PAYROLL MANAGEMENT SYSTEM is one of the most important function of an organization. It works on compensation of employees which contains attendance and leave management, advances , loans, bonuses, tax deductions, stat. compliance in accordance with the organizations policies. Apart from distributing pay checks to the employees , of salary is important a lot of time consumes in the areas of payroll management such as calculating tax deduction, statutory compliance.
Every time flipping through numerous files to respond to the employee queries is again a time-consuming task. Employee for whom monetary salary is the only source of income . Imagine what if the salary is not paid accurately or delay in releasing salary. Such irregularities can take a toll on the morale of the employees and ultimately affect the business productivity. While ensuring accurate and timely payment is important , adhering to the various laws and regulations such as labour law, PF, P TAX, and other statutory compliance is also critical. Non- adherence with these laws can attract serious legal and financial consequences.To make sure that your employees are happy and you are law compliant, you need to have a proper understanding of what payroll is and how to run payroll effectively. we will start with the basic of payroll.
WHAT ARE STAGES TO PROCESSING PAYROLL?
A payroll PROCESS needs to do careful planning. There are always ongoing tasks that needs attention and a constant need to monitor changes to withholdings, contribution to social security funds ,etc. The entire process can be spilt into three stages , pre- payroll, actual payroll and post payroll activities.
Key benefits of a payroll management system
There are several benefits of implementing a service like this for your business. Some of them have been briefly highlighted below:
- Employee morale – By making sure your employees are paid in a systematic and timely manner, you are reinforcing their faith in your business’ financial integrity. This will boost employee morale and motivate them to perform better.
- Statutory compliance – This refers to the legal framework your business must adhere to. As an employer, you are required to maintain various payroll and payment records of your employees. Every organisation that hires employees and pays salaries must comply with the labour laws. By having a payroll process in place, you are automatically complying with the employment and labour laws in India.
- Manage employee information efficiently – You will be able to accurately store and manage all your employee information in one place. There will be no need to use any additional tool for this purpose.
Core components of payroll processing in India
- SALARY
- GRATUITY
- Housing Rent Allowance (HRA)
- Dearness Allowance (DA) – Subject to the city of employment
- Special allowance
- leave Travel Allowance (LTA)
- Maternity leave
- ESIC
- Provident fund
Let us start our discussion with salary
A salary is a form of payment from an employer to employee, which may be specified as an employment contact. As per income tax act 1961, income of a person is computed under the five heads-
IN payroll income from salary and income from house property is considerable.
1. Income from salary
2. Income from house property
3. Income from business and profession.
4. Income from capital gains
5. Income from other sources.
INCOME FROM SALARY (TAXABLE INCOME UNDER SALARY)
1 Any salary due from an employer or a former employer to an assessee in the previous year whether paid or not.
2 Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it comes due to him.
HRA ALLOWANCE
(U/S 10(13A))
HRA exemption is not mandatory …. that means not Applicable to all.
5% HRA is mandatory in state of Maharashtra. In metro 50% of basic salary and in mon-metro 40% of basic salary is applicable.
In HRA more than 50% is treated as special allowance.
HRA can be fully taxable, fully non-taxable, partly taxable, partly non-taxable.
HRA allowance can be non-taxable , in case employee is stayed on rent within India and submit rent paid slips to employer along with form 12BB.
HRA exemption should be paid in case-
Rent location should be in India.
Present proper rent slips with address, bills etc.
Only rent amount is considerable , no other charges.
Employee should part of residence.
Rent slip should be required monthly or quarterly.
Rent amount should be paid by employee. Rent should not be paid more than three months.
Every employee has to submit landlord’s PAN along with name in case rent amount is more than 8333 rupees.
HRA exemption cannot be in negative figure.
PROVIDENT FUND
A provident fund is a government-managed, mandatory retirement savings scheme used in India, Singapore, and other developing nations. A worker gives a portion of his/her salary to the provident fund, and an employer should make a contribution on behalf of the employees.
What are the benefits of PF to employees?
Tax-saving :
Under Section 80C of the Indian Income Tax Act, an employee’s contribution towards their PF account is deemed eligible for tax exemption. Moreover, earnings generated through EPF scheme are exempted from taxes. Such exemption can be availed up to a limit of Rs.150000
How PF is calculated on salary?
– If you are a man, you must contribute 10% or 12% of your basic salary. – In case you are a new woman employee, it is 8% of your basic salary for the first 3 years. Thereafter, it becomes 10% or 12% of your basic salary. – Your employer has to contribute an amount equal to 10% or 12% of your basic salary towards EPF.
WHAT IS THE ELIGIBILITY CRITERIA FOR AN EMPLOYEE?
Any salaried employee who is a resident of India is liable to be a member of the employee provident fund scheme. The employee is liable for this scheme right from the first day of his/her joining to any job. Once the employee becomes a member, he/she is accountable for provident funds benefits along with the insurance and pension benefits.
It is mandatory for employees having a salary of Rs. 15,000 or more to be a member of this scheme although the employee can voluntarily apply for it at any wage. The employee contributes a minimum 12% of salary (can voluntarily contribute more).
WHAT IS THE ELIGIBILITY CRITERIA FOR THE EMPLOYER?
An employer is exempt from EPF scheme registration if the total employment of the organisation is less than 20 employees. An employer can also get an exemption if maximum employees voice their consent over the exemption although the latter case involves certain conditions and requires a lot of formalities. But in case, the total employees are more than 20 then it becomes mandatory for the employer to register for the EFF scheme.
What is the current PF contribution rate?
Based on Basic salary: Generally, 12 per cent of Basic Salary goes into the PF account each month. So, if your monthly Basic Salary is Rs nearly 1.75 lakh ( just the basic salary and not your total monthly income), your monthly contribution is nearly Rs 20833, which is Rs 2.5 lakh in a year.
How is PF calculated?
The employee contributes 12 percent of his or her basic salary along with the Dearness Allowance every month to the EPF account. For example: If the basic salary is Rs. 15,000 per month, the employee contribution shall be 12 % of 15000, which comes to Rs 1800/-. This amount is the employee contribution.
ESIC –( EMPLOYEE STATE INSURANCE CORPORATION ACT 1948)
ESIC ACT was enacted by the government of india in 1948.The major objectives of this act was to provide certain benefits to employees in case of sickness, maternity and injury (during employment) and for providing other benefits in relation to main objects.
Those people whose gross monthly salary less than 21000 are eligible for ESIC.
In case person is disabled ESIC limit will be 25000.(Disability should be more than 40%.
ESIC provides full medical care to employees (spouse and dependents) in case of sickness,maternity,funeral expense, etc.
ESIC registration for new joiners within 10 days from the date of joining.
ESIC BENEFITS:
MATERNITY BENEFIT- either in block 70 days working she is eligible for maternity benefits.
ILLNESS BENEFITS- sickness benefit after completing 78 days. payable 70% of daily wages.
DEATH BENEFITS: start from date of joining 100% payable.
Vocational Benefits: During employment in case if there is any injury employee can claim 123 rupees per day.
ESIC always deducted in gross salary.
ESIC RATE
0.75% EMPLOYEE
3.25% EMPLOYER
PAYMENT MODE ONLINE,LAST DATE OF ESIC
CHALLAN DEPOSIT IS 15 OF FOLLOWING MONTH.
D A (DEARNESS ALLOWANCE)
What is Dearness Allowance
Dearness Allowance is paid by the government to its employees as well as a pensioner to offset the impact of inflation. The effective salary of government employees requires constant enhancement to help them cope up with the increasing prices. Despite several measures by the government to control the rate of inflation, only partial success has been achieved because the prices move according to the market. It, therefore, becomes essential for the government to shield its employees from the adverse effects of inflation. As the impact of inflation varies according to the location of the employee, dearness allowance is calculated accordingly. Thus, DA varies from employee to employee based on their presence in the urban, semi-urban or rural sector.
Calculation of Dearness Allowance
As DA is provided to employees to protect against the price rise in a particular financial year, it is calculated twice every year – in January and July. The formula to calculate the dearness allowance was changed in 2006 by the Government. Presently, DA is calculated as per the following formula: For the employees of Central Government % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 12 months -115.76)/115.76} x 100For Central Public Sector Employees % of DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for the last 3 months -126.33)/126.33} x 100
Treatment of Dearness Allowance under Income Tax
As per the latest updates, DA is fully taxable for salaried employees. If the employee has been provided with an unfurnished rent-free accommodation, it becomes that part of the salary up to which it forms the retirement benefit salary of the employee, provided that all other pre-conditions are met. The Income Tax rules in India require the dearness allowance component to be mentioned separately in the returns that have been filed.
MATERNITY BENEFIT ACT
Maternity leaves applicable on a woman worker after 86 days. She should work at least 86 days for 6 months of maternity leaves.
Full wage salary is paid during this period.
Overtime is not allowed.Termination is not allowed.During maternity leave no other leave will be counted.
Work from home is allowed during maternity leave.
During maternity leave transfer is not allowed.
INCOME TAX
Income tax is a type of tax that central government charges on the income earned during a financial year by the individuals and businesses. Taxes are sources of revenue for the government. Government utilizes this revenue for developing infrastructure, providing healthcare, education, subsidy to the farmer/ agriculture sector and in other government welfare schemes. Taxes are mainly of two types, direct taxes and indirect form of taxes. Tax levied directly on the income earned is called as direct tax, for example Income tax is a direct tax. The tax calculation is based on the income slab rates applicable during that financial year.
What is the Existing / Old tax regime?
The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate and 30% for different brackets of income. The individuals have been given the option to continue with this Old tax regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House Rent Allowance (HRA), and certain other allowances. Additionally, deductions for tax saving investments as per section 80C (LIC, PPF ,NPS etc) to 80U can be claimed. Standard deduction of Rs 50,000, deduction for interest paid on home loan.
Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:
| Income Range | Tax rate | Tax to be paid |
| Up to Rs.2,50,000 | 0 | No tax |
| Between Rs 2.5 lakhs and Rs 5 lakhs | 5% | 5% of your taxable income |
| Between Rs 5 lakhs and Rs 10 lakhs | 20% | Rs 12,500+ 20% of income above Rs 5 lakhs |
| Above 10 lakhs | 30% | Rs 1,12,500+ 30% of income above Rs 10 lakhs |
There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs for previous years and other age brackets.
Income Tax Slabs under new tax regime
From the FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. Individuals and HUF have the option to choose the new regime or continue with the old regime.The new tax regime is optional and the choice should be made at the time of filing the ITR. If the old regime is continued than all the deductions/exemptions as available can be availed by the taxpayer. The income tax slabs under the new tax regime are:
| New regime slab rates | Existing regime slab rates | ||
| Income from Rs 2.5 lakh to Rs 5 lakh | 5% | Income from Rs 2.5 lakh to Rs 5 lakh | 5% |
| Income from Rs 5 lakh to Rs 7.5 lakh | 10% | Income from Rs 5 lakh to Rs 10 lakh | 20% |
| Income from Rs 7.5 lakh to Rs 10 lakh | 15% | Income above Rs 10 lakh | 30% |
| Income from Rs 10 lakh to Rs 12.5 lakh | 20% | ||
| Income from Rs 12.5 lakh to Rs 15 lakh | 25% | ||
| Income above Rs 15 lakh | 30% |
Most of the deductions like deductions and exemptions are not allowed if the taxpayers opts for the New Tax regime. However he exemptions and deductions available under the new regime are:
- Transport allowances in case of a specially-abled person.
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
- Any compensation received to meet the cost of travel on tour or transfer.
- Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
GRATUITY
EXEMPTION U/S10(10(iii))
Gratuity is a retirement benefit payable at the time of retirement. Or leaving company at the age of 45 years. Or at death.
Eligibility- If a person complited 5 years in accompany.
Gratuity amount should be paid within 30 days of leaving.
Upto 2000000 lacs of gratuity amount is taxfree.
Calculation- last basic salary+ DA/26*15* no,of years of service.
LTA U/S10(5)
This allowance is meant for travelling expenses. Destination should be within India. This facility given 2 times within 4 years block.
Employee should have one of the traveller.
Foreign travel is not allowed.
LTA is non taxable upto 3 lacs in whole life.
Travelling mode –
By air-economy class.
By rail-AC first class.
By taxi AC first class train rate.
SPECIAL ALLOWANCE
Special allowance is a fixed amount that is given to employees over and above the basic salary in order to meet certain requirements. There is a taxable allowance and an exempt allowance. There are different categories of special allowances.
CONCLUSION (THE ROLL OF PAYROLL MANAGEMENT)
Broadly speaking, the payroll department pays employees accurately and on time. A wide range of duties encompass this process. Depending on the size of the business, the payroll department may have one or two employees or several employees. The primary mission of the payroll department is to ensure that all employee is being paid accurately and timely with currect withholding and deduction ,and that withholding and deduction are remitted in a timely manner. The payroll department takes care of wage deduction, record keeping, and verifying reliability of pay data.
Thank You
Rupa Banerjee – Payroll Executive – Mumbai
Write to me at: rupabanerjee70@gmail.com