Labour Compliance

What is the Procedure of Payroll Processing in India?

Payroll Processing is the most critical domain for any business as it directly deals with the compensation that is required to be paid to the employees for their services. The morale and productivity of employees are directly proportional to the compensation being paid by the businesses. Hence, efficient payroll processing directly impacts the organisation’s environment and efficiency.

The article discusses the Procedure of Payroll Processing in India to help businesses in opting for a systematic approach towards the same.

What is Payroll Processing?

Payroll processing refers to the calculation of the net pay of the company’s employees for the purpose of payment of their salaries.

Objectives of payroll processing for businesses

A business opts for the process of payroll processing due to the following objectives –

• Define the payroll policy of the business
• Keep track of the salary disbursements along with all the other relevant information about the employees.
• Assessing the impact of return on investment
• Comply with payroll Compliance along with other labour compliances
• Ensuring the employees about the market stability of the business
• Maintain a healthy reputation regarding payroll management considering the moral and ethical factors

What is the Procedure of Payroll processing in India?

The payroll process can be divided into 3 stages, i.e. the pre-payroll stage, the actual payroll stage and the post-payroll phase, with is elaborated below-

Pre Payroll Phase

The pre-payroll phase includes the following steps

On-boarding the Employees

This is the first step of the payroll processing procedure involving the onboarding of employees and preparing a list of the employees for the payment of salaries.

Drafting the payroll Policies

The payroll policy forms an essential part of the payroll process as it is the payroll policy that defines the structure of the payroll. The company’s responsibility is to prepare a payroll policy, and the management approves it to process the standard payroll execution. The pay role policies of companies may differ based on their philosophy, employee engagement and work culture. A company is required to draft the following policies –

• Pay policy
• Employee benefits policy.
• Leave and attendance policy.
• Salary components, including deductions.
• Pay schedule policy

Gathering the Employee Information

The employee information includes bank account details, address proofs, PAN, income tax declarations, and investment proofs, to name a few. This information is usually collected at the time of joining of the employee in the concerned team or department. There are designated departments that keep a record of this information like –

• The finance team is responsible for maintaining variable pay, commission, bonus, deductions, and income tax declaration records.
• The HR team keeps a record of the attendance, leaves, working hours, overtime salary revision date of joining and resignation.
• The admin team is responsible for maintaining employee bills, transpiration bills, expenses, and reimbursement.

Validating the Employee Information

The next step of the procedure of payroll processing is the validation of the information of the employees. This is done by compiling the active employee information received from different departments of the company and verifying such information to check the adequacy and accuracy of the same before initiating the actual payroll process. The purpose of such validation is the elimination of risks of mistakes in the actual payroll processing as well as the consequences and delays experienced in rectifying the same.

Actual Payroll Processing Stage

As the name suggests, this is the stage where the actual Procedure of Payroll processing takes place, wherein the management inputs the validated employee data in the payroll processing system maintained by the management for calculating the employees’ salaries. The employees receive the net salaries after the essential deductions and tax dues which include the gross deductions from the employee’s gross salary, which are computed using spreadsheets or a designated software in this respect.

The necessary elements of salary structure for calculating the net salary include the following:

• Cost to Company (CTC)
• Payslip
• Allowances
• Prerequisites
• Arrears
• Professional tax, PF, and insurance deductions
• Leave adjustment.
• Form-16^[1]
• Loan repayment (if any)
• Employee financial details
• Reimbursements
• Employee financial details
•  Incentives, Employee financial details
• Expenses and one-time payments (if any)
• Employee investment declarations

Post-Payroll Activities

This stage includes the following steps-

Accounting

The management must record the salaries paid to employees as the company’s biggest expenses. Payroll accounting involves maintaining the company accounts in respect of the employees’ salaries.

Payment of the Employee Salaries

The companies need to ensure that the company’s bank account has sufficient funds for payment of salaries to its employees, for which the company send the salary bank advice statement to the concerned bank for disbursing the salaries to the employees from the salary bank account and distribute the salary payslips after such transfer.

Compliance and Reporting  

All statutory deductions of an employee, such as TDS, PF, Employees State Insurance (ESI) and professional tax, must be deducted during payroll processing. These payments must be made to the appropriate government departments as per the prescribed due dates, deductions need to be reported to the government departments by filing the prescribed forms prescribed by each department.

What are the methods of Payroll Processing

There are certain methods which can be used to carry out the procedure of payroll processing, such as –

Spreadsheets

 Companies mostly use spreadsheets during their initial stage of operations. Spreadsheets are considered a convenient alternative when there are just a few employees to manage at the initial stage. This payroll management involves calculations using standard templates that contain pre-determined mathematical formulas for salary and compliance payment computations. 

Although this alternative is considered cost-effective for carrying out the procedure of Payroll Processing isn’t appropriate for companies with more employees at the time of expansion or for medium and large-sized companies. Additionally, the opportunity cost increases when using a traditional system over automated methods. The reconciliation and verification of the values become difficult to even after being important, avoiding any errors in this method.

Outsourcing 

Payroll outsourcing means delegating the company’s payroll execution to an outside or third-party agency. This method is opted for by companies that do not have dedicated personnel for payroll management. The company provides their employees’ salary information and other relevant data, such as leaves, attendance, reimbursement details, etc., every month to the outsourced agency based on the company’s payroll cycle. The outsourced agency calculates dues and is responsible for complying with statutory compliances.

Automation 

 Payroll processing is done by payroll automation software and tools for payroll computations to reduce manual efforts while increasing efficiency. Automated payroll software avoids the challenges faced while using spreadsheets or outsourcing by eliminating the risk of clerical or mathematical errors. The software needs to be updated with the latest compliance laws.

Conclusion

The employees’ salaries are considered a reward for their hard work and contribution to the company. Therefore it is important to effectively manage the payroll, which can be done by following the payroll procedure in the right manner; in order to facilitate the same, the businesses must have efficient payroll management software from a trusted company like Enterslice.  

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