What is Payroll ?
Payroll is the total compensation a company must pay its employees for a decided period, typically bi-weekly or monthly. It encompasses all the activities ensuring employees receive their correct pay according to their work hours, salary, bonuses, and deductions.
Earlier, it used to be calculated manually, now with the help of payroll software.
What is the Payroll Management Process?
Payroll management process includes a gamut of tasks started assigning payroll breakup to new joiner while onboarding, establishing payroll policies, defining pay components, calculating and verifying payout, processing salary, distributing pay slips, tax-filing, and reporting.
You can easily manage end-to-end payroll processes with best payroll software in India.
3 Stages of Payroll
The payroll management process is nothing but a set of pre-defined steps to process payroll every month during payroll cycle managed by payroll software.
The stages of payroll process include:
Pre-Payroll Process
- Delineating Payroll Policies: Company’s different policies come into play at the time of payout. To begin with, these policies need to be properly defined and approved by the management to ensure standard payroll processing and administration. The primary company policies that are considered while processing payroll include:
- Time & Attendance Policy
- Employee Pay Policy
- Leave and Benefits Policy
- Reimbursement Policy
- Centralised Database for Information: Information required to define in HR payroll software for payroll processing includes:
- Salary Structure
- Mid-year Salary Revisions
- Variable Payouts
- Attendance Inputs like paid days for the month, overtime, shift allowances, and leave encashments
- Ad hoc Deductions like EMIs or Recoveries like replacement of ID card, or clearance recoveries
- Employee Joining Date
- Month on Month Pre-processing
- Investment Declarations – collected from employees
- Bills for Reimbursements
- Old & New Tax Regimes
- Previous Employer Income/ Tax Declaration
- Previous Company Relieving Details
Tip:Use a smart payroll software having integrated attendance management software and employee self-service portal so that the information can be utilised from centralised system.
Actual Payroll Process
- Payroll Calculations: When someone says payroll, the first thing to strike most minds is money math. So, at this stage, the gathered and validated input data is fed into the payroll system for actual payroll processing.
Deductions e components including EPF, ESI, LWF, PT, Statutory Bonuses, Statutory Bindings and applicable taxes, the salary is computed.
The final result is the Net Pay or Net Take Home Salary with adjusted taxes and other deductions. Once the payroll process is over, it is always advised to reconcile the values and verify data for accuracy to prevent errors. It can also be automated with HR payroll software.
Post-Payroll Process
- Payout: “Salary has been credited to your account.” Yes, it’s that time of the month! The time to bring a smile to the employees’ faces through this small notification on their phone screens. Usually, organizations provide employees with a salary bank account and prefer bank transfers that could be auto scheduled with payroll software available in India. However, you can also pay salary in cash or by paychecks.
Once the payroll is complete, you just need to ensure that the company’s bank account has sufficient funds to make the salary payment.
Details such as employee name & ID, bank account number, PF details, and the number of wages is then sent to the branch concerned through a salary bank advice statement.In case you are technically woken, and opt for payroll software that has a ESS portal, you can simply publish the payslips for the employees to log-in to their accounts and access the same, at anytime and anywhere.
- Statutory Compliance: After making all the statutory deductions like EPF, TDS, ESI, LWF, and PT at the time of processing payroll, the company remits the amount to the respective government agencies.
After that, the payment of dues is made via challans. Once all dues are paid, then quarterly/half-yearly/annual returns/reports are filed and submitted to the respective government bodies. For instance, ECR is generated and filed for filing EPF returns.
- Payroll Accounting: Keeping a record of all the financial transactions is an indispensable part of the payroll process. The employee salary is one of the most integral operating costs recorded in the books of accounts.
So, it is essential to keep an eye on the financial data and ensure that all salary and reimbursement information is fed accurately into the accounting/ERP system as part of the payroll management process.
- Reporting: In order to perform analytics, take decisions, and forecast the business future, in-depth reports are prepared and maintained. Thus, after you lock and run the payroll for a month, reports such as department-wise and location-wise employee costs are analyzed to plan for the next month and submitted to the finance and senior management team. With payroll management software, you can create reports in a few clicks.
