Payroll Processing in India – A complete

step by step guideline

Payroll Processing in India is an overwhelming process as it constitutes enormous
financial elements like gross salary, net salary, bonuses, daily wages, leave,
compliances, and many more such elements which are part of each employees’ hire to
retire journey with an organization.

Employees are viewed as the most significant asset of an organization.

Thus, companies invest a generous amount of time and energy in recruiting, training
and setting up an adequate process for each employee.

One of the most significant chores in payroll exercise is the processing of the payroll.

In a way, employees rely on the company’s process to get paid without any type of
delays.

Irrespective of the size of the organization, whether small, medium, or large, payroll
plays a crucial role in HRM (Human Resource Management).

Table Of Contents

 1 What is ‘Payroll’?
 2 What is Payroll Processing?
o 2.1 How is Payroll calculated in India?
 3 Stages to process Payroll in India
o 3.1 STAGE – 1 / Pre-Payroll Activities
o 3.2 STAGE 2 / Actual Payroll Processing
o 3.3 STAGE 3 /Post Payroll Activities
o 3.4 Filing

What is ‘Payroll’?
‘Payroll’ as a term basically is the list of employees who are entitled to receive
compensation from an organization.
Along with the amount that each employee should receive for the time worked or tasks
performed, payroll refers to a company’s financial record of payments that are made to
the employees by the employer including wages, salaries, bonuses, incentives, etc. (as
per Wikipedia and other sources)

What is Payroll Processing?

Payroll Processing refers to the complete set of steps involved in calculating the total
remuneration of each employee.

The process typically involves three to four stages and tasks such as defining salary
structures, gathering employee data, components, deductions, allowances, and setting
up the necessary policies with respect to taxes and other adjustments, and then
calculating the total salary after adjusting all the company policies.

After the salaries are disbursed, filing, reporting and providing payslips to employees
also comes under the entire payroll processing cycle.

In simplest words, if payroll is the amount paid by the employer to employee, payroll
processing is the whole methodology to accurately calculate the net pay of the
employees as per statutory compliances and company policies.

How is Payroll calculated in India?

The formula,

Net Salary = Gross Salary – Gross Deductions 

here,

Gross Salary = Basic Salary + HRA + All types of Allowances + Reimbursements +

Arrears + Bonus 

Gross Deductions = Professional Tax + Public Provident Fund + Income Tax +

Insurance + Leave adjustments + Loan repayments (if any)
Recommended read: All you need to know about Salary Structure in India 

Important elements of Salary Structure in India:

 CTC
 Gross Salary
 Net Salary
 Allowances
 Prerequisites
 Deductions
 Payslip
 Form-16
 Reimbursements
 Bonus/Incentives/Expenses/One-time payments
 Ad hoc Components
 Company PAN, TAN, PF, ESI, PT, LWF (if applicable) details
 Signatory Details
 Company Bank Details
 Employee Financial Details
 Employee Investment Declarations
 Previous Salary Details
 Annual CTC / Gross of all the employees
Stages to process Payroll in India

A company’s payroll cycle consists of overall 3 stages

  Pre-payroll activities
 Payroll process
 Post-payroll activities

(Some of the professionals add a fourth stage by dividing the final one-Post Payroll
activities into two parts. However, the entire payroll stage is covered in this article)

Both HR and Payroll go hand in hand when it comes to the company’s payroll
operations.

As an entrepreneur, it’s very important to recognize the importance of payroll

processing.

The most important yet untouched element in payroll processing is the morale of an
employee.

If payroll is delayed due to any reason, employees tend to underperform which may end
up affecting the company’s revenue in the end.

Payroll should always be accurate and on time. Overall payroll processing includes 3
stages.

Let us take a look;

STAGE – 1 / Pre-Payroll Activities

Organizations of any industry cannot deny the fact that payroll is one of the most
consequential functions performed in daily business activities as it is related to
employee salaries as well as the company’s finance.

So as to run an accurate payroll, data inputs are assembled from multiple sources in the
company.

Payroll is a time consuming and tedious activity due to the various compliances to be
adhered to.
For the sake of a smooth payroll process, a sorted-out procedure must be set up to
guarantee an error-free payroll.

The first phase, in such a process flow, are the pre-payroll activities.
Below are the activities majorly taken care of, in pre-payroll activities:

 Understanding taxable, non-taxable and partially taxable components of the salary.

 Gathering payroll data
 Data requirements to run a payroll
 Data validation before proceeding further

Recommended read: What are pre-payroll activities? A detailed overview

Understanding taxable, non-taxable and partially taxable components of salary

While the basic compensation is completely taxable, there are different advantages
offered to the employees as allowances and prerequisites.

These recompenses are offered to employees for the costs they bear during work and
can be totally liberated from tax collection, or they can be taxed, either partially or
completely.

A salary slip consists of two categories – Earnings and Deductions, however, the
various terms listed under them can be confusing.

Moreover, these different components have different tax implications, adding further to
the havoc.

While some components are fully taxable, some are fully exempt, and few others are
partially taxable or tax-exempt based on certain conditions.

Periodically, companies also offer perks to their employees that may or may not have
tax liabilities.

Here, you will understand the tax implications of the common constituents of salary.

Recommended read:  Taxable, Non-Taxable and Partially Taxable elements of Salary

Gathering the Data to run Payroll

Gathering the data for processing payroll is a task in itself. The traditional pattern of
working towards data assembling is done by paper-based sheets or excel sheets.
Using excel sheets is time and energy-consuming. Recent evolution in technology has
led to the development of web-based systems.

These can be aimed at both managers and employees. There is no doubt that Excel is
a very useful tool to create charts, carry out complex calculations and present insights.

However, gathering data and processing payroll is a different venture. This is where an
automated cloud-based payroll software as a solution will eliminate the hassles and
ensure error-free payroll.

Understand where excel fails and software scores in payroll in the related blog.

Data requirements to run a payroll

 Leave and attendance data: To accurately process payroll, one of the most
important activities in pre-payroll is calculating the time that an employee has
invested in a given pay period. Attendance data is the key input for processing
payroll as almost all the other calculations are based on it. Any errors in this step will
invariably lead to wrong calculation of employees’ compensation, causing employee
dissatisfaction. For the HR departments too, it is a time-consuming activity. Along
with attendance, it is also important to track whether the employee is spending the
stipulated amount of time at work.

Recommended read: Data requirements to run Payroll in India | Gathering Leave and

attendance data.

 Payments and Deductions: One more set of most crucial data to be collected as

part of pre-payroll is the information regarding payments and deductions to be made
to employees. Payment and deductions data for the specified period helps determine
how much is to be paid as salary to a particular employee.

Recommended read: Gathering data to run Payroll in India | Understanding Payments

and Deductions

 Income tax information: According to section 192 of the Income Tax Act, the
employer is responsible for deducting income tax (tax deducted at source) while
paying salaries to employees. This deduction is based on the estimate of the income
that will be earned in the particular financial year and the applicable tax rates.
As most employees make investments to save tax, organizations ask their
employees to declare their investments at the start of the financial year. Based on
this declaration of tax-saving investments, the organization calculates the taxable
 income and the projected tax, which the employee is liable to pay for the financial
year. This tax is then deducted on a monthly basis as tax deducted at source. (TDS).

Recommended read: Gathering data to run Payroll in India | Understanding Income

Tax

Data validation before actual payroll process

Data validation is the most foremost step of pre-payroll, which can’t be avoided
regardless of any cost.

The collected data is checked for accuracy and correctness before further using it in the
actual payroll process.

It is important to confirm that the background work done so far as part of pre-payroll is
error-free to ensure that the subsequent activities of payroll run smoothly. Inaccurate
data can menace the entire payroll process.

Validation is a proactive step in the sense that it eliminates the risk of committing
mistakes in payroll and the consequences faced while rectifying them later.

Recommended read: Data Validation! Gaze before you leap | Pre-Payroll Activities

STAGE 2 / Actual Payroll Processing

This is where real work towards reaching the net compensation of employees happens,
in the way of finishing the pre-payroll activities.

This is the time when accumulated payroll data (Leave & Attendance data, shift wise
calculations, Tax and Deductions, Expenses, Incentives) during pre-payroll should run.

When you feed the validated data into the system, the outcome you will get will be the
net compensation after the adjustments of necessary taxes and deductions.

In this stage, you also verify the information to achieve accuracy.

Recommended read: Payroll Processing in India | The Actual Payroll Process

Statutory Compliances in India

Statutory compliance in HR refers to the lawful structure and regulations within which
organizations must operate while dealing with their employees.

Detailed knowledge of legal compliance and expertise is required to minimize the risk
associated with the non-compliance of statutory requirements.

Each nation has different sorts of compliance requirements.

There are a number of statutory requirements for Indian companies and they have to
spend a significant amount of time in their payroll management to ensure that they are
compliant with the legal regulations.

If companies fail to adhere to statutory compliances, they may need to confront heavy
penalties which are several times more than complying with legal guidelines.

