Technically, the term ‘payroll’ has several meanings. However, throughout this guide, payroll will be used as the term which defines the process of providing the employees of a company, the remuneration for their time and efforts spent in working for the company. Since the employees are the backbone of any organization, the process of payroll must be timely, error-free and efficient and ‘payroll management’ takes care of it.
In layman terms, ‘payroll management’ is the practice of computing the salaries of the employees by considering their working hours, attendance, leaves, taxes as well as adding any extra benefits or bonuses and distributing it on time. Payroll management also includes the tasks of accounting for the wages and reporting them correctly for bookkeeping purposes.
The ‘Earnings’ section comprises the various amounts which the employee can ‘take home’ and keep with them forever. The following are the various components that can be categorized under the ‘earnings’ section:
The ‘Basic Salary’ of an employee is the base pay that is defined by the government. It is the amount that the employee is eligible for before other components are added to it to make it the ‘Gross Salary’. It is recommended that the base pay should be 50% of the total salary of an employee. However, employers often try to keep it as low as possible since the other salary components are a percentage of the basic salary.
The ‘Net Salary’ is the final amount the employee takes home after all statutory deductions are removed and the additional allowances and bonuses are added. It is the amount that is given to the employee at the end of each salary cycle.
The ‘Gross Salary’ refers to the amount that the employee receives each month before the statutory deductions. It includes all the allowances, bonuses, etc. that the employee is eligible for as well as the deductions, which are removed before paying it to the employee. Basically, as a general rule of thumb, Basic Salary + Net Salary = Gross Salary.
The Dearness Allowance (DA) is the amount paid to government employees, public sector workers and pensioners in India, Pakistan and Bangladesh to counter the effect of inflation on these employees and is calculated as a percentage of the basic pay.
The House Rent Allowance (HRA) is the amount paid by the employers for paying towards their rent. The employee is exempted from HRA taxes in case they are staying in a rented house. It can be up to 50% of the basic pay for employees staying in Metro cities and 40% for other cities.
The Hostel Expenses Allowance (HEA) is the amount paid by the employers for paying the employee’s children’s hostel fees. It is exempted from tax until Rs. 300 per month and is applicable for a maximum of 2 children of the employee.
The Child Education Allowance (CEA) is the amount paid by the employers for the school and education-related expenditure of the employee’s children. It is exempted from tax until Rs. 100 per month and is applicable for a maximum of 2 children of the employee.
The Travel Allowance (TA) is the amount paid by the employers towards their employee’s daily travel expenditure to and from the workplace. It is also referred to as the ‘Conveyance Allowance’.
There are various other allowances such as allowances related to owning a car, leave and travel on travelling for business purposes, home furniture allowance, etc. The kind of allowances available for the employee would depend on the kind of company, their business vertical as well as the employee’s position.
The ‘Deductions’ section comprises the various components which are deducted from the employee salary to reach the final net salary that is distributed to the employee. These deductions are a result of the different labour laws and it applies to all salaried employees in the country irrespective of their designation and company.
The Employees’ Provident Fund (EPF) is an arrangement by the government to help the employees accumulate wealth and prepare them for retirement. Under the EPF, every employee has to contribute 12% of their basic income to the EPF fund, while the employer also pays the same amount as their contribution to the EPF fund. This fund can be used by the employee in case of any emergencies or can be kept as a fund for enjoying one’s retirement period.
The Professional Tax (PT) is the tax applied on the incomes of the employees by some states in India. It is deducted from the employees’ salaries and is exempted from their taxable income. The professional tax also depends on the state the employee is working in as well as their income bracket. Hence, the amount varies throughout India. There are some cases in which PT is not deducted. For example, if the employee is physically disabled or if they are a parent of a disabled child, such employees need not pay professional tax.
Tax Deducted at Source (TDS) is the tax deducted by the employer before paying the salary and it is later deposited to the income tax department as per section 192 of the Income Tax Act, 1961. TDS can range between 10% to 30% of the employee salary based on the salary slab that they fall under. Also, if the employee’s annual income is below ₹ 2,50,000, then no TDS should be deducted.