It is more of a responsibility of the payroll professionals to dig into the data, extract required information and share similar reports on a monthly, quarterly, half-yearly, and yearly basis for eg., they need to keep a track of liabilities such as leave encashments, gratuity liabilities, and bonus liabilities and provision the same in the organization’s sustainability plan.
What are the components of Payroll?
The disbursement of monthly salary and employee wages have several prime components structured together in the form of payroll collectively form a salary package. These are imperative for the employers & employees to calculate taxes, EPF, medical expenses, benefits, travel allowances and other elements.
The payroll components consist of ‘taxable’ and ‘tax-exempt’, variable, constant pay, earnings, allowances, and deductions.
Let’s understand what CTC is before understanding components.
When new recruits join the company, a total salary package is offered to them. CTC, short for Cost To Company. It delineates the overall amount of expenses an employer spends on an employee in one year.
Earnings
- Basic Salary: This is the base pay defined by the central and respective state governments that every working professional is expected to earn prior to including any added benefits, bonus, profits, and compensation or deducting tax and penalty payments.
It is recommended that 50% of the total pay that an employee earns should comprise basic pay. Employers often want to keep this as low as possible to curb additional liabilities such as Gratuity, Leave Encashments, or Employer’s PF Contribution.
- Gross Salary: Gross salary is the sum total of all the monthly wages, salaries, allowances, rents, and other forms of earnings of an employee, before any deductions or taxes are paid. The components of Gross Salary include Basic Pay, HRA, Special Allowance, Conveyance Allowance, Educational Allowance, Medical Allowance, and Leave Travel Allowance.
- Net Take Home Salary: Having learnt about the two aforementioned components of salary, the Net Pay is quite easy to understand. Net Salary or Take-Home Salary is the actual pay that an employee takes home. This is calculated by subtracting the total deductions for the employee such as Income Tax, Employee PF Contribution, Notice Pay Recovery from the Gross Earnings for the month.
Allowances
Examples of Other Allowances/ Reimbursement Exempt Under Section 10 (5)
- Car Allowance The amount of money that an employer offers to its employees who need to use their car for traveling purposes, as a part of the job.
- Leave Travel Allowance (LTA) As per Income Tax Act, 1961, LTA is an important component of an employee’s salary which is eligible for income tax exemption. It is provided to an employee by his/her employer to compensate for the leave and expenses incurred on business-related travel.
- Uniform AllowanceAny allowance offered to the employees to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the execution of the job role of an office or employment of profit.
- Transportation Allowance Also known as Conveyance Allowance, this is a monetary allowance given to employees by their employers to compensate for the amount they spend traveling from their residence to the workplace.
- Books and PeriodicalsEmployees can claim reimbursement of expenses incurred on books, newspaper subscription, periodicals, journals and so on. These reimbursements are tax-free for employees. Allowances are a part of employees’ CTC (Cost-to-Company) and are paid in addition to basic salary.
- Furnishing Allowance Under this allowance, an employee can buy some household items or pay for soft furnishing of the house and submit original bills for reimbursements. Usually, there is a max cap depending on the hierarchy of the organization.
Deductions
- EPF (Employees’ Provident Fund) is a scheme in which the retirement benefits of working professionals are accumulated. Under the scheme, an employer has to contribute 12% of the Gross Earnings towards the scheme and an equal contribution is paid by the employee.
The total collection is then deposited into the employee’s EPF account. Any contribution made by the employer is not accounted for in taxable income upto a limit of INR 2.5 lakhs per year w.e.f. 1st April 2021. Employee PF contribution is also subject to deduction under section 80(c).
- ESI or Employee State Insurance is a self-financed health insurance started for Indian workers. Every month, employers and employees must make a nominal contribution for the employee to enjoy the ESI benefits.
- Professional Taxes is the tax levied and collected by the state governments in India. It is an indirect tax, only applicable in select states. Just like TDS, PT is deducted from an employee’s salary. PT deducted from an employee’s salary is also exempted from taxable income for the assessment year.
- TDS (Tax Deducted At Source) TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.
The concept of TDS also extends to the salary paid by the employer to an employee. Employers are expected to consider all investments made by the employee and adjust income or loss from sources such as House Rent before computing the final TDS.
Employers are expected to deposit the deducted TDS to the government monthly and file the TDS return quarterly.
