Payroll compliance in India is more complicated than it seems. This is because there are many components, such as CTC, gross salary, net salary, HRA, TA, DA, EPF, professional tax, Form-16, etc. With so many components, it is easy to miss minute details and be non-compliant – a must-avoid situation.
We’ve created this extensive guide to help you stay compliant with Indian labor laws and prevent potential penalties. This guide will explain the basics of payroll compliance in India, the important elements of salary structure in India, and the payroll processing procedures.
Let’s dig right in!
What is Payroll in India?
In simple terms, payroll is the process of paying your employees on a month-on-month basis. However, it’s not as simple as paying the predetermined amount (as per the offer letter) at the end of the month. Instead, it is a long, complex process that requires accurate calculations (while considering leaves and overtimes).
However, you can manage all these complexities effortlessly by hiring a reputed PEO service provider. They’ve in-depth knowledge and experience managing payroll compliance in India. They will also keep you updated with changes in labor laws, if any.
Key Elements of Payroll In India: Explained
As mentioned above, payroll in India consists of multiple components. These constituents are crucial for both employer and employee to calculate the payroll accurately. So let’s dig deeper into those components.
CTC
The total amount spent on employees is known as the CTC or cost to the company. It includes all monthly salary components, including gross salary and gross deduction.
CTC = Gross Salary + Gross Deductions
Gross Salary
Gross salary is the sum of basic salary, HRA, and other allowances.
Gross Salary = Basic salary + house rent allowance (HRA) + reimbursements + arrears + bonus
Net or Take Home Salary
It is the amount that employees receive at the end of the month (or as per the company’s policy).
Net Salary = Gross salary – professional tax – gratuity – PPF – income tax
Allowances
Employers in India must pay for certain benefits to employees over and above their basic salary. These benefits are either fully/partially taxable or completely exempt from tax. It includes:
House rent allowance (HRA): HRA helps employees cover the cost of renting a home. Subject to certain conditions, HRA is partially exempted from tax. HRA accounts for 40% of the basic salary for employees in non-metro cities while 50% for those in metro cities.
Medical: It helps employees meet their medical expenditures. However, it is not mandatory, and employers are free to decide if and how much they want to pay.
Leave Travel Allowance (LTA): It helps cover employees’ travel expenses when they’re out of work. It is eligible for tax exemption.
Conveyance: It helps employees cover their travel expenses from home to the office and vice-versa.
Dearness Allowance (DA): Dearness allowance is a certain percentage of the basic salary paid to employees to mitigate the effects of inflation.
Deductions
Ensuring payroll compliance in India requires deducting a part of salary for the following aspects.
- Employee Provident Fund (EPF): It is a pension scheme that helps employees after they’ve retired. Both employers and employees contribute 12% of the basic salary to the EPF every month.
- Professional Tax: It is a tax that salaried employees must pay to the government. Employers deduct the professional tax (Rs 200) per month from employees’ salaries and pay it directly to the government.
- Gratuity: It is an amount that employees receive after they leave the job. Companies usually deduct 4.81% of the basic salary plus DA towards gratuity. However, employees will be eligible for gratuity payment only if they have spent five years in the company.
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How is Payroll in India Calculated?
Payroll is widely divided into two parts: gross salary and gross deduction.
What employees receive is known as net pay.
Net pay is the difference between gross salary and gross deduction.
Net Salary= Gross Salary – Gross Deduction
Where,
Gross Salary = Basic salary + house rent allowance (HRA) + reimbursements + arrears + bonus
Gross Deduction = Professional tax + public provident fund (PPF) + income tax + gratuity + insurance + leave adjustments + loan repayments (if any)
Payroll Stages in India
Indian payroll cycle is divided into three broad categories:
- Pre-payroll activities
- Payroll process
- Post-payroll activities
Let’s understand them in detail.
Pre-Payroll Activities
As the name suggests, it includes activities that you need to perform before processing the salary.
It includes:
Defining payroll policy
As discussed above, the net amount payable to employees depends on many factors. For example, your company’s pay policy, benefits, attendance, etc., all decide how much an employee will receive.