The Employee State Insurance (ESI) is another form of a deduction from the employees’ salaries; although in this case, it benefits the employee, as is the case with EPF. ESI is managed by the Employee State Insurance Corporation, an autonomous organization under the Ministry of Labour and Employment. ESI proves useful for the employee as it is a kind of medical insurance and hence, can be used in case of hospitalization.
The ‘Statutory Compliances’ section deals with other credits and debits prescribed by law, which does not belong to the above sections. These are mandatory based on their condition clauses and the employers and employees in India are required to adhere to the same for the smooth functioning of the organization.
Bonuses are awarded to those employees who perform exceptionally well. However, these bonuses need to comply with the law. As per the Bonus Act, 1965, an employer is entitled to provide a bonus ranging from 8.33% to 20% of the employee salary, wherein, the said employee’s salary (Basic + DA) should be between ₹ 7,000 and ₹ 21,000 monthly.
The National Pension Scheme (NPS) is a scheme by the Government of India, wherein the employees and their employer contribute a part of the employee’s salary to their pension account to account for the social security of the individual after their retirement. An added benefit of this scheme is that it is classified as an Exempt- Exempt-Exempt (EEE) scheme, which means that the entire amount is exempt from any kind of tax deductions.
Gratuity refers to the additional payment provided by the company to employees who have stayed with the company for a minimum period of 5 years and is leaving the organization. As per the Payment of Gratuity Act, 1972, the employer is required to pay 15 days of salary for each year the employee has spent in the company as gratuity. Gratuity payments under ₹ 20 lakhs are exempted from taxes for the lifetime of an employee.
In this section, we will take a look at the various steps involved with calculating the payroll verifying it.
The first step of collecting data is the most crucial one since the subsequent steps depend solely on the data collected during this step. Hence, it is very much imperative that the gathered data is accurate. However, it is easier said than done since it involves collaborating with other departments. In the case of MNCs with a huge number of employees, it becomes a daunting task and this is where a dedicated payroll solution helps a lot. It would be ideal to have an HRMS in these situations as it would have attendance, payroll, etc. as modules and hence, there would not be a need to pester anyone for the data. Having dedicated software also helps in avoiding data inconsistency as well as removing any errors. Various parameters need to be collected for arriving at the payroll amount. Some of them are:
Once the data is collected, one needs to ensure that it is precise and devoid of any kind of errors. It also needs to be verified by cross-checking it with the statutory policies and the supporting documents, such as reimbursement proofs, investment declarations, etc. Similarly, while verifying the data, it is required to take into account the newly joined staff members as well as those that are leaving the organization. One needs to adjust the payment details accordingly and ensure that both of these kinds of staff are being paid accurately with all the required components.
In this section, we will take a look at the various tasks which are undertaken to distribute the payroll.
Payroll calculation is the process of calculating the final payroll amount that the employee is eligible to receive in the current salary cycle, based on the data collected. This process will be accurate only if the collected data is error-free. After considering all the components of the salary such as base salary, EPF, ESI, PT, IT, bonuses, etc. the final gross amount is calculated.
This is where all the deductions and additions occur and the net pay amount is finally calculated. Based on the employee’s tenure, designation, business vertical as well as the state the company is situated in, there are various taxes and other deductions such as EPF, PT, etc. which needs to be subtracted from the employee’s salary and the final net pay figure is calculated.
Based on the steps until now, the payslip is generated which proves to be a blueprint for that salary cycle’s pay-out. The employee gets an accurate picture of their salary structure by looking at the payslip and hence, it is a very vital part of the whole salary process. Payslips also help the employee understand specifically where the deductions have been made as well as understand whether any extra payments have been made for overtime, extra work, etc.
This is the best part of the entire process since it is where the salary is distributed to the employees. The pay-out has to be timely and accurate and it helps the employees remain loyal and engaged with the company. Different companies have different pay-out systems in place, with crediting to the employee’s bank account being one of the most common forms of salary disbursement. The other common methods include issuing cheques, paying with Demand Drafts (DD) as well as paying with cash in an envelope.