Other Statutory Compliances
- Statutory Bonus: As a reward for accomplishing or overachieving the work targets, employees receive additional amounts called bonus with their base monthly salaries, as part of their wages.
An employer is expected to comply with the Bonus Act, 1965 to be able to pay a bonus. To an eligible employee who earns between INR 7,000 to INR 21,000 (Basic +DA) on a monthly basis, the employer pays a minimum of 8.33% and maximum 20% of the employee’s salary earned during the relevant accounting year.
- Gratuity: In case an employee parts away from the organization, under The Payment of Gratuity Act, 1972, an employer is expected to pay an employee 15 days of salary for every completed year. This computation needs to be done as per the employee’s last drawn salary.
An employee is only eligible for Gratuity if he/she has completed 5 years of service with a single organization. Any payment made under Gratuity is exempted for upto INR 20 lakhs for a lifetime.
- Leave Encashments: A category of leaves such as the earned leaves which are not used by an employee within a particular period can be encashed. The accumulated leaves are usually encashed at the time of Full & Final Settlement or after every financial year. The amount paid under Leave Encashments is exempt from taxable income under special constraints defined by the government.
- NPS (National Pension Scheme): The National Pension System is a voluntary defined contribution pension system in India. National Pension System is an EEE (Exempt-Exempt-Exempt) instrument in India where the entire corpus escapes tax at maturity and the entire pension withdrawal amount is tax-free. In addition to this, there are multiple tax benefits under 80CCD that an employee can enjoy.
Reimbursements
Reimbursement is the act of compensating an employee for business-related expenses incurred by an employee. It is generally a good practice to pay reimbursements in a separate reimbursement bank account for the employee.
Various types of reimbursements can be:
- Reimbursements Expense: Reimbursement is the way businesses pay back their employees who have spent their own money on business-related expenses. While reimbursements for business travel are quite common, employees can also be reimbursed for education, healthcare, and other expenses incurred on behalf of the organization.
- Auto Mileage & Travel Reimbursements: This is a type of business expense reimbursement, however there are some specific characteristics of travel reimbursement that set it apart from the other types such as standard mileage rate and per diem travel.
- Medical Expense Reimbursements: Medical Reimbursement is an arrangement under which employers reimburse the portion of the health expenses incurred by the employee. The Income Tax Act allows tax exemption of up to INR 15,000 on medical reimbursements paid by the employer.
- Arrears: Arrear is a legal term for the part of a debt that is overdue after missing one or more required payments. In context to an employee, different types of arrears can be Salary Increment Arrear, Loss of Pay Adjustment Arrears, or any other ad hoc payment that an employee was entitled to and was missed in the previous pay cycles. Any arrear payments are expected to be taxed and considered for all other statutory computations.
You can also opt for Payroll Outsourcing Services- that could free up your time consumed in payroll management, or you can deploy payroll management software with your existing system.
How to create a payslip?
A payslip or salary slip, even called pay stub or paycheck is a stamped document that entails the details of an employee’s monthly payout.
It is shared with the concerned employee on or a few days after the salary is deposited into his/her account. It is issued to keep a record of the employee’s salary information including Basic pay, Dearness Allowance, HRA, TA, Bonus, Gross Pay, Net Pay, etc.
It is even produced as a proof of employment to the new employer when joining another company.
The structure of a salary slip includes the following elements:
- Personal Information: Name, Employee ID, PAN, and Aadhaar No.
- Bank Details
- Universal Account Number (UAN) and Payroll Number
- Earnings: HRA, TA, and DA, etc.
- Deductions: EPF, ESI, Professional Taxes, and LWF, etc.
- Reimbursements: Arrears, Travel Reimbursement, etc.
