Payroll can be defined as the process of paying a companys” employees.
It includes collecting the list of employees to be paid, tracking the hours worked, calculating the employees pay, distributing the salary on time, and recording the payroll expense.
In order to get this done , there is tons of background work involved because payroll is more than just about calculating paychecks .It is an intricate set of process which requires different teams to work in tandem, But all this complexities can be managed effortlessly by the standardization of processes, selecting the right service delivery model, and using modern technology to manage payroll operation.
Steps involved in completing to payroll.
- Onboarding employees to payroll.
- Defining your organizations pay policy.
- Creating your salary components for all compensation structure.
- Collect payroll input from employees and dependent items.
- Compute the salary to be paid for all employees.
- Distribute authentic payslips, and tax worksheets.
- Compile tax reports.
- Complete tax filing for all the statutories (PF,LWF,ESI,TDS)
3 STAGES TO RUN INDIAN PAYROLL
Stages to process Payroll in India
Leave and attendance data : To accurately process payroll , one of the most important activities in 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 calculation based on it. Any error at this step will inveriably lead to wrong calculation of employee”s compensation, causing employees dissatisfaction. For the HR departments too, it is a time consuming activity. Along with attandance , it is also important to track whether the employee is spending the stipulated amount of time at work.
Data requirements to run a payroll
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. Payments and deductions data for the specified period helps how much to be paid as salary to a particular employee.
Income tax information: According to section 192 of Income Tax Act , the employer is responsible for deducting income tax (tax deducted at source) while paying salaries to the employees. This deduction is based on the estimate of the income that will be earned in the particular financial year and the applicable tax rate.
As most employee make investment to save tax , organization 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 the financial year. This tax then deducted on monthly basis as tax deduction at source.(TDS).
New joinees
Anew joinee needs to be added with all data records (such as PAN NO,Address information,dependent information),salary structure and benefit deductions.To allow accurate calculation of taxex , you also need to capture prior salary informatio through Form 12B.
To allow that payroll calculations for new joinees is accurate and does not disrupt the process for all other employees , identify a cut off date, post which you will not include the new joinee in the current months” payroll.
Data validation before actual payroll process :
Data validation is the most foremost step of pre- payroll ,which cannot be avoided regardless of any cost. The collected data is checked for accuracy and correctness before 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 sub sequent activities of payroll run smoothly. Inaccurate data can menance the entire payroll process.
Exits:
Many companies stop the payroll run for employees who have handed in their resignations .This is tricky – especially in cases where employees just stop coming to work post the pay period end date. (eg. absconding employees ).But can be achieved if we saparate the payroll processing and disburse processes.
Validation is a proactive step in the sense that it eliminates the risk of committing mistakes in payroll and the consequences faced while retifying them later.
Arrears:
An employee’s salary may have changed in a prior period because there was a delay in the performance increment cycle .
The salary changrs will need to be paid restrospectively and this calculation is called Attear calculation. The calculation will include additional income, increased tax and deductions.
Let us now discuss common salary components:
Basic salary
Basic salary is the base income of an individual. It is a fixed part of one’s compensation package.
A basic salary depends on the employee’s designation and also the industry in which the employee works.
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, over-time pay, holiday pay, and other differentials.
Gross Salary = Basic Salary + HRA + Other Allowances
Net salary or take-home salary
Net salary or take-home salary is obtained after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax
Basic salary
Basic salary is the base income of an individual. It is a fixed part of one’s compensation package.
A basic salary depends on the employee’s designation and also the industry in which the employee works.
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, over-time pay, holiday pay, and other differentials.
Gross Salary = Basic Salary + HRA + Other Allowances
Net salary or take-home salary
Net salary or take-home salary is obtained after deducting income tax at source (TDS) and other deductions as per the relevant company policy.
Net Salary = Basic Salary + HRA + Allowances – Income Tax – Employer’s Provident Fund – Professional Tax
Allowances
An allowance is an amount received by the employee for meeting service requirements. Allowances are provided in addition to the basic salary and vary from company to company. Some common types of allowances are discussed below:
- HRA or House Rent Allowance: It is an amount paid out to employees by companies for expenses related to rented accommodation.
- Leave Travel Allowance (LTA): LTA is the amount provided by the company to cover domestic travel expenses of an employee. It does not include the expenses for food, accommodation, etc. during the travel.
- Conveyance Allowance: This allowance is provided to employees to meet travel expenses from residence to work.
- Dearness Allowance: DA is a living allowance paid to employees to tackle the effects of inflation. It is applicable to government employees, public sector employees, and pensioners only.
- Other such allowances are the special allowance, medical allowance, incentives, etc.
Reimbursements
DEDUCTIONS
This is where real work towards reaching the net compensation of employees happens, in the way of finishning 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.
Structuring salaries in an inevitable task for every HR and Payroll professional . Despite the importance of the activity , professional are often uninformed of the technical and best practices of a drafting a complete and efficient salary structure.
Through this article we will look atvthe various components of a salary, what they mean and how you can use them effectively.
components:
BASIC FULLY TAXABLE.
DA FULLY TAXABLE.
MEDICAL FULLY TAXABLE
CONVEYANCE FULLY TAXABLE.
HRA MINIMUM OF THE FOLLOWING.
1) ACTUAL HRA RECEIVED.
2)RENT (-) 10% OF BASIC.
3) 40% OR 50% OF BASIC( IN METRO 50%,OTHERWISE 40%)
LTA As per actuals of the fare expenses.
SPECIAL ALLOWANCE FULLY TAXABLE.
Children Education Allowance rs 100 monthly for each child upto 2 children.
DEDUCTIONS.
PROVIDENT FUND EMPLOYEE AND EMPOYER BOTH DEDUCT12% OF BASIC.
ESIC EMPLOYER CONTRIBUTION 3.25%, EMPLOYEE CONTRIBUTION 0.75%.
PROFESSIONAL TAX VARIES FROM STATE TO STATE.
LABOUR WELFARE FUND VARIES FROM STATE TO STATE.
Deductions
Deductions are part of the salary that are the part of the CTC but are deducted from the in-hand salarythat employees receive.Let”s take a deeper look at some of the most common salary deductions and what they mean.
- Provident Fund(PF)- is calculated 12% of basic +DA+special allowance .The employer and the employee both make an equal contribution of 12% eac h. This is applicable to companies who have 20 or more employees on their payroll.
- Employees state insurance corporation(ESIC)- Deductions towards ESIC are mandatory for employees whose gross salary is not more than 21000.It is only applicable on the companies where 20 or more employees within the 21000 gross salary bracket. Employee have to make a contribution of 0.75% and employer 3.75%.
- Professional tax – Professional tax is a tax levied by Government of certain state on salaried employees. The states where professional tax is applicable are Karnataka ,Bihar, West bengal , Andhra pradesh, Telengana,Maharastra,Tamil nadu, Gujarat, Assam, Chhattisgarh, Kerala, Meghalaya, Odisha, Tripura, Madhya pradesh , and Sikkim . The contribution amount varies from state to state where they are applicable.
- Labour welfare fund:_ Labour welfare fund , as the name suggest , is a contribution made by salaried employees for the benefit of labour class. This contribution is applicable in the state of Karnataka, West bengal, Maharastra , Andhra pradesh, Kerala, Goa, Delhi, Punjab, and Haryana, Madhya pradesh. The contribution amount varies from state to state and relatively small. The employer and the employee both make the contribution and employer pays approximately twice the employee contribution. Like professional tax labor welfare fund contribution also varies from state to state.
- 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.
Thanks for Reading.
Rupa Banerjee – Payroll Editor