Payroll Compliance – A Guide For Your HR?

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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 (Cost to Company)

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.

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

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

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

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

t is offered to an employee who works on a non-working day (e.g., national holidays or Sundays).

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

Wages

Industrial Relations

Benefits of Women

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)

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!

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