- Year To Date (YTD)
You may also want to include a detailed tax computation slip (be it large or small business, implement payroll software to auto-generate payslips)
Here’s a format for your reference –
Payslip for November 2021
| Name | Mr | PAN | AKLMN70198F |
| Employee Code | A12345 | Sex | Male |
| Designation | Content Writer | Account Number | SBI2200975 |
| Location | Mumbai | PF Account Number | 3456789019 |
| Joining Date | Oct 04, 2020 | PF UAN | 8903739039300 |
| Leaving Date | NA | ESI Number | A657678 |
Pay Days: 25
Arrear Days: 05
Deduction Days: 01
| EARNINGS (Rs.) |
|---|
| Components | Rate | Monthly | Arrear | Total |
| Basic | 50,000 | 45,000 | 2,000 | 47,000 |
| HRA | 25,000 | 22,500 | 1,000 | 23,500 |
| Daily Allowance | 5,000 | 4,500 | 2,00 | 4,700 |
| Transport Allowance | 1,000 | 900 | 40 | 940 |
| Medical Insurance | 500 | 500 | 0 | 500 |
| Education Allowance | 500 | 500 | 0 | 500 |
| Internet Allowance | 1,000 | 1,000 | 0 | 1,000 |
| Mobile Allowance | 200 | 200 | 0 | 200 |
| Bonus | 30,000 | 35,000 | 0 | 35,000 |
| Others | 2,000 | 0 | 0 | 2,000 |
| Total Earnings | 1,15,000 | 1,09,100 | 3,240 | 1,13,340 |
| DEDUCTIONS (Rs.) |
|---|
| PF Employer | 1,250 |
| ESI | 200 |
| Internet | 1,000 |
| |
| |
| |
| |
| |
| |
| |
| Total Deductions | 2,450 |
| Net Pay (Rs.): | 1,07,650 |
|---|
| Net Pay in Words: | One Lakh Seven Thousand Six Hundred Fifty Only |
Leave Balance
| Leave Type | Opening Balance | Availed Leave | Closing Balance |
|---|
| EL | 5.0 | 5.0 | 5.0 |
| SL | 5.0 | 2.0 | 3.0 |
| CL | 0 | 0 | 0 |
| CO | 2.0 | 2.0 | 2.0 |
Income Under Salary Heads
| Components | Earning YTD | Projected Annual Earning | Exempted Income | Taxable Income |
|---|
| Basic | 15625.00 | 171875.00 | 0.00 | 187500.00 |
| DA | 4688.00 | 51650.00 | 0.00 | 56250.00 |
| HRA | 4063.00 | 44693.00 | 0.00 | 48756.00 |
| Additional Payment | 3000.00 | 33000.00 | 12233.00 | 23767.00 |
| Special Allowances | 30621.00 | 336831.00 | 0.00 | 367452.00 |
| Total | 683731.00 | |
Tax Calculation
| Professional Tax | 144.00 |
| Net Taxable Income (D-E-F-G) | 577530.00 |
| Tax on Total Income | 28006.00 |
| Surcharge | 0.00 |
| CESS | 1120.00 |
| Marginal Relief | 0.00 |
| Total Tax | 29126.00 |
| TDS to be deducted | 2427.00 |
| Net Tax (I-L) | 29126.00 |
Month Wise TDS
| Month | TDS |
|---|
| April | 2427.00 |
| May – March | 0.00 |
HRA Exemption
| Actual Rent Paid | X. HRA | Y. 50% of Basic | Z. Actual rent paid – 10% of Basic | Min of X, Y & Z |
|---|
| 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Payslip is considered as one of the most complex official documents to be issued by employers. The number of components and breakdown of each element of the payslip is not an easy job. That’s why companies use HR payroll software to automatically create downloadable salary slips for their employees. Besides, deep insights and detailed reports are cherry on the top for understanding and analyzing the same.
Download HROne’s free payslip template and customize it as per your needs and preferences.
How to Select a Payroll System?
Before you adopt a new payroll solution or service, it is extremely crucial to consider some primitive factors while choosing the same.
There are 3 types of payroll services:
- Online: This is the easiest and the most common way to manage payroll nowadays. You must choose online payroll software that suits your company’s needs and user preferences. Get a stable internet connection and avail online payroll services as per your budget. In a few clicks, the salary is auto processed into your employees’ accounts.
- In-house: This is when you decide to purchase payroll software of your own and integrate it with your existing HR management system. In this case, there is no need to raise requests for rectifying errors or making changes to the process. You can simply hire experts to operate the software and get things done in the workplace.
- Outsourced: Now comes the most liked option of processing and managing payroll – Outsourcing! It is cost-effective as you don’t need to hire experts or use your resources to perform the functions. You just have to finalize the budget and hand over all your payroll responsibilities to a third-party payroll service provider.