The most common statutory compliances that companies have to follow for their payroll
management in India are:

 ESI fund and PF (Provident Funds)

 Professional Tax
 TDS (Tax Deduction at Source)
 Gratuity

While processing actual payroll, the following elements play a major role:

 Salary Components and Structures Configuration

 Statutory Compliances
 Finance settings; HRA, tax consideration for bonus given to employees, ,old/new tax
regime
 IT Declarations-globally
 IT Declarations-employee
 Loans facility
 Freezing the salary by finalizing the payroll

Actual Payroll Processing: the payroll process after gathering data and validating it
involves;

 Running the Payroll

  Leave attendance and LOP data Recommended read: What is Leave attendance
and LOP data in Indian Payroll Processing
 New joiners and Exits (Full and Final Settlement) Recommended read: Employee
Full and Final Settlement: All you need to know
 Salary revisions, Arrears and Bonus payments Recommended read: Employee
Salary Revision, Arrear Processing & Bonus Payments | A detailed run-through
 One Time Payments/Deductions, expenses, reimbursements Recommended read:
All about Employee One Time Payment, Deduction and Expenses | HR and Payroll
 Salary on hold Recommended read: Salary on hold; All you need to know
 Reimbursements Recommended read: Understanding Reimbursable components of
salary in Indian HR

Running Payroll; Software versus Excel

An Excel sheet is a fantastic tool when used for the right purpose.

However, many organizations face problems when they extend the use of excel sheets
far beyond their capacity, such as completing the entire payroll process. Payroll is not
just computing paychecks, and excel isn’t the best tool for the extensive process.

Recommended read: Running Payroll-Excel versus Software. Which is better?

STAGE 3 /Post Payroll Activities

Post-Payroll Activities in an organization include reporting, declarations, and statements

that each employer must produce for the relevant corresponding bodies. In the system,
this reporting consists of reports that generate issues and downloads. (As per relevant
sources)
Payroll Accounting: Payroll accounting involves a company’s recording of its
employees ‘compensation including:

 Gross wages, salaries, bonuses, commissions, and so on that have been earned by
its employees.
 Withholding of payroll taxes such as income taxes, ESI etc.
 Withholding for the employees’ expense of health insurance premiums, employees’
contributions to savings plans, garnishments of salaries and wages.
 Employer’s expense of fringe benefits such as health and dental insurance, paid
holidays, vacations and sick days, pension and savings plan contributions, worker
compensation insurance, etc.

Payout: Generally, organizations provide salary to employees with a salary bank

account. Once the payroll is completed, companies need to ensure that the bank
account has sufficient funds to make the salary payment. Then you need to send a
salary bank advice statement to the concerned branch. You can pay salary by cash,
cheque, or bank transfer.

Reporting: Once, you run the complete payroll process, manually or through any
system, your senior authorities as per your company culture, may ask you for the
reports such as department wise employee cost, location wise employee cost, etc. As a
payroll officer, it becomes your responsibility to dig into the data and extract the required
information and share the reports. These reports are automatically created by the
professional payroll software whereas; some organizations invest a lot of time in
creating those reports manually.

Post Payroll activities explained in brief:

 Review, generate and issue of Payslips, TDS Reports, Cash Reports.

 Accessing the Bank Statements and downloading them by choosing a financial year,
frequency, period and batch.
 Employee information like employee count, CTC, gross, and net pay, bonus and loss
of pay, commissions, processed date, processed by etc.
 PF, ESI, & PT challans, to be generated in ECR format and along with arrears.

Recommended read: All you need to know about Post-payroll Activities

Filing

Form 24Q: Form 24Q is used to file the return for tax deducted at source from salary
payments.

Form 12B: Form 12B is a statement to be provided by the employer to an employee if

he is joining in the middle of the year.

Form 12BB: Form 12BB is an investment declaration form in which employees would

mention all investments made by them for tax savings in a financial year.

Form 15H: Form 15H is for senior citizens, those who are 60 years or older to file ITR
valid for one financial year.

Form 15G: Form 15G is for everybody else to file ITR valid for one financial year.

Form 16: Form 16 is the certificate issued under section 203 of the Income-tax Act for
tax deducted at source (TDS) from income under the head ‘salary’.

Form 16A: Form 16A is the certificate of deduction of tax at source and issued on
deduction of tax by the employer on behalf of the employees. These certificates provide
details of TDS/TCS for various transactions between deductor and deducted.

Form 16B: Form 16B certifies that the tax has been deducted at source on the income
earned from the sale of immovable property (building or part of it) other than agricultural
land, and the TDS has been deposited by the property buyer with the Income Tax
Department.

Form 10C: Form 10C is filled and submitted when you want to claim benefit under the
Employee Pension Scheme (EPS)

Form 26QB: Form 26QB is a return cum challan for payment of TDS to the
government.
Form 26AS: Form 26AS (Tax Credit Statement) is the annual statement in which the
details of tax credit are maintained for each taxpayer as per the database of the
Income-tax department. Form 26AS will reflect the tax credit against the PAN of the
taxpayer.

Form 27C: Form 27C is a document that can help in getting tax exemption from the tax
deducted at the source. Both buyers and sellers can use this for all the goods specified
in the Income Tax Act.

Form 24G: When income tax is deducted at source (TDS) for a salaried individual or a
non-salaried individual or even a person who is not a resident of the country, is not
salaried but still has to pay tax, the Accounts Officers who process such need to use a
form to submit information about the deduction. Form 24G is used to submit such
information for processing.

Form 64A: Form 64A contains the statement of income paid or credited by Venture
Capital Company and credited by Venture Capital Fund to be furnished under section
115U of the Income Tax Act 1961.

Form 24Q: The employer has to file a salary TDS return in Form 24Q. 24Q is to be
submitted on a quarterly basis. Details of salary paid to the employees and TDS
deducted on such payment is to be reported in 24Q.

Form 12BA: Form 12BA is a detailed statement showing particulars of perquisites,

other fringe benefits, and profits in lieu of salary.

Form 27EQ: Form 27EQ is a quarterly certificate that contains details of the Tax
Collected at Source or TCS under Section 206C of the Income Tax Act, 1961.

Form 49B: Form 49B is an application form under section 203A of the Income Tax Act
1961 for the assignment of TAN number or TAN deduction and payment account
number.
All you need to know about Salary Structure in India

Salary structure in Indian payroll is a ceaseless process. Activities in Payroll

Management are never marked as done. Every month the same set of tasks come in
front of the screen and again the same obstacles are encountered. However,
organizations are now shifting to cloud-based payroll management software solutions
for perfect processing of every month’s payroll.

Salaries are paid by an employer to the employees in exchange for the services
delivered by them. The process of Payroll calculation can be hectic if not streamlined.
While the payroll processing varies from company to company and depends on their
work culture, the salary elements remain the same in India.

Terms like CTC, Net Pay, Gross Salary, Allowances, Prerequisites, Deductions, and
Payslips can be difficult and might create confusion for a person with less accounts
experience. In payroll processing, it’s important to understand salary structure and
elements associated with the same.

Recommended Read: Payroll processing in India- A complete step by step guideline

Table Of Contents

 1 What constitutes Salary in Indian Payroll Processing?

o 1.1 CTC
o 1.2 Gross Salary
o 1.3 Net Salary/Take Home Salary
o 1.4 Allowances
o 1.5 House Rent Allowance (HRA)
o 1.6 Medical
o 1.7 Leave Travel Allowance (LTA)
o 1.8 Conveyance
o 1.9 Children education allowances
o 1.10 Dearness Allowance (DA)
o 1.11 Prerequisites
o 1.12 Deductions
o 1.13 Provident Fund (PF)
o 1.14 Employees’ State Insurance Corporation (ESIC)
o 1.15 Professional Tax
o 1.16 Labour Welfare Fund
o 1.17 National Pension Scheme (NPS)
 o 1.18 Two basic types of salary structuring
 2 Other Elements of Salary:
o 2.1 Payslip/ Salary Slip
o 2.2 Form 16
o 2.3 Reimbursements
o 2.4 Bonus and Incentives
o 2.5 Ad hoc Components
o 2.6 Income Tax
o 2.7 Employee Investment declarations
o 2.8 Gratuity

What constitutes Salary in Indian Payroll

Processing?

CTC

CTC full form is the cost to the company, the total amount spent by the company on its
employees. It refers to the total salary package of an employee. CTC is inclusive of all
monthly components such as “Basic Salary” “ Allowances”
“ Perquisites” Mandatory or retirement contributions. CTC is never the take-home salary
of an employee.
  CTC=Gross Salary + Gratuity + PF

Gross Salary

Gross salary is the amount calculated by adding up one’s basic salary and allowances,
before deduction of taxes and other deductions. It includes bonuses, overtime pay,
holiday pay, and other differentials.

 Gross Salary = Basic Salary + HRA + Other Allowances

Net Salary/Take Home Salary

Take-home Salary or Net Salary is the amount calculated after deducting income tax at
source (TDS) and other deductions as per the company’s HR policies.

 Net Salary = Gross Salary – Professional Tax – Public Provident Fund – Income Tax

Allowances

These are the monetary benefits provided over and above the basic salary, which may
be partially or fully taxable or are completely exempt from tax. Common ones include;

House Rent Allowance (HRA)

A house rent allowance is that component of the salary which is paid to employees for
meeting the cost of renting a home. It offers tax benefits to the employees for the sum
that they pay towards their accommodation every year.

