Payroll Processing in India: How to do it? Understanding process, methods, and the stages.
Posted On:- 28 June, 2024 By:- Arjun Singh
Employees are critical to the success of organizations and considerable time and effort are spent on manning, developing, and managing of employees. However, one of the most crucial activities in managing any organization is payroll processing as it impacts the personnel's morale and financial plan. In fact, managing payroll is always an important aspect of Human Resource Management (HRM) no matter the size of the organization.
What is 'Payroll'?
'Payroll' refers to the list of employees entitled to receive compensation from an organization. It includes the financial record of payments made to employees by the employer, covering wages, salaries, bonuses, incentives, and other forms of compensation.
What is Payroll Processing?
Payroll processing entails determining the total wages of all employees, which has several steps like establishing salary structure, data collection for employees, applying penalties and exemptions, and setting standards and taxes for adjustments. Once total salaries have been obtained the process involves issuing salaries, making reports, and issuing of pay slips to the employees.
Payroll processing involves several key steps and following the industry norms, it can be calculated in the following way in India.
As will be evident from the description of the steps and requirements for calculating payroll in India, the process of calculation is quite elaborate. To determine total employment costs include payrolls, wages, bonuses, commissions, and other emoluments paid to employees for services rendered for a given period.
How to Calculate Payroll in India?
Payroll calculation is a complex task involving various steps and compliance with diverse tax and regulatory requirements in India. The calculation process includes determining the total amount paid to employees for their work during a specific period, including salaries, wages, bonuses, and other benefits.
Factors Impacting Payroll in India:
Income Tax:
Employers must deduct tax at source (TDS) from employees' salaries and deposit it with the government.
Provident Fund (PF):
Employers contribute to the employee's PF, typically 12% of the basic salary, matched by the employer.
Employee State Insurance (ESI):
Employers with more than 10 employees must register under the ESI Act and contribute 4.75% of the employee's salary, while employees contribute 1.75%.
Professional Tax:
Some states levy a professional tax on employees, deducted from their salary.
Leave Encashment:
Employees can encash unused annual leave at the end of the year.
Important Elements of Salary Structure in India:
CTC: Cost to Company
Gross Salary: Total salary before deductions
Net Salary: Salary after all deductions
Allowances
Prerequisites
Deductions
Payslip
Form-16
Reimbursements
Bonus/Incentives/Expenses/One-time payments
Ad hoc Components
Company PAN, TAN, PF, ESI, PT, LWF (if applicable) details
Signatory Details
Company Bank Details
Employee Financial Details
Employee Investment Declarations
Previous Salary Details
Annual CTC / Gross of all the employees
Payroll Calculation Formula in India
The payroll calculation formula in India involves several components, including basic salary, allowances, deductions, and taxes. Here is a basic formula to calculate payroll for salaried employees in India:
Gross Salary Formula:
Gross Salary=Basic Salary + Dearness Allowance (DA) + House Rent Allowance (HRA) + Medical Allowance + Other Allowances
Net Salary Formula:
Net Salary=Gross Salary – (Employer's Provident Fund Contribution + Employee's Provident Fund Contribution + Professional Tax)
Income Tax Deduction:
Income tax is deducted as per the applicable income tax slab rates defined by the Income Tax Act, 1961.
Provident Fund (PF) Contribution Formula:
Employer's PF Contribution=12% of Basic Salary + Dearness Allowance (DA)
Employee's PF Contribution=12% of Basic Salary + Dearness Allowance (DA)
Employee State Insurance (ESI) Contribution Formula:
Employee's ESI Contribution=0.75% of Gross Salary
Employer's ESI Contribution=3.25% of Gross Salary
It is important to note that the actual calculation of payroll in India may vary depending on factors such as company policies, employment contracts, and applicable laws and regulations. Therefore, it is recommended to consult with a payroll professional or use specialized payroll software to ensure accurate calculations and compliance with legal requirements.
Steps of Payroll Processing
There are different steps in the process of payroll processing in India. undefined
Pre-Payroll Activities
This is a stage that contains all the activities that have to be accomplished prior to the actual processing of the payroll. Some of the responsibilities that it entails include tallying employee attendance and work hour records, checking employee data for accuracy, adjusting and modifying records as needed, checking on tax and deduction information, as well as ensuring that the organization of the payroll is in conformity with the laws of the local, state and the federal government. Payroll processing is a very important stage because any mistakes made in this stage means that the rest of the payroll cycle will be affected.
Payroll Processing Activities
This stage entails the computation and management of payrolls. These are for example preparing gross pay according to worked hours and salary, deducting taxes and other deductions, and issuing paychecks or electronically transferring money to the employees. This stage must follow proper procedures to ensure that all employees are paid appropriately and in compliance with the applicable laws and regulations.
Post-Payroll Activities
This stage comprises all activities that are required to be done once the payroll process is over. It encompasses activities like preparing reports, establishing and maintaining payroll accounts, and checking for compliance with all existing tax and labor legislation. It also entails preparing tax returns, providing employees with internal tax forms, and addressing any questions or concerns regarding payroll from the employees.
In all, each of the mentioned stages is vital for delivering accurate and timely payroll processing, adherence to all legal requirements, as well as for keeping the employees' confidence. Payroll calls for careful planning, detail in the processing, and good communication between all the parties that are involved in the process.
Payroll Filing Forms
To become familiar with different types of payroll forms in India, the following list of forms should be known:
Form 24Q: This form is used to file the return for tax deducted at source from salary payments.
Form 12B: Employers must provide this statement to employees if they join in the middle of the year.
Form 12BB: This form is used as an investment declaration where employees mention all investments made for tax savings in a financial year.
Form 15H: This form is for senior citizens who are 60 years or older to file Income Tax Returns (ITR) valid for one financial year.
Form 15G: This form is for everyone else to file an ITR valid for one financial year.
Form 16: Employers issue this certificate under section 203 of the Income-tax Act for tax deducted at source (TDS) from income under the head of 'salary'.
Form 16A: Employers issue this certificate on deduction of tax by the employer on behalf of the employees. These certificates provide details of TDS/TCS for various transactions between the deductor and deducted.
Form 16B: This form certifies that the tax has been deducted at source on the income earned from the sale of immovable property and the TDS has been deposited by the property buyer with the Income Tax Department.
Form 10C: This form is filled and submitted when claiming benefits under the Employee Pension Scheme (EPS).
Form 26QB: This form is a return cum challan for payment of TDS to the government.
Form 26AS: This form is the annual statement in which the details of tax credits are maintained for each taxpayer as per the database of the Income-tax department.
Form 27C: This form can help in getting tax exemption from the tax deducted at the source. Both buyers and sellers can use this for all the goods specified in the Income Tax Act.
Form 24G: This form is used to submit information for processing when income tax is deducted at source (TDS) for a salaried individual a non-salaried individual or even a person who is not a resident of the country.
Form 64A: This form contains the statement of income paid or credited by Venture Capital Company and credited by Venture Capital Fund to be furnished under section 115U of the Income Tax Act 1961.
Form 12BA: This form is a detailed statement showing particulars of perquisites, other fringe benefits, and profits in lieu of salary.
Form 27EQ: This form is a quarterly certificate that contains details of the Tax Collected at Source or TCS under Section 206C of the Income Tax Act, 1961.
Form 49B: This form is an application form under section 203A of the Income Tax Act 1961 for the assignment of a TAN number or TAN deduction and payment account number.
Conclusion:
In conclusion, payroll processing in India is a critical aspect of a company's financial management that involves several steps, including collecting and verifying employee attendance and timesheet records, calculating gross pay, applying taxes and deductions, and issuing payments via direct deposit or checks. The stages of payroll processing in India can be divided into three main steps, which include pre-payroll activities, payroll processing activities, and post-payroll activities. These steps ensure that employees are accurately paid for their work and that compliance with local, state, and federal laws and regulations governing payroll is maintained.
By following this step-by-step guide, companies in India can effectively manage their payroll process and ensure timely
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