Now that you know about the 3 types through which you can optimize your payroll operations, it’s time to prepare a detailed payroll checklist before choosing the payroll software. So, before you start:
- Get recommendations from acquaintances and colleagues
- Read & Research from online & offline resources
- Take payroll experts’ advice specific to company size and nature
- Shortlist, and make a list of the best-suited providers
Once the homework is done, you can pitch vendors or service providers by asking the following questions so that they have a clear understanding of your demands.
Considerations while choosing a payroll service:
What core payroll features do you offer?
- How user-friendly will the process become?
- Is the price to performance ratio low?
- How is the vendor’s brand reputation?
- How steep/shallow is the learning curve?
- Can other business tools be integrated with payroll?
- How timely and efficient is customer support?
- What additional services do you offer with payroll? (eg. HR, accounting, benefits & compensation)
After the service search and purchase is complete, it’s time for implementation. Payroll is an elaborate process and thus, requires strong attention during the set-up. From feeding each employee’s name and personal details into the system and converting data to taking care of the statutory compliance and taxes and going live, every step should be taken carefully.
- How to set up a Payroll System?
- Here are some important steps to follow while setting up payroll:
- Define goals and fix target dates
- Create an implementation plan and team
- Train your team of payroll professionals
- Convert, transfer and integrate data into the new system
- Perform payroll tax compliance management
- Go live and make it operational
Why is Payroll Important?
Payroll is an elaborate and thought-through process, developed to control and maintain the multifaceted tasks pertaining to the employees’ salary in an organization. Not only does it reflect a company’s financial stability and repute, but it also promotes employee morale.
If the final payout of the employee is erroneous, it creates lack of trust. Similarly, when accurate salaries are deposited on time, it leads to employee satisfaction and motivation. Besides, the streamlining of payroll-related activities saves time, energy, and resources of the workforce. A payroll system is therefore one of the best solutions for employees.
Let’s throw some light on the 5 main reasons why Payroll is considered as an important part of Human Resource Management:
- Budget Cutting: It is often advised that companies give a go at outsourcing their non-core processes to cut the budget fat, and payroll is often number one on that list.
- One of the major reasons why payroll processing is so vital is its influence on your budget. The amount of time, energy, and other resources it takes to process every cheque, expense, deduction, garnishment, and every remittance is incredible.
- Risk Mitigation: The legal hurdles and the stringent compliance expected of each company is the most complex aspect of payroll processing. So, if someone asks you why payroll processing is important, remember that even a little error or glitch can increase the risk of leading you to legal troubles.
- Something as trivial as a misclassification issue can land you gross class action lawsuits, penalties, fines, and even charges for jail time. That’s the main reason why every second organization relies on payroll services for risk management.
- Resource Reallocation: Taking care of the wide range of activities to finally release employees’ pay is a time-consuming task. And if you employ a reliable payroll management team to work beside you, these cumbersome tasks can be delegated, making way for a sustainable use of resources.
- Compensation Determination: It is nothing else but payroll that determines the net worth of an employee within an organization. Every working individual’s total compensation is ultimately built into payroll which includes elements such as payout, allowances, benefits, bonuses, and increments among others. Generally speaking, every employee has to undergo performance evaluations by their managers, following which, they either get an increase in their salary or a bonus or both.
- Positive Company Culture: This is a widely recognised benefit of payroll. An efficient payroll management team is important to cater to matters like benefits, perks and compensation as a core responsibility.
There are many reasons why payroll management is necessary for organizations irrespective of the number of employees and type of industry.
Firstly, it ensures that employees are paid accurately, on time, and have outstanding experience in the organization.
Secondly, an efficient payroll management system helps organizations save money, time, and resources spent on recalculations and mismanagement.
Thirdly, it enables organizations to stay compliant with labor laws and ensure that they are paying their employees correctly and in accordance with the law.
Not just these three but a proper payroll management system can automate many of the payroll processes related to organizations and redefine employee-employers’ relationships.
Employees want recognition for the hard work they do every day, and their salary slip compensates the same.“A person who feels appreciated will always do more than what is expected.”
And employees who are compensated for their extra effort or new initiatives feel valued and honored in the organization. Therefore, if you don’t have an efficient payroll team or payroll software by your side, you will face the threat of a bad reputation and lack of employee engagement, resulting in high employee attrition.