 40% of basic (non-metros)

 50% of basic (metros).

Medical

Medical allowance is a fixed allowance paid to the employees of an organization to

meet their medical expenditure.
Leave Travel Allowance (LTA)

Leave travel allowance is eligible for tax exemption. It is offered by employers to their
employees to cover the latter’s travel expenses when he or she is on leave from work.
The amount paid as leave travel allowance is exempt from tax under Section 10(5) of
Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the
mode of travel needs to be air, railway or public transport.

Conveyance

Conveyance allowance, also known as transport allowance, is a kind of allowance

offered by employers to their employees to compensate for their travel expenses to and
from their residence and workplace.

Children education allowances

Employees are given a certain amount to educate their children in India. Any sum spent
more than the provided limit of INR 100 per month per child for a maximum of two
children, is taxable.

Dearness Allowance (DA)

Dearness allowance is a certain percentage of the basic salary paid to employees,

aimed at mitigating the impact of inflation. It is paid by the government to employees of
the public sector and pensioners of the same.

Prerequisites

Perquisites refers to fringe benefits. Mostly non-monetary benefits provided on the basis
of an employee’s official position in the organization. They include companies providing
car, phone, Internet services etc. They are non-cash benefits.
Deductions

In Indian Payroll Processing, deductions, when applied to the CTC give you the actual
take-home salary that an employee gets. Here are some of the most common
deductions:

Provident Fund (PF)

Employee Provident Fund is an employee benefits scheme where investments are

made by both the employer and the employee each month.

 How is it calculated? – Both employee and employer contribute 12% of Basic Salary
+ DA + Special
 To whom does it apply to? – Organizations with a strength of 20 employees or more.
It is compulsory for employees whose Basic, DA and Special allowances amount to
less than ₹15,000 per month

Employees’ State Insurance Corporation (ESIC)

As per the ESI Act, 1948 in Indian Payroll Processing, if a company has 10 or more
employees (20 in case of Maharashtra and Chandigarh) whose gross salary is below
Rs. 21,000 per month, then the employer is required to avail ESIC scheme for such
employees.

How is it calculated?

 Employer’s contribution; 4.0% of gross salary

 Employees’ contribution; 1.0% of gross salary

Whom does it apply to?

 The firm should have at least 20 employees whose gross salary does not exceed
Rs.21, 000 p.m. It is applicable to all such employees.
Professional Tax

Professional tax is a tax levied on the income earned by salaried employees and
professionals, including chartered accountants, doctors and lawyers, etc. by the state
government. Different states have varying methods of calculating professional tax.

How is it calculated?

 Varies from one state to another

Labour Welfare Fund

Labour welfare fund is a statutory contribution managed by individual state authorities.

The state labour welfare board determines the amount and frequency of the
contribution. The contribution and periodicity of remittance differs with every state.
Labour welfare is an aid in the form of money or necessities for those in need.

National Pension Scheme (NPS)

National Pension Scheme or NPS scheme is an initiative of the government of India. It

is a contribution-based pension scheme that allows a person to create a retirement
corpus. Men and women can use it as a saving-investment or post-retirement tool.

How is it calculated?

 Employer’s contribution – Max. of 10% of basic salary

 Employee contribution – a minimum of INR 6000 up to INR 50,000 pa

Two basic types of salary structuring

The two basic types of structuring salary involve how we want to break up and define
CTC. There are two ways to this:

Top-down

In this type, you define the amount for different salary components and add up the total
as gross. For example Basic – 5000, DA – 5000 = Gross – 10000.
Bottom-up

In this type, you define the total gross and then divide the amount between different
components. For example, Gross = 10000; Basic is 40% of gross, DA is 60% of gross.
(as per the sources)

Other Elements of Salary:

Payslip/ Salary Slip

A salary slip is a document issued by an employer to an employee. It contains a

detailed description of the employee’s salary components like HRA, LTA, Bonus paid
etc. and deductions for a month. It is issued every month by an employer either in the
form of a printed hard copy or an electronic copy.

Form 16

Form 16 is a certificate issued by an employer and it contains the information you need
to prepare and file your income tax return. Employers must issue it every year on or
before 15 June of the next year, immediately after the financial year in which the tax is
deducted.

Reimbursements

Reimbursement is the amount paid by the employer to an employee for the official
expenses such as; official phone calls, taxi trips for travel to client locations, meals at
client location or hotel stay for official trips. These reimbursements are usually on an
actual basis and payment is made after the submission of bills. This reimbursement is
not taxable to the employee.

Bonus and Incentives

An incentive is a program set up with specific goals to be met. A bonus is a form of

award and usually isn’t dependent on reaching quantitative goals.
Ad hoc Components

Ad hoc items are those infrequent payments that you have to make on payroll.
Adjustments are a great example of an ad hoc item. Every time you do an adjustment
you are making it to fix a specific error or issue.

Income Tax

The tax levied on one’s personal income is called income tax. Usually, an employee
gets his or her salary after the tax deduction by the employer. This process is called Tax
Deduction at Source (TDS). The deducted tax amount is paid to the government by the
company.

Employee Investment declarations

Investment declaration has to be done in the beginning of a financial year. Your

employer asks you to declare your tax-saving investments for the year to be able to
deduct tax accordingly from your monthly salary. Investment declaration is important for
you because it can lead to a higher in-hand salary.

Gratuity

Gratuity is the part of the salary that is received by an employee from the employer for
the services offered by the employee upon him or her leaving the job. Though an
employee can receive the gratuity amount only after 5 years, it will be deducted by the
employer every year and hence it will get deducted from your CTC.

Taxable, Non-taxable and Partially Taxable elements of salary

As per the Payroll Processing in India, in addition to the basic salary, there are various
other salary components such as taxable benefits offered by employers to employees.
Moreover, these different components have different tax implications.

Under the IT Act of 1961 in Payroll Processing, taxable benefits can be broadly
classified into two broad categories – recurring and ad hoc. Allowances and perquisites
are part of these categories.  An allowance is usually the money paid to the employees
for the expenses incurred by them as part of their work. Perquisites, on the other hand,
are various other facilities provided by the employer to its employees.

Some allowances that come under ‘salaries’ are fully taxable, while others are partly
taxable or fully exempt from tax liability. Periodically, companies also offer perks to their
employees that may or may not have tax liabilities. Here is an attempt to understand the
allowances or benefits which can be classified into three categories – fully taxable,
partly taxable and tax-exempt.

Recommended Read: Payroll processing in India- A complete step by step guideline

Table Of Contents

 1 Fully Taxable Components:

o 1.1 Basic
o 1.2 Medical Allowance
o 1.3 Conveyance Allowance
o 1.4 Dearness Allowance
o 1.5 City Compensatory Allowance
o 1.6 Project Allowance
o 1.7 Overtime Allowance
o 1.8 Meal Allowance
 2 Partially Taxable Components:
o 2.1 House Rent Allowance (HRA)
o 2.2 Leave Travel Allowance (LTA)
o 2.3 Children Education Allowance
o 2.4 Hostel Expenditure Allowance
 3 Non-Taxable/ Fully Tax-Exempt Components
o 3.1 Medical Insurance Premium
o 3.2 Phone and Internet bills
o 3.3 Meal Coupons
o 3.4 Books, periodicals, newspapers, and journals
o 3.5 Gadgets
o 3.6 Recreational and medical facilities
 o 3.7 Gifts in kind
o 3.8 Other Non-Taxable Allowances:

Ad Hoc Components:

Adhoc components are salary components that are added to an employee for a given
payroll month and are typically not paid as regular monthly components. Examples are
– Joining bonus, Performance Bonus, Reimbursements, Leave Encashment at the end
of a year, Penalty for late arrival etc.

Recurring Components:

Recurring Components are the fixed salary components irrespective of the performance
of the employees like basic salary, HRA, DA etc.

Fully Taxable Components:

Basic

This is the base/first level of salary before making any deductions or additions. Most of
the other components of salary are calculated as a percentage of basic. Basic salary is
a fixed amount paid to employees by their employers in return for the work performed or
the performance of professional duties by the former. Basic salary, therefore, does not
include bonuses, benefits, or any other compensation from employers. Basic salary is
always taxable and should not be more than 40% of the cost to the company. However,
it should also not be kept too low since it will then result in a reduction in the other
constituents of the salary.

Medical Allowance

Any allowance provided by the employer to meet the medical expenses of employees is
fully taxable. Medical allowance is a fixed part of an employee’s monthly salary structure
that gets paid irrespective of actual medical expenditure.
Conveyance Allowance

Also known as transport allowance, this is the allowance provided for commuting to and
from work. It is usually provided when the company does not provide transport facilities
like cabs or buses. This is completely taxable for the employee. Exemption from
allowance is available to the extent of Rs. 1600 per month. However, in case of blind,
deaf, dumb and handicapped employees the exemption limit is Rs. 3200. Any amount
received in addition to the above limit is taxable.

