Payroll computation for staff in India is as follows:

• Computation of Gross Salary: Gross salary includes the basic pay for the employee, allowances, and other benefits like bonuses.
• Provident Fund to be Deducted: The gross is deducted by the employer’s EPF contribution.
• Taxable Income: This is the gross salary minus any deduction under EPF and other deductions like professional tax.
• Deduction of Income Tax: The employer deducts TDS from the salary of his employee according to his tax slab.
• Deduction of ESI Contribution: The employer deducts the ESI contribution of the employee from the salary received by him.
• Calculation of Net Salary: The net salary is what an employee actually receives after deducting everything.

Salary Formula:

Net Salary = Gross Salary- Gross Deductions

Where:

Gross Salary = Basic Salary + HRA + All Allowances + Reimbursements + Bonus + Arrears

Gross Deductions = Professional Tax + Provident Fund + Leave Adjustments+ Insurance Income Tax + Loan Repayments (if any)

How to Process Payroll in India

Processing payroll involves adherence to the many state law requirements, in addition to the federal FLSA. The FLSA itself has certain requirements that must be adhered to. Employers must count the hours of employees working and maintain the proper records. To get started, choose a payroll system in one of the following ways that best fits your business:

• Select a Payroll System: The choices are manual payroll (handled manually or on a spreadsheet); outsourced payroll (in which you hand over the process to a third party); or payroll software. Your decision should be directed towards the growth of business, employee benefits, and state payroll laws.
• Payroll Policy: Either do payroll in-house or outsource but have a policy in place. This would include establishing pay dates, and methods of payment, such as direct deposit or checks, deductions, and benefits. Research local, state, and federal labor laws to avoid violations; for example, failure to pay overtime.
• Employee Information: Onboard all employee personal and tax filing information on forms such as the W-4. If offering benefits, such as health insurance or retirement savings, collect paperwork for additional deductions. If offering direct deposit, collect employee consent and banking information.
• Set Up Direct Deposit: If your business is using a bank or payroll service, arrange direct deposits for employees. Employees will need to provide a bank name, account type, account number, and routing number, which you’ll then enter into your payroll system.
• Implement a System for Tracking Time: Designate a time-tracking system to track work hours, especially for those employees that are classified as non-exempt under the FLSA. This might be either physical tracking or using time-tracking automated software, with added conditions to involve training employees properly to use the system.
• Collect Employee Timesheets: Make sure the timesheets are accurate and prepared for processing. If you still use paper timesheets, you will have to go through them manually, feeding the data into your payroll records, or importing them from your digital timesheet software.
• Approve and Submit Payroll: Before any payments are processed, all timesheets are checked for accuracy. Approvals are crucial to confirm that everything is accurately keyed to avoid payroll errors.
• Report and Update Payroll Records: When payroll is processed, update your records for all withholdings and deductions. Maintain these records in conformance with laws like the Age Discrimination in Employment Act, which requires employers to maintain payroll records for three years, including records dealing with employee benefits.

These steps will enable the employer to stay within the legal boundary while guaranteeing timely payment and smooth working of his payroll system.

Payroll Filing Forms in India

Payroll processing in India uses different forms, including:

• Form 10C: For claiming benefits under the Employee Pension Scheme
• Form 12B: Statement for employees joining in the middle of the year.
• Form 12BA: Statement of perquisites and fringe benefits.
• Form 12BB: A declaration of investments for tax savings.
• Form 15G: ITR form for others, valid for one year.
• Form 15H: ITR form for senior citizens above 60 years, valid for one year.
• Form 16: Certificate for TDS from salary income
• Form 16A: Certificate for TDS for various transactions
• Form 16B: Certifies TDS on the sale of immovable property.
• Form 24G: For furnishing information regarding TDS processing
• Form 24Q: This form is used when filing returns for TDS on salary payments.
• Form 26AS: Annual tax credit statement
• Form 26QB: Return for TDS payment to be deposited to the government
• Form 27C: For availing tax exemption from TDS
• Form 27EQ: Quarterly certificate for TCS
• Form 49B: Application for TAN or deduction account number.
• Form 64A: Statement of Income for Venture Capital Companies

Conclusion

Payroll processing is very significant in organizations, as it is one of the most timely and proper ways of paying for wages, benefits, and taxes. It is governed by legal guidelines; thus, it is conducted with the help of payroll software.

Outsourcing or automating payroll processing is one of the best means of streamlining organizational processes, reducing errors, and freeing HR personnel to spend time on other important aspects. Payroll management forms the important foundation for employee satisfaction and financial stability and decides whether an organization’s longevity will be ensured.