Like anything else, payroll management processes are prone to mistakes. Thus, it’s best to keep everything in order while implementing the best possible approach to fix or avoid errors in the first place. Due to errors in payroll processing, employees’ salaries are often not paid timely or are inaccurately calculated.
Such instances take a toll on business productivity as staff members get demotivated and don’t perform their jobs with full potential. Therefore, in addition to error-free and timely paid salaries, businesses need to adhere to many payroll processing in India laws like PT, and PF with other compliances. Not complying with these laws results in severe legal and financial troubles.
Thus, payroll management is a vital process to know that your staff members are content and your business is not prone to any legal trouble. You must have proper knowledge of payroll and they right way to efficiently run payroll. Let’s begin with the basics of the payroll system and later we will know how to calculate payroll.
Understanding Payroll and Payroll Processing in India
The term payroll is used to denote a list of staff members who are entitled to get compensation from an organization, like salaries, incentives, and wages. Processing payroll is also available with many steps to accurately calculate the remuneration of staff members, including collection of staff member data, defining pay structures, deducting taxes with allowances, and making payslips.
- For a better understanding, as an essential business operation, payroll involves:
- Creating organization pay policies like leave encashment policy, flexible benefits, etc.
- Defining various payslip components such as basic, variable pay, LTA, and HRA.
- Collecting essential payroll inputs (e.g. a business collects information from the food vendor about the amount which is yet to be recovered from the staff for consumed meals.
- The total gross salary calculation, statutory and non-statutory deductions, and arriving at net pay.
- Releasing the salary of staff.
- Depositing dues such as PF, TDS, etc. to the concerned authorities and filing returns.
The Components Of Payroll
The payroll calculation process is made of 4 main components: allowances, deductions, basic pay, and tax declarations. With the help of a payroll calculator or software, you can streamline these processes. The below-listed formulas help us understand how to Calculate Payroll in India.
Payroll processes consist of delivering what is due to staff members, also known as ‘net pay’ after you adjust all taxes with other deductions.
We can calculate net pay with the help of the following payroll calculation formula:
Net Pay = Gross income – gross deduction
Where,
Gross salary or income = All regular income types + allowances + any benefit or one-time payment
To calculate gross deduction,
Gross deduction = All regular deduction types + statutory deductions + one-time deductions
Various Payroll Processing Stages
Payroll processing involves careful analysis and planning and the concerned officer must follow each drill with care. Many ongoing tasks are there that require attention and also have to monitor changes to withholding, contributing to social security funds, etc. To simplify the whole procedure is categorized into three phases, pre-payroll, real-time, and post-payroll functions. Following are the various stages to process payroll in India.
Pre-Payroll Activities
Forming payroll policy
The paid net amount is affected by various factors. The company’s many policies like leave, pay policy, attendance policy an benefits, etc. are all essential to form policies. These policies should be well defined and the management must approve it further for standard payroll processing.
Collecting Inputs
The payroll procedure is all about interacting with many personnel and departments. There is vital information such as attendance data, mid-year salary revision data, etc.
Payroll Input Sources
For smaller organizations, you get such inputs from fewer teams or consolidated sources. However, for larger businesses, collecting data can appear overwhelming. To ease such burdens many businesses use smart payroll software with hi-tech integrated features such as attendance and leave management, employee self-service portal, etc. The input collection process isn’t a problem.
Validation Of Inputs
After you get inputs, you’ll have to cross-check for data validity while complying with the organization’s policy, right formats, approval matrix, etc. You would also have to ensure that any active employee is not left out and no records are present for inactive employees to withdraw salaries.
Actual Payroll Process
Calculation of Payroll
In this stage, The payroll system gets the validated input data to start actual payroll data processing. The net pay left after adjustment of all vital taxes with other deductions is the outcome. After you’re done with payroll processing you must reconcile all values and verify further to ensure accuracy and avoid any error.
Post Payroll Processing
Ensuring Statutory Compliances
All legal pay deductions such as ESI, TDS, and EPF get reduced while payroll processing. The firm later remits all amounts to the concerned government authorities. This frequency varies based on the due values. In a lot of cases, due payment is done with challans. After paying all dues, you need to file all reports/returns. Example – Organizations generate ECR to file PF returns.
Payroll Accounting
Organizations need to keep a good track record of their annual financial transactions. Paid salary is among the core functions that managers must record in accounting books. As the payroll management part, it is vital to check all reimbursement data and salaries are accurately fed into the ERP/accounting system.
Payout
Managers can release staff salaries through bank transfer or cheque. Generally, organizations also offer staff salary bank accounts. After finishing payroll tasks, the manager would have to ensure that the bank account of the company has all the necessary funds for releasing salaries. After that, they would have to send a bank statement to the branch in charge. The statement is available with important particulars including employee ID, wages amount, bank account number, etc. When you opt for payroll software with the staff service portal you also publish payslips and staff logs in to the account for accessing payslips.
Reporting
After finishing the payroll run for a certain month, high management teams and finance can ask for reports like location-wise staff cost, department-wise cost, etc. As a payroll officer, you’re also responsible for digging into data and also extracting vital information, and sharing reports.
Conclusion
Payroll calculation processes are generally time-consuming and intricate functions, but with the combination of the right method and the right payroll software the organization can generate more productivity. While handling payroll by hand, you should ensure that you’re using a conversion chart to ensure quicker transactions. Employees can either get motivated or demotivated based on how well the payroll processes are handled. In case of errors, companies get violation complaints. The calculation method ensures that you’re always on top of the payroll, which leads to staff satisfaction and ultimately overall better business productivity.