Dearness Allowance

Dearness Allowance or DA is the allowance given by certain employers to their

employees to compensate for an increase in the cost of living. The purpose of this
allowance is to reduce the impact of rising inflation. It is usually paid in the form of a
fixed percentage of basic salary. As per the Income Tax Act, the entire amount of DA
received is taxable and has to be declared at the time of filing income tax returns. In
October 2019, the DA of central government employees and pensioners was increased
to 17% from the earlier 12% of basic salary.

D.A. Calculation for Central Government employees:

Dearness Allowance % = [Average of AICPI (Base Year 2001=100) for the past 12
months -115.76]/115.76*100

Here, AICPI means All India Consumer Price Index

D.A. Calculation for Central public sector employees:

Dearness Allowance % = [(Average of AICPI (Base Year 2001=100) for the past 3
months -126.33]/126.33*100

It is not mandatory for private sector companies to provide D.A to its employees.
However, every government employee irrespective of his position or rank is entitled for
D.A.
City Compensatory Allowance

CCA or City Compensatory Allowance is offered by companies to their employees to

help them bear the high cost of living in metropolitan areas or large cities like Mumbai
and Delhi.

Project Allowance

It is the type of allowance paid by the employer to the employees who are occupied with
a particular project to make up for the costs caused due to their engagement in the
project. Project allowance is typically a temporary allowance and completely taxable for
the employees.

Overtime Allowance

As per the Indian Payroll Management, the overtime allowance is remunerated to the
employees who work in the office past the ordinary working hours as mentioned in their
KRA (Key Responsibility Area) contract.  Any overtime allowance provided by
employers to employees is fully taxable.

Meal Allowance

The name already suggests the meaning of meal allowance. It is paid for the food
requirements of the employees. It tends to be utilized for refreshments/meals/ tiffin
services by the employees. As per the Indian Payroll Process, this allowance is fully
taxable.

Partially Taxable Components:

House Rent Allowance (HRA)

House Rent Allowance is partially exempt from tax in Indian Payroll Processing.
However, this exemption is applicable only for employees who live in rented
accommodation. It becomes fully taxable if the employee resides in his/her own house.
As per Section 10(13A) of the Income Tax Act, the exemption can be claimed by
employees on house rent allowance (HRA) provided:

 Actual HRA is received by the employee from the employer

 Rent paid less 10% of (Basic +DA)
 40% of the basic salary for non-metros and 50% of basic salary for metro cities.

Leave Travel Allowance (LTA)

Leave travel allowance is the tax exemption provided on the amount incurred on the
employee’s travel for a holiday with family. The employer decides the amount to be paid
as LTA. This exemption comes with certain conditions. To begin with, it can be claimed
only on the actual travel costs and not on hotel accommodation, local conveyance or
other holiday-related costs. Only domestic travel is covered for exemption and is
available for only two such holidays in a 4-year block.

Children Education Allowance

Children Education Allowance is the amount given by the employer for the educational
expense of the children of the employees. Education allowance for children is tax-
exempt up to Rs.100/- per month, which is Rs.1200/- per year. This exemption can be
claimed for only two children. Hence the maximum that can be claimed is Rs.2400/- per
year.

Hostel Expenditure Allowance

This is the allowance given by the employer for meeting the hostel accommodation
expenses of the employee’s children, a maximum of Rs.300/- per month per child can
be claimed as an exemption. This allowance is also limited to two children of the
employee, limiting the tax-exempted amount to Rs.7200/- per year.
Non-Taxable/ Fully Tax-Exempt Components
In addition to the above-mentioned completely taxable or partially taxable allowances,
there are certain other allowances that are fully exempt from tax. These allowances are
usually paid to government employees. Examples of these allowances are:

Medical Insurance Premium

If the premium for medical insurance for the employee or his family members is borne
by the company it is treated as a tax-free perquisite in the hands of the employee.

Phone and Internet bills

Reimbursement of telephone and Internet bills is tax-exempt. Though there is no set

limit, it is set at the company’s discretion for reasonable usage. Bills have to be provided
by the employee to claim this tax benefit.

Meal Coupons

Meal coupons like Sodexo are a popular tax saving perquisite offered by most
employers in Indian Payroll Processing. These are tax-exempt, for a limit set at Rs.50
per meal. Assuming 22 working days and two meals per day during office hours, an
amount of Rs.2200 per month is tax-free in the hands of the employee.

Books, periodicals, newspapers, and journals

Subscriptions to books, journals etc. which the employees may use to further their skills
are also a tax-free perk that can be offered by the employer, provided the actual bills
are submitted. Again, the limit here is set on the employer’s discretion.

Gadgets

Tablets, laptops, computers etc. provided by the company are considered as tax-free
perks. They can be used for both professional and personal purposes.
Recreational and medical facilities

If the company provides medical facilities such as doctor check-ups then they are
considered as tax-free. Similarly, membership to sports or health clubs or such facilities
provided at the workplace are also fully exempt from income tax.

Gifts in kind

Gifts in kind, up to a maximum value of Rs.5000/- per year are not taxable in the hands
of the employee.

Other Non-Taxable Allowances:

 Allowances paid by the government to its employees located outside India
 Allowances paid to the judges of Supreme Court and High Court
 Allowances to Retired Chairman or Members of UPSC
 Allowances paid by the UNO to its employees

Gathering Leave and attendance data | Data requirements to run payroll in India

The entire payroll process is an avalanche loaded with tasks. Each step has to be
accurate. HR and payroll walk together in any organization. HR, being the only
centralized department connected to all other departments, payroll becomes a
significant responsibility. The payroll process revolves around calculating employee
compensation, but it is not easy as it looks; for a successful payroll process, gathering
accurate inputs is the most important aspect.

Related Blog: Payroll processing in India- A complete step by step guideline

Table Of Contents

 1 What is Leave and Attendance Data?

 2 What are the types of leaves in Indian Payroll and leave management?
o 2.1 Casual leave (CL)
o 2.2 Earned Leave (EL)/Privilege Leave (PL)/Paid Leave (PL)
o 2.3 Maternity Leave
 o 2.4 Paternity Leave
o 2.5 Sick Leave
o 2.6 Comp offs
o 2.7 Bereavement Leave
o 2.8 What is Loss of Pay?
 3 The Significance of leave and Attendance data
o 3.1 Maintaining Employee MIS (Management Information System)/Employee
Records
o 3.2 Roster Management/Shift Management
o 3.3 Leaves Data Management
o 3.4 Conclusion

What is Leave and Attendance Data?

Gathering leave and attendance data is fundamentally keeping track of leaves and
attendance of employees. One of the significant challenges of the managers is to
manage the time of employees successfully so that the resources in the organization
are productive. Employee leave & attendance data gathering involves keeping records
of leaves sanctioned by managers and their daily attendance which includes: number of
working hours of each employee and half days.

What are the types of leaves in Indian Payroll

and leave management?
Casual leave (CL)

This is the most common type of leave utilized by an employee in any unplanned
situation. This leave policy is not a mandatory one in Karnataka. As per the Kerala
Shops & Establishment law, 12 days of CL (casual leaves) have to be provided to an
employee. Companies have their own sub-policies with respect to bifurcating these 12
casual leaves. Such as few companies do not allow an employee to take all the casual
leaves in one go and few do.

Earned Leave (EL)/Privilege Leave (PL)/Paid Leave (PL)

Typically known as paid leave in common HR and Payroll language, it is the type of
leave provided by all companies in India whether start-ups or SMEs. This leave can be
anywhere between 20-30 per year depending on the company’s leave policy. An
employee can enjoy his holiday, vacation etc without affecting the pay.

Maternity Leave

It is a type of leave provided to new mothers for a period of 12-26 weeks, again
depending on the company’s policy. Many expecting mother’s avail additional maternity
leaves by giving overtime to the company during the initial period as per the comfort
zone. Maternity benefit Act of 1961 requires that employers have to provide 12 weeks
paid leave to any woman who has worked for at least 80 days in the 12 months
preceding the date of the expected delivery

Paternity Leave

It is a type of leave provided to the father-to-be. It does not come in the mandatory
category of the leave policies. But companies who provide, usually offer 1-2 weeks.

Sick Leave

Also known as medical leave, is provided when an employee feels sickness. This type
of leave is mandatory in labour law.

Comp offs

If an employee works on non-working day, he/she is offered a comp-off leave.

Bereavement Leave

Such type of leave is provided to an employee in case of any emergency or unfortunate

death of a family member.

What is Loss of Pay?

When an employee is out of his leave quota and does not have sufficient leave balance
and still avails leaves, such leaves are beyond his/her ‘paid leave’ entitlements and
therefore he/she will not be paid salary for such excess leaves. These are termed as
Loss of Pay (LOP) or Leave Without Pay (LWOP).

Recommended Read: Running Payroll – Excel versus Software. Which is better?

The Significance of leave and Attendance data

Gathering leave and attendance data is a part of the pre payroll process. Leave and
Attendance data is the key input for processing payroll as almost all the other
calculations are based on it. Any errors in this step will invariably lead to wrong
calculation of employees’ compensation, causing employee dissatisfaction. For the HR
department too, it is a time-consuming activity.

Along with attendance, it is also important to track whether the employee is spending
the stipulated amount of time at work. Given that attendance data is central to payroll
processing, it must be calculated accurately. The collection of this data sounds like a
simple task, right? – All that needs to be done is to find out how many employees
attended office or were on leave for a given period. On the contrary, given the amount
of details and variations involved, it is quite a challenging task.

Giving an example of one scenario, with the advent of technology, workspaces are no
longer confined and it is quite common for employees to work remotely.

When it comes to managing Employee MIS, it’s not at all an easy task. Knowing the fact
that the payroll process is a step that needs expertise. Many organizations follow the
manual process of recording the time and leave details of their employees. With the
manual process, the chances of human errors are very high. It is a known fact that the
HR department is always loaded with work.

Let us understand the complexity of this activity. Below are the myriad variations that
are regularly encountered and impact the gathering of attendance and leave data:
Maintaining Employee MIS (Management Information
System)/Employee Records

Recruitments, retirements, employee resignations, retrenchments, and

transfers/relocations are the constant changes in any organization. The first step of
collecting attendance data is to make the necessary updates to the employee master
file.

This involves adding details and recording attendance data of new recruits and making
the necessary changes in case of employees who retire, resign or are retrenched. For
organizations operating at multiple locations, data of employees’ who are transferred or
relocated also has to be taken into account.

Roster Management/Shift Management

Remote working has now become new normal in no time. Work from home, shift
differentials, Interdepartmental transfers/ project changes, overseas deployment, client
location deployment, overtime etc. are only some of the work variations that are part of
the modern work scenario.

With recently encountered changes across the globe due to the Covid-19 pandemic, it is
no longer compulsory for the employee to be present at the office. Also, in industries
like consultancy, IT, and jobs like marketing; the employees are often deployed at client
locations or are constantly traveling. Similarly, employees may be transferred between
projects, departments, shifts, etc.

In some cases, employees may report to or work for more than one department.
To calculate the time and attendance accurately, all these changes have to be updated
in the attendance data.

Leaves Data Management

There are various reasons why an employee can be absent from work. In like manner,
organizations provide different classifications of leaves, which the employees can avail
of. While, casual leaves, earned leaves, compensatory offs are common; in certain
instances, employees likewise may go on long leaves.

The reasons could be medical, bereavement, maternity, study, sabbatical etc to give
some examples.  While some are paid leaves, surpassing the allotted leaves or being
absent from work for long periods of time can result in loss of pay. Similarly, absconding
or absenteeism without information can also lead to salary cuts. While recording and
collecting leave data, care should be taken to correctly categorize the type of leave, as
any error will impact payroll calculations and employee compensation.

A number of businesses choose spreadsheets to reduce the manual burden a little. But,
just to be more specific about the nature of spreadsheets, they are not dynamic in
nature. Though they serve the basic fundamentals of calculations, the entire agenda of
managing payroll activities remains untouched.

Given the dynamic and time-bound nature of this activity, and considering that it is
significant for processing payroll, streamlining the gathering and collection of employee
attendance and leave data is very important. An automated time attendance system that
is convenient to use for the employees will definitely reduce the difficulty of the task.
Payroll accuracy can be further guaranteed by integrating attendance automation with
payroll software.

Recommended Read:  Gathering data to run Payroll in India | Understanding

Payments and Deductions

Conclusion

Most of the companies with growth mindsets have shifted to cloud-based HR and
Payroll software solutions. The year 2020 has got nothing but changes. It is the time
when entrepreneurs have to see opportunity in obstacles. Professional HR and Payroll
software will streamline your entire HR and payroll process.

From pre-payroll activities to managing post payroll activities, cloud-based Payroll

Software will micromanage everything at core level. It is important for an organization to
understand the gaps within the departments and fill those obstacles with automation. A
system will make your employees not only accountable but responsible for their tasks.
Your organization’s work flow will be process-oriented rather than people-oriented.

Understanding Payments and Deductions | Gathering data to run Payroll

The entire payroll cycle has three segments or stages; pre-payroll Activities, payroll and
post-payroll activities. The pre-payroll is most significant on the grounds as it builds up
the “data”, which gets moved to the next step that is actual payroll processing. The pre-
payroll activities are the base of the entire payroll story.

Gathering data is a major task in pre-payroll activities. The most crucial data to be
collected as part of pre-payroll is the information regarding payments and deductions to
be made to employees. While attendance data answers the question – who will be paid
salary and on what basis? Payment and deductions data for the specified period helps
determine how much is to be paid as salary to an employee.

Table Of Contents

 1 Understanding Payments and Deductions:

o 1.1 Payments
o 1.2 Salary
o 1.3 Increments/Revisions
o 1.4 Arrears
o 1.5 Payroll Reimbursement
o 1.6 Bonus
o 1.7 One-time payments
 2 Payroll Deductions
o 2.1 Employees’ Provident Fund (EPF)
o 2.2 Income Tax (IT) deduction of TDS
o 2.3 Professional Tax (PT)
o 2.4 ESI
o 2.5 Loan repayments
o 2.6 Leave on loss of pay
o 2.7 Other one-time deductions
Understanding Payments and Deductions:
Payments

Payments in each payroll cycle include recurring payments such as salary,

reimbursements, bonus, incentives, and various salary components. Along with these
cyclical pay-outs, non-recurring and one-time payments also must be tracked and
collected accordingly.

Salary

This is the monthly compensation that includes all the fixed salary components such as
basic and the specified allowances (house rent allowance, special allowance, leave
travel allowance, educational allowance etc.) This is a recurring payment in payroll that
does not usually change in a given period of time.

However, any special cases where the employee is absconding also must be
considered. In such instances the “salary is put on hold”. Depending on the scenario,
the salary process might be put on hold or salary is processed but “the payment is on
hold” (in which case the statutory payments must be made).

Increments/Revisions

Any modifications or revisions to the components of the salary structure, if any, must be
incorporated into the salary payments. Similarly, increments, raises or salary hikes must
be monitored to ensure correct pay-outs.

Arrears

Arrears refers to payment for compensating the salaries left, which should have been
given earlier. Employees are paid arrears when they get a salary hike in one month but
receive the amount in some other month. In this case, the company due to its
employees and the due amount which is paid at a later date is termed as arrears. For
example, pay revisions, which are effective from previous periods, will lead to arrears in
the current payment period. Any such payments due in the current pay cycle have to be
accounted for.

Payroll Reimbursement

Reimbursement is the amount that the employee will get only after they have spent it.
For an employee to claim the reimbursement, it should be defined by the company. In
many cases, the employee has to produce the necessary bills to claim it. But first, the
employee has to pay the expenditure on such heads and then a claim can be possible.
If reimbursements are defined as a part of the salary, then to be able to get tax
exemptions, producing the bills is necessary.

Usually, a fixed amount is paid as part of the salary irrespective of the amount spent for
the specified purpose. For example, every month fixed fuel expenses can be paid to the
employees. However, bills have to be submitted to claim any tax exemption, else the
amount becomes taxable.

Bonus

This is the payment made to reward performance or achievement of goals, where the
amount and the time of payment is usually declared beforehand. Hence any payment of
Bonus declared during the payment cycle should be considered.

One-time payments

Cash Incentives or other performance-related cash awards, if announced for the given
period should also be included in the payments to be made.

Recommended Read: Components of salary in India; Taxable, Non-taxable and

Partially Taxable elements.
Payroll Deductions
It is a general guideline from the Government of India that if a company crosses the
employee strength of 20, it is time the employers should bring some statutory
deductions in the payroll process.

While some of these like mandatory deductions are recurring in nature, few of them may
be one-time deductions or specific deductions only for a short period of time. Statutory
deductions are recurring in nature and include Provident Fund, ESI, Professional Tax
and TDS. Companies may also deduct a specified amount for facilities provided such as
transportation services, mess facility etc. Another category of deductions such as loss of
pay, loan repayments or other one-time deductions are non-recurring in nature.

Employees’ Provident Fund (EPF)

EPF has traditionally been the most popular device for most Indians, particularly for the
salaried class, so that they can save their retirement corpus. When employees change
their jobs, they generally either withdraw their EPF accounts or just ignore these, if the
profit is not much, and continue the same account in their next organization. This is a
recurring statutory deduction where both the employee and the employer make an
equal contribution.
EPF contributions may vary from company to company. These are some of the logics
applied:

 Flat 12% of Basic salary

 Some companies also calculate EPF based on salary range – For employees having
salary Rs. 15k per month it is flat Rs.1800.
 There is also an option of Voluntary Provident Fund (VPF), where employees may
choose an amount to contribute for his/her EPF.

Income Tax (IT) deduction of TDS

Under Section 192, the employer is needed to deduct TDS while making the payment
month-on-month salary for any financial year to the employees. Tax returns must be
listed every year for a person or business that received income through the year,
whether by regular income like wages, dividends, interest, capital gains, or other profits.
Tax deductions on income are to be strictly followed as per the slabs defined by the
Government of India. TDS is thus a recurring deduction.

Professional Tax (PT)

Professional Tax is the tax duty on professions & trades in India. It is the state-level tax
& has to pay imperatively by every member employed in private organizations.

Business owners, merchants, working individuals, & people carrying out different
occupations come under the range of this tax type. PT is mostly under the scope of the
commercial tax department of the corresponding states. It is the source of revenue for
state governments. There are fixed slabs for the deduction of PT based on the salary of
the employees. However, the maximum PT to be paid is Rs.2500 per year. PT paid by
an employee is qualified for Income Tax deduction.

ESI

This is a recurring deduction calculated on the employees’ gross pay. Employee State
Insurance Corporation (ESIC) is a social security scheme that covers the medical
expenses of employees and their dependents. Both employer and employee make a
contribution to this scheme.

Other recurring deductions: Companies may also deduct a fixed amount for providing
facilities such as canteen/mess or for cab services to commute to and from the office.
These are also charged and deducted on a monthly basis from the salary.

Loan repayments

In some instances, companies offer an advance on salary or loans to employees at low

or nil interest rates. These loans are offered for a short period, usually not for more than
a year. When employees avail of such loans, they are repaid through monthly
installments deducted from salary.
Leave on loss of pay

When an employee avails of leaves more than those stipulated or allowed in a given
period, a certain amount is deducted from the salary. This is a non-recurring deduction
and is done only when the situation arises.

Other one-time deductions

In some instances, there may also be deductions made for recovery of loss of office
assets/equipment, etc. All these deductions have to be taken into account and data
regarding the same has to be accurately collected for error-free payroll.

Collecting such a huge amount of data is behind the picture of the pre-payroll process.
Once the information on the various payments and deductions is gathered, the next
step in pre-payroll is to collect the tax information of the employees.

Understanding Income Tax – A Detailed Guide

Under Section 192 of the Income Tax Act, every employer who is paying a salary
income to his employee is required to deduct TDS from the salary income if it exceeds
the basic exemption limit. This deduction is based on the estimate of the income that
will be earned in the particular financial year and the applicable tax rates. As most
employees make investments to save tax, organizations ask their employees to declare
their investments at the start of the financial year.

Based on this declaration of tax-saving investments, the organization calculates the

taxable income and the projected tax, which the employee is liable to pay for the
financial year. This tax is then deducted on a monthly basis as tax deducted at source
(TDS). If this information is not furnished, it results in higher TDS, as it will be calculated
on the entire income without taking into account tax-saving deductions.

In such cases, though the extra tax deducted can be claimed at the time of filing IT
returns, it will result in a lesser take-home salary for the employees for the entire
financial year.
Recommended read: Payroll processing in India- A complete step by step guideline

Table Of Contents

 1 What is Financial Year?

 2 How is Income Tax Calculated?
 3 What is TDS?
 4 How to calculate TDS on salary?
 5 Investment Declaration Guide in Brief
o 5.1 How to reduce Income Tax?
o 5.2 House Rent Allowance
o 5.3 Leave Travel Allowance
o 5.4 Professional Tax
o 5.5 Investments under Section 80C, 80CCC and 80CCD
o 5.6 OTHER DEDUCTIONS
o 5.7 Form 12BB
o 5.8 Sample Form 12 BB
o 5.9 Form 16

What is Financial Year?

In India, a Financial Year (FY) is the period between 1 April and 31 March – the year in
which you earn an income. There are 4 quarters in a financial year; April-June, July-
September, October-December, January-March. The income tax returns are filed and
taxes for a company are usually paid in the next year after the end of the Financial
Year. This next year in which the income is assessed to tax is called as the Assessment
Year.

How is Income Tax Calculated?

Income from salary is the sum of Basic salary + HRA + Special Allowance + Transport
Allowance + any other allowance. Some components of an employee’s salary are
exempt from tax, such as telephone bills reimbursement and; leave travel allowance. If
an employee receives HRA and lives on rent, you can claim an exemption on HRA.
What is TDS?
Tax Deducted at Source (TDS) is exactly what the name suggests. It is the amount of
money deducted as tax by the payer before making a payment for any kind of service or
job done. TDS has to be paid by individuals as well as businesses.

For example, when an employer gives a salary to his employee, he has to cut a certain
percentage of the amount as TDS before making the payment. The employer must then
deposit the money with the government.

TDS applies to other types of payments as well – such as rent, commission, interest
payment by banks, professional fees, consultation fees, etc. It is mandatory for
companies and institutions to deduct this tax and deposit it with the Income Tax
Department within the stipulated time.

As salaries are paid after TDS, one of the steps in pre-payroll is collecting tax
information of the employees. In fact, gathering data on tax-saving investments of
employees completes the list of data prerequisites for processing payroll. Let us briefly
understand the important exemptions and tax-saving investments that are available to
employees and should be considered for calculating TDS.

How to calculate TDS on salary?

When an employee receives compensation from an employer, as a payment for
professional services there is a certain percentage of the total sum that has been
deducted as TDS. This is tax deducted at source. According to Indian tax laws,
employers are expected to deduct a percentage of the total payment as tax and deposit
it with the government.

The Finance Minister introduced a new tax regime in Union Budget, 2020 wherein there
is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower
rates without claiming deductions under various sections. The following Income Tax
slab rates are notified in new tax regime vs old tax regime:
Income Tax slab Tax Rates as Per New Regime Tax Rates as Per old Regime

INR 0 –
Nil Nil
₹2,50,000

INR 2,50,001 – ₹
5% 5%
5,00,000

INR 5,00,001 – ₹ INR 12500 + 10% of total income INR 12500 + 20% of total income
7,50,000 exceeding ₹5,00,000 exceeding ₹5,00,000

INR 7,50,001 – ₹ INR 37500 + 15% of total income INR 62500 + 20% of total income
10,00,000 exceeding ₹7,50,000 exceeding ₹7,50,000

INR 10,00,001 – INR 75000 + 20% of total income INR 112500 + 30% of total income
₹12,50,000 exceeding ₹10,00,000 exceeding ₹10,00,000

INR 12,50,001 – INR 125000 + 25% of total income INR 187500 + 30% of total income
₹15,00,000 exceeding ₹12,50,000 exceeding ₹12,50,000

Above INR INR 187500 + 30% of total income INR 262500 + 30% of total income
15,00,000 exceeding ₹15,00,000 exceeding ₹15,00,000

Investment Declaration Guide in Brief

How to reduce Income Tax?

As per Clear Tax, an Investment declaration has to be done at the beginning of a

financial year. The employer asks employees to declare tax-saving investments for the
year to be able to deduct tax accordingly from your monthly salary. Investment
declaration is important for employees because it can lead to higher in-hand salary.

Investment declaration has to be made for the following tax-saving investments and
expenses:

House Rent Allowance

Least of the following is exempt from tax – Actual HRA received; Rent paid in excess of
10% of salary; or 50% of salary for metros and 40% for non-metro cities.
Leave Travel Allowance

An exemption can be claimed on travel with family for a vacation in India. This
exemption can be claimed twice in a block of 4 years, subject to certain conditions.

Professional Tax

The entire professional tax paid by the employee is allowed as a deduction from taxable
income.

Investments under Section 80C, 80CCC and 80CCD

Deductions under Section 80C, 80CCC, and 80CCD are subject to the overall limit of
Rs.1,50,000. The following are some of the popular investments and exemptions under
these three sections.

Section 80C

 Life insurance premiums paid by the employee for self, spouse, or children.
 Contribution to PPF
 Investment in Unit Linked Insurance Plans (ULIPs)
 Investment in Equity-linked saving schemes (ELSS)
 Investing in term deposits of 5 years or more in banks and post offices
 Investment in National Saving Certificates (NSC)
 Investment in Sukanya Samriddhi Scheme.
 Investment in notified deposit schemes of Public Sector Housing Finance Company,
Housing Development Authorities.
 Home loan repayment
 Children’s tuition fees paid to schools, colleges or other educational institutions in
India, applicable for 2 children.

Section 80CCC

 Payment made to the pension plans of LIC or another approved insurer

Section 80CCD

 Deduction for a contribution towards National Pension Scheme of Central

Government.
OTHER DEDUCTIONS
Section 80D

Under this Section, a deduction can be availed on the premium paid on a medical
insurance policy for employee, spouse, children or parents. The amount of deduction
depends on certain conditions such as – whether the policy is for the employee, family
or parents or if the parents are senior citizens etc.

Section 80E

Interest paid on the education loan of an employee, spouse or children for higher
education in India or abroad is eligible for deduction. There is no limit for the amount of
deduction, however, there is a limit on the time period. It can be claimed only for 8
assessment years from the time interest is paid or when interest is paid fully, whichever
is earlier.

Section 80G

This deduction is available for donations made to specified funds and charitable
institutions. Some of these donations are 100% exempt while others have a limit.

Section 80TTA

Deduction is available on income from interest earned on deposits of savings accounts

in banks, post offices or cooperative societies. Deduction is lower of Rs10,000 or actual
interest earned.

All these deductions are added up and removed from the gross total income of the
employee to obtain the taxable income. Employees also have the option of declaring
their income from other sources to the employer. This includes – rental income, interest
received on bank fixed deposits or savings bank accounts, income from debt
investments, mutual funds and shares; capital gains, earnings from part-time jobs or
business etc. The employer can then club this income along with the salary and deduct
TDS accordingly.
Form 12BB

The Form 12BB is a statement of claims by an employee for deduction of tax. With
effect from 1st June 2016, a salaried employee is required to submit the Form 12BB to
his or her employee to claim tax benefits or rebate on investments and expenses. Form
12BB has to be submitted at the end of the financial year.

Form 12BB applies to all salaried taxpayers. Using Form 12BB, an employee has to
declare the investments that they have made during the year. Documentary evidence of
these investments and expenses have to be provided at the end of the financial year as
well.
Sample Form 12 BB
Form 16

Form 16 is the certificate issued under section 203 of the Income-tax Act for tax
deducted at source (TDS) from income under the head ‘salary’. It is issued on deduction
of tax by the employer from an employee’s salary and deposit of the same with the
government.

Data Validation! Gaze before you leap | Pre-Payroll Activities

As an extremely high-volume business activity, payroll is a department where delays,

corrections, and reprocessing incidents are all too common, however risky to encounter.
Payroll is straightaway related to the compensation of all the employees of an
organization. A blunder in any employee’s salary calculation implies a hole in the
process; this may prompt serious issues in the bigger picture of the payroll process.

A small error in payroll processing can cause financial embarrassment for an

organisation or can prompt employee complaints and in most pessimistic scenarios,
invite legal actions.

The typical source of most encountered problems is incorrect, incomplete, or

mismanaged payroll data, which is gathered during the pre-payroll process.
Consequently, it is a need that after the data is accumulated from various sources, it
has to be validated.

Data validation is the most significant step of pre-payroll, where the gathered data and
information is checked for precision and correctness before further utilizing it in the
actual payroll process. It is crucial to affirm that the background work done so far as a
major aspect of pre-payroll is error-free to ensure that the subsequent activities of
payroll run smoothly.
Inaccurate data can jeopardize the entire payroll process. Validation is a proactive step
in the sense that it eliminates the risk of committing mistakes in payroll and the
consequences faced while rectifying them later.

Importance of Data Validation in Payroll Process

The HR (Human Resource) department has deserted the picture of the desk work
department and now has become a key business partner in an organization. The HR
roles have now extended along with the processes. Organizations have increasingly
started relying on their human resource management system (HRMS) for a smooth HR
workflow.

For HR, payroll is a significant process where even minor slip-ups can have tremendous
implications. Given that payroll is a dynamic process with evolving regulations,
compliances, and internal changes such as employee exits, new hires, contract staff,
independent consultants, etc., it is no big surprise that the odds of mix-ups are the
highest.

Payroll mistakes can be expensive and bring about heaps of superfluous work for the
HR department. Errors in payroll can lead to employee dissatisfaction, affecting
business operations. Subsequently, it is critical to get payroll right and this can be
ensured if the data used for processing payroll is error-free. Also, just as the data is
garnered from multiple sources, the data used in payroll has multiple uses, as it is not
just limited to processing paychecks.

Payroll data finds use in devising organization strategy, the employee benefits system,
the finance department, reporting system – to name a few.  Hence the importance of
data validation as a pre-payroll activity cannot be over-emphasized.

Errors in payroll
There are enormous ways in which errors can occur in payroll. Particularly in small
businesses where the payroll is overseen manually or by using spreadsheets, errors
can begin right from the hour of making data entries. Let us identify a couple of such
errors.

 The majority of errors in payroll can be attributed to incorrect or incomplete data.

 Collecting data from various sources in different formats and integrating it into payroll
compliant formats is a challenging task prone to errors.
 The road to making mistakes can start while entering basic employee details itself,
like name, employee id, email address, department or project, bank details etc.
 Mistakes may also creep in employee classification or in updating changes in pay
grades as and when they occur.
 Another area that needs attention is employee leave and attendance data. As salary
calculations are based on this data, mistakes here, will definitely lead to errors in
payroll.
 Keeping track of payroll deductions is one of the complex processes in payroll. It is
also one of the common areas of mistakes.
 As already mentioned, an important area of payroll, which is prone to changes, is
rules and regulations. If the business does not track these changes and make the
necessary updates, it can sometimes lead to gaps and errors in compliance.
 Improper organizing and maintenance of payroll and employee data i.e. ineffective
workflows can also lead to mistakes in payroll.

Pre-process data validation allows payroll managers to be more proactive: By checking

supplied payroll data in an automated and flexible manner, and notifying relevant
constituencies of issues prior to the pay run, validation can enable global payroll teams
to catch and fix errors before they occur – that is, before they lead to re-runs, added
costs and processing delays.

4 Suggestions to maintain spotless HR Data

 Create a strong system documentation

 Conduct new team member training in person

 Create validation rules for entering data into HRMS

 Remember, maintaining clean data is not just accuracy, but aesthetics and
consistency

Some errors may seem simple and insignificant but may snowball into serious problems
for the organization. Validating payroll data will help in identifying and fixing such errors
before they occur. Equally important is ensuring that there is a proper backup of the
data and there are no security breaches.

Conclusion
Realizing the challenges and the huge costs of mistakes in payroll, most organizations
are moving towards automation and outsourcing of this activity. This reduces the
chances of errors as checks can be incorporated at every stage of data collection and
pre-payroll. It eliminates the need for manually checking spreadsheets at every stage,
thus ensuring that the payroll process is handled accurately.

A competent system of data validation will identify and highlight missing or wrong data
as and when they occur. Just as reports are generated after processing payroll, reports
on payroll inputs and the detected errors during validation will ensure that such errors
do not occur in the future. This will also help in improving and standardizing the
process.

Also, it is important to design a detailed process flow, incorporating checks and controls
at every stage of pre-payroll. In case of an automated process, tolerance limits and
triggers can be included in the data validation process according to organization
specifications.

All said and done, whether payroll is managed in-house or outsourced, even the
smallest error in data will ruin the entire process and put the credibility of the company
at stake. Hence, picking up the right HR and payroll solution is the key to the locked
happiness of managers and decision-makers.

Core components of Payroll | The Actual Payroll Process

Payroll is a financial record of compensation paid to an employee as salaries, wages,

bonus, or deduction. It is given for the work done during a particular period of time.
Payroll processing is referred to as the administration of an employee’s financial records
as well as involves tedious routine work.
Payroll processing is a significant business function that involves reaching at the ‘net
salary’ of the employees after the adjustment of necessary taxes and deductions.
For an efficient payroll management process, the payroll administrator needs to plan the
payroll process step-by-step.

Table Of Contents

 1 What is Payroll Processing?

 2 The Actual Payroll Process
o 2.1 Running the payroll data
o 2.2 Calculation of new employee pay-outs and full & final settlement of employees
who recently took an exit
o 2.3 Statutory Compliances In India
o 2.4 Payroll Calculation

What is Payroll Processing?

Payroll Processing is the methodology that involves reaching at the ‘net pay’ of
employees after defining the salary structures, components, deductions, allowances
and setting up the necessary policies with respect to taxes and other adjustments.

In simpler words, payroll is defined as the total amount of compensation paid by the
employer to the employee towards the month-end and the detailed steps associated
with the calculation of the accurate amount is known as payroll processing.

Here’s the formula,

Net Pay= Gross Income-Gross Deductions

In depth explanation:

Salary = Basic + HRA + Transport Allowance + Reimbursements + Arrears + Bonus +

FBP Allowance + Bonus – Professional Tax -Provident Fund – Income Tax – Insurance-
Leave Adjustments (If any)- Loan Repayments (if any)

The entire payroll procedure is divided into 3 stages:

 Pre-Payroll Activities
  Actual payroll process
 Post-Payroll Activities

Recommended Read: What are pre-payroll activities? A detailed overview

Recommended read: All you need to know about Post-payroll activities in HR

In this article, we are going to discuss the second phase; the actual payroll process.

The Actual Payroll Process

During the pre-payroll phase, policies are defined such as pay policy, attendance policy,
leave and benefits policy, and more. Parallelly, data is gathered from various
departments to ensure accurate calculation of payroll. 

Running the payroll data

This is the stage where actual work towards reaching the net pay of employees takes
place, after completing the pre-payroll activities. This is the time when already gathered
payroll data (Leave & Attendance data, shift wise calculations, tax and Deductions,
Expenses, Incentives) during pre-payroll activities will have to run.

Once you feed the verified data into the system, the result you will get will be the net
pay after the adjustments of necessary taxes and deductions. In this stage, you also
verify the information to achieve accuracy.

Calculation of new employee pay-outs and full & final settlement

of employees who recently took an exit

This calculation involves evaluating the pay-out of employees who have recently joined
the company but not at the start or end of the month, but, somewhere in the middle of
the month. The company’s policy decides whether to pay the salary calculated till the
last day of the month or to add the calculated amount as an arrear in next month’s pay-
out.
This stage also includes F&F (Full and Final) settlement of the employees who recently
took an exit. The whole objective is to be ready with all factors needed while calculating
the actual salary.

Statutory Compliances In India

Statutory compliance in HR refers to the lawful structure and regulations within which
organizations must operate while dealing with their employees. Detailed knowledge of
legal compliances and expertise is required to minimize the risk associated with the
non-compliance of statutory requirements. Each nation has different sorts of compliance
requirements.

There are a number of statutory requirements for Indian companies and they have to
spend a significant amount of time in their payroll management to ensure that they are
compliant with the legal regulations. If companies fail to adhere to statutory
compliances, they may need to confront heavy penalties which are several times more
than complying with legal guidelines.

The most common Statutory requirements that companies have to follow for their
payroll management in India are:

ESI fund and PF (Provident Funds)

ESI maintained by ESIC is applicable to employees earning INR 21,000 or less per
month to provide the cash and medical benefits to them and their families. Provident
Fund consists of the money saved throughout the working years of an employee.
Provision of the Provident Fund ensures income when the employee retires from his
job. If the employee, unfortunately, meets early death, the PF gets passed on to his/her
family.

According to the Employees’ Provident Fund (EPF) Act, 1952, 12% of an employee’s
basic salary and dearness allowance has to be invested into EPF and the employer
needs to invest an equal amount. If an employee earns more than ₹15,000 per month in
basic salary plus dearness allowance, Employers can limit the PF deduction to 12% of
₹15,000 (INR 1,800) under the provision to Para 26A of the Employees Provident Fund
Scheme, 1952.

Professional Tax

Professional tax or employment tax is a state-based tax. It is one of the statutory

deductions from the gross income before computing the tax. The tax and the calculation
differ from state to state. A few states in India do not charge PT (Professional Tax). 

TDS (Tax Deduction at Source)

When an employee receives a payment, his/her TDS gets deducted under the Income
Tax Act. The salary elements that impact the TDS deductions are


o Medical Allowance 
o HRA
o Special Allowance
o Leave & Travel Allowance
o Education
o Investments

Gratuity amount

In India, under the Gratuity Act, 1972, an amount is calculated under the gratuity rules
and regulations when the employee leaves the company. An employee has to complete
a minimum period of five years to become eligible for gratuity. Gratuity in India is
calculated using the formula:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service

 The ratio 15/26 represents 15 days out of 26 working days in a month

 Last drawn salary = Basic Salary + Dearness Allowance.
 Years of Service are rounded down to the nearest full year. For example, if the
employee has a total service of 20 years, 10 months and 25 days, 21 years will
be factored into the calculation.
Payroll Calculation

After the necessary deductions are made. Information is uploaded in the system; the
end amount to be paid to the employee gets calculated. Most Often, calculating the
payroll is done through three methodologies:

Payroll Software

Payroll software is a cloud-based system that helps companies to oversee HR and

entire payroll activities within their organizations. These systems are quick, reliable and
safe. The cloud-based HR and payroll solutions help in streamlining the business at
core. When it is about automation, cloud-based HR and payroll software solutions are
considered on top priority. 

Outsourcing

Here, organizations give their entire month’s payroll data to the experts in the market
and they take care of the payroll management. This way organizations pick expertise for
their payroll process. Since it is a delicate task and needs high accuracy, this is an
option for many organizations. 

Manually through spreadsheets

This is the traditional way of working. It involves dependency and more amount of time
and energy as compared to the above two ways. However, many organizations still
consider spreadsheets but in the long run, automation is a must to bring productivity.

All you need to know about Post-Payroll Activities | Payroll Processing in India

Post-Payroll is the third and final stage in the Payroll Process. The whole payroll
process comprises three phases; the first-pre-payroll activities, the second- actual
payroll process, and the third one post-payroll activities. The process is prolonged and
incorporates gigantic tasks. Each task plays a significant role as payroll is a crucial
segment of every organization whether small or big.
Let’s understand a few basics

Table Of Contents

 1 What is Payroll?
 2 Phase-1 Pre-payroll activities
 3 Phase-2 Actual payroll process
 4 Phase – 3 Post-Payroll Activities
o 4.1 Post Payroll Activities
 5 Post-Payroll Process
o 5.1 Statutory compliance
o 5.2 Payroll accounting
o 5.3 Payout
o 5.4 Reporting
o 5.5 Statutory compliance in Indian payroll
 6 What is a Payroll System?

What is Payroll?
Payroll is the process by which employers pay an employee for the work they have
completed. Any business with employees should have a payroll management process
established. An effective and efficient payroll process ensures that employees are paid
accurately and consistently and gives HR the chance to focus on other aspects of their
job.

Processing payroll is a very important function of any business and necessitates an

understanding of current regulations, detailed tax knowledge to ensure proper
withholding and filing, and a highly organized system that can be relied upon to pay
each employee the right amount of money.

Phase-1 Pre-payroll activities

Before reaching the actual amount of money to be paid to employees, the payroll
process needs pre-planning. This planning covers a major segment in the entire gamut
of payroll processes. This process is called pre-payroll activities.

It involves setting up the salary structures, payroll cycle, gathering data of the entire
month, validating the data and then using the same to process the actual process which
is the step right after pre-payroll processing. Few setups are done as per the company’s
policies and few are done as per the law and regulations; statutory compliances in India.

Recommended Read: What are pre-payroll activities? A detailed overview

Phase-2 Actual payroll process

This is the stage where actual work towards reaching the net pay of employees takes
place, after completing the pre-payroll activities. This is the time when already gathered
payroll data (Leave & Attendance data, shift wise calculations, tax and Deductions,
Expenses, Incentives) during pre-payroll activities will have to run.

Once you feed the verified data into the system, the result you will get will be the net
pay after the adjustments of necessary taxes and deductions. In this stage, you also
verify the information to achieve accuracy.

Recommended Read: Payroll Processing in India | The Actual Payroll Process

Phase – 3 Post-Payroll Activities

The work does not stop even after the disbursement of salaries. Once the
compensation is paid to each employee, post-payroll activities take place.

Post-payroll activities specific to an organization include reporting, declarations, and

statements that each employer must produce for the relevant corresponding bodies. In
the system, this reporting consists of reports that generate, issues and downloads
paychecks.

Post Payroll Activities

 Review, generate and issue of Payslips, TDS Reports, Cash Reports,
 Accessing the Bank Reports and downloading them by choosing a financial year,
frequency, period and batch.
 Employee information like Employee Count, CTC, Gross, and Net Pay, Bonus and
Loss of Pay, commissions, Processed Date, Processed By etc.
Post-Payroll Process
Statutory compliance

All statutory deductions like EPF, TDS, ESI are deducted at the time of processing
payroll. The company then remits the amount to the respective government agencies.
The frequency can vary depending on the type of the dues. In most cases, payment of
dues is made via challans. After all, dues are paid return/report are filed. E.g., for filing
PF return, ECR is generated and filed.

Payroll accounting

Every organization keeps a record of all its financial transactions. Salary paid is one of
the significant operating costs which has to be reported in the books of accounts. As
part of payroll management, it is essential to check that all salary and reimbursement
data is fed accurately into the accounting/ERP system.

Payout

You can pay salary by cash, cheque or bank transfer. Typically, organizations provide
employees with a salary bank account. Once you complete payroll, you need to ensure
that the company’s bank account has sufficient funds to make the salary payment. Then
you need to send a salary bank advice statement to the concerned branch.

This statement is issued with particulars like employee id, bank account number,
amount of wages, etc. If you are opting for payroll software that has an employee self-
service portal, you can easily publish the payslips and employees can log-in to their
account and access the payslips.

Reporting

The last step is to prepare accurate reports containing information such as department
or location- wise employee cost. These reports are then sent to the finance department
or the management team for further analysis.
Once you complete the payroll run for a particular month, the finance and high
management team may ask for reports such as department wise employee cost,
location wise employee cost, etc. As a payroll officer, it becomes your responsibility to
dig into the data and extract the required information and share the reports.

Statutory compliance in Indian payroll

When you run payroll, being statutory compliant means that you are paying as per the
applicable employment norms set by the central and state legislation. The common
statutory requirements that apply to Indian businesses include the provision for
minimum wages, payment of overtime wages to workers, TDS deduction, contribution to
social security schemes such as PF, ESI, etc.

While computing salary you need to consider all these deductions and contributions.
Income tax is one such deduction. At the beginning of the year, the employee is asked
to make a declaration about his additional incomes, tax-saving investments, etc. called
an ‘income tax declaration.’ Accordingly, an employee’s tax liability is calculated, and
TDS is deducted.

Recommended Read: All you need to know about Statutory compliances in India

Various methods available to do payroll for your business

The possible options for running payroll can be

 Excel-based payroll management

 Payroll outsourcing
 Using payroll software

Recommended Read: Running Payroll – Excel versus Software. Which is better?

What is a Payroll System?

A payroll system is software to automate the payroll process. These systems can be
integrated with leave and attendance tracking systems and employee self-service portal
and are used to keep track of employee’s working hours, calculate salaries, calculate
taxes and deductions, print payslip, etc.

Payroll software, thus, minimizes employers’ efforts so that they can focus on more
pressing problems of the business.