The following activities are undertaken after the salary distribution and they are mainly required for statutory compliance and accounts maintenance.
Since salary is a financial aspect of the company, it is required by law to maintain the files and records for a specified period. It is also beneficial for the internal company audits, and hence companies maintain their financial records even after the required time frame is completed.
Reports are generated by organizations for various purposes such as analysing the data, taking important decisions, predicting future business forecasts, etc. Financial reports related to the salary along with the department-wise and location-wise data would help the upper management understand the current situation better and take necessary actions for the overall betterment of the organization.
We have already discussed how the company deducts the salary components required by law while paying the employee wages. These deductions are then paid to the government and the individual employee accounts based on the type of deduction. For example, the professional tax is provided to the government, while the EPF contribution is deposited into the employee’s provident fund account.
Based on what we have discussed until now, it is clear that payroll management is a complex process. It involves various departments and a huge amount of data manipulation. Similarly, due to its complexity, errors can creep in easily and being a repetitive process, it also becomes fairly monotonous.
Hence, it is suggested to implement a good payroll management software as it has multiple advantages over the manual process. It can transform your entire payroll management strategy right from the way the finances are handled to the way the reports are visualized, while also being much more efficient than the manual method. Modern payroll software even takes the help of predictive analysis of artificial intelligence to analyse and predict various patterns such as leave trends, the likelihood of attritions, etc. which can be acted upon to minimize their effects on the business.
So, let us take a closer look at the ways that payroll management software can be deployed:
We simply cannot discuss payroll management without mentioning payroll software nowadays. With so many advanced features, it will help you with anything and everything related to salary management and then some more!
So, let us take a look at some of the features which make having software such an incredible tool for any HR:
Technically, the term ‘payroll’ has several meanings. However, throughout this guide, payroll will be used as the term which defines the process of providing the employees of a company, the remuneration for their time and efforts spent in working for the company. Since the employees are the backbone of any organization, the process of payroll must be timely, error-free and efficient and ‘payroll management’ takes care of it.
In layman terms, ‘payroll management’ is the practice of computing the salaries of the employees by considering their working hours, attendance, leaves, taxes as well as adding any extra benefits or bonuses and distributing it on time. Payroll management also includes the tasks of accounting for the wages and reporting them correctly for bookkeeping purposes.
Before we delve further into payroll management, we need to understand the basic factors which affect the payroll of the employees and its various components. Understanding these components will help us comprehend what makes it so tedious.
As is common knowledge, an employee’s salary is comprised of their earnings, deductions as well as some other components for statutory compliance. However, one needs to understand these components better to really appreciate the efforts put in by the HR department in calculating the wages and distributing them without errors for each salary cycle.
For our understanding, let us simplify the components into 3 categories and take a closer look at each of them to understand how it plays into the bigger picture:
The ‘Allowances’ and ‘Bonuses’ refer to the additional payment which the company provides its employee for them to remain with the company as well as for any job well done. It comes in various forms depending on the company and the business the company is involved with.
The Dearness Allowance (DA) is the amount paid to government employees, public sector workers and pensioners in India, Pakistan and Bangladesh to counter the effect of inflation on these employees and is calculated as a percentage of the basic pay.
Bonuses are awarded to those employees who perform exceptionally well. However, these bonuses need to comply with the law. As per the Bonus Act, 1965, an employer is entitled to provide a bonus ranging from 8.33% to 20% of the employee salary, wherein, the said employee’s salary (Basic + DA) should be between ₹ 7,000 and ₹ 21,000 monthly.
The National Pension Scheme (NPS) is a scheme by the Government of India, wherein the employees and their employer contribute a part of the employee’s salary to their pension account to account for the social security of the individual after their retirement. An added benefit of this scheme is that it is classified as an Exempt- Exempt-Exempt (EEE) scheme, which means that the entire amount is exempt from any kind of tax deductions.
Now that we have understood the various components in the payroll, let us understand the process of its calculation, how it becomes statutory compliant, as well as how is it distributed and finally, how it is accounted for and recorded for bookkeeping purposes.
The following activities are undertaken after the salary distribