Introduction
Knowledge of payroll deductions can help to operate according to the law requirements and learn how much employees should receive. Ensuring that these deductions are handled correctly guarantees that employees receive their correct salary while fulfilling legal requirements.
Businesses, in particular, can make this complex process seamless and trustworthy and reduce the error rate with the help of Human Resource Management Systems (HRMS). In this article, let’s look at the different kinds of deductions and how to simplify them using HRMS.
Index
What are Payroll Deductions?
Payroll deduction is the amount subtracted or withheld from an employee’s earnings. These can be in the form of taxes or as voluntary deductions. After these deductions from the gross pay, the final net take-home amount or pay is determined for the employees. The simple formula to calculate the net pay is as follows:
Net take-home pay = gross income – total deductions
Gross income = all kinds of regular income + allowances + any one-time benefit or payment
Total deductions = all regular deductions + statutory deductions + any one-time deductions
Types of Deductions
Many deductions apply to salaried employees in India based on employee benefits, legal requirements, and other factors. Some common types are mentioned below:
Statutory Deductions
These deductions are mandated, and every employer must deduct them if applicable to the employee based on their salary.
1. Income Tax
Every employer subtracts TDS or the income tax deducted at source from their employee’s earnings and forwards the same to the government. Income tax is deducted based on employee’s income and the applicable tax slab.
2. Employee Provident Fund (EPF)
A retirement savings plan in which a portion of the base pay along with dearness allowance is contributed to the Employee Provident Fund (EPF) account by both the company and the employee. Each month, during the payroll processing, the employee’s salary is deducted to cover their contribution.
3. Employee State Insurance (ESI)
Benefits, including health and disability insurance, are provided by ESI to workers whose monthly income is less than INR 21,000. These deductions are sent to the ESI Corporation, which oversees employee benefits and healthcare services.
4. Professional Tax
In India, professional tax is a state-imposed tax, with different rates applied in different states. Professional tax rules exist in states like Maharashtra, Karnataka, and West Bengal. Deductions may vary depending on the salary band, and these employee deductions are deposited with the state government.
5. Labour Welfare Fund
This is one of the statutory deductions implemented in some states of India, such as Maharashtra and Karnataka. This fund enables the workers to receive welfare incentives such as concessional housing, health, and education allowance. Despite the small amounts involved, employers are required by laws of the land to deduct and make the correct contribution.
Voluntary Deductions
Besides the above-mentioned statutory deductions, there are several voluntary deductions that employees opt for. Some of them are:
1. Health or Medical Insurance
This applies if the employer offers medical insurance to its employees on a paid basis. The employer deducts the premium amount paid for employees for medical emergencies.
2. Loan or Advance Repayment
Many employers also offer loans to their employees for higher education, home buying, etc. The repayment of these loans is made by deducting the employee’s salary.
3. Voluntary Provident Fund (VPF)
Many employees prefer to get more PF deducted from their salaries over and above the mandatory amount. This amount is also deducted from the pay, which helps create a much bigger retirement corpus.
How to Manage Deductions in HRMS?
Calculating deductions manually can be a time-consuming process. Besides, it can also lead to human errors that can impact the overall monthly pay of employees. Hence, investing in payroll software is recommended to streamline the payroll process and reduce errors.
Employers can maintain compliance with legal obligations by using these tools, which accurately calculate payroll deductions and generate simple reports to submit to the government.
Most of the HRMS platforms provide many self-service online tools, where employees can view their pay slips, check deductions, and even make voluntary amendments to pay, such as switching insurance or retirement contributions.
Conclusion
Salary deductions play a very significant role in determining the total amount employees receive each month. Besides, they are necessary for ensuring financial stability and complying with regulations.
To provide financial stability, ensure the correct deductions are made, inform employees about rules and benefits, and keep up with regulatory requirements. Therefore, the best option is to go for software that can automate the entire process and ensure the correct amount is deducted to create a happy and satisfied working environment for their employees.