Therefore, you need to define and get the payroll policy approved by the management to ensure standard payroll processing. It is a one-time process (although it can be modified as and when required).
Gathering inputs
To ensure accurate payroll processing, you need to work with multiple departments and personnel. Here are some details you will need:
- Salary structure
- Leave and attendance records
- Payments and deductions
- Facilities availed (e.g., cab, food coupons, etc.)
- Expense claim and reimbursements
- Income tax declaration
- Payroll settlement terms
- Arrears
- Ad-hoc payments
At first, collecting and verifying so much information could feel overwhelming. However, with a structured policy in place, everything gets streamlined.
Payroll Process
Now that you have all the data you need, you can calculate the exact salary for each employee. Once done, you can transfer the amount to the employees’ bank accounts.
Here are some elements that play a major role while processing payroll:
- Salary components and structure
- Statutory compliance
- Finance settings: HRA, tax for bonus, old/new tax regime
- IT declarations: globally
- IT declarations: employee
- Loans facility
- Freezing the salary by finalizing the payroll
Post-Payroll Activities
Post-payroll activities are again a time-consuming process. It includes:
- Statutory Compliance: Deductions like professional tax, EPF, TDS, ESI, etc., should be reported and remitted to the respective government agencies.
- Payroll Accounting: You need to keep records of salaries paid, including the entire salary structure (that indicates the net pay and deductions). These records must be preserved for a period of three years after the date of the last entry made therein.
- Payslip: You must send a payslip to employees after payout. The salary slip should include details like their take-home salary and deductions.
Types of Leaves In the Indian Payroll System
Every employee is entitled to leave as per the Indian payroll system. Failing to provide could result in non-compliance and invite penalty. Here are the most common types of leaves:
- Casual leave: Employees can take casual leaves for personal reasons, such as travel, vacation, rest, and family events. The number of casual leaves an employee is entitled to depend on the state and the employer. However, every employee must get a minimum of 15 casual leaves per year.
- Sick leave: It allows employees to take a leave when they’re not well. While the number of sick leaves depends on the organization, most companies offer 7-10 days of sick leaves a year.
- Maternity leave: As per the Maternity Bill 2017, employees can take eight weeks of paid leave before the delivery and 18 weeks post-childbirth.
- Comp Offs: It is offered to an employee who works on a non-working day (e.g., national holidays or Sundays).
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Payroll Statutory Compliance In India
In order to ensure payroll compliance in India, you will need to comply with several standard statutory requirements.
Here are some laws you need to be aware of:
Social Security
- The Employee Provident Fund Act, 1952
- The Labor Welfare Fund Act, 1965
- The Employees State Insurance Act, 1948
- The Payment of Gratuity Act, 1972
Wages
- The Payment of Wages Act, 1936
- The Minimum Wages Act, 1948
- The Payment of Bonus Act, 1965
- The Equal Remuneration Act, 1976
Industrial Relations
- The Industrial Dispute Act, 1946
- The Industrial Employment (Standing Orders) Act, 1946
- Shops and Establishment Act
- The Trade Union Act, 1926
- The Factories Act, 1948
Benefits of Women
- The Equal Remuneration Act, 1976
- The Maternity Benefit Act, 1961
- The Sexual Harassment of Women at Workplace Act, 2013
Challenges Involved in Payroll Compliance in India
With all the challenges involved, payroll processing can be a mundane task. The challenges include (but are not limited to):
- Coordinating with multiple teams to collect necessary information
- Staying compliant with payroll laws
- Minimizing churn due to payroll errors (a survey found that 44% of employees considered leaving their employers because of incorrect payment)
Leave the Payroll Compliance Headache to a PEO
Given the complicated nature of payroll compliance in India, it is a good idea to outsource the payroll activities to an experienced PEO service provider.
Husys is a leading PEO provider with 19+ years of experience managing payroll for businesses of all sizes and industries. Our state-of-the-art technology – APHUSYS, makes us a pioneer in HR and payroll-related tasks.
Ready to elevate your payroll services? Let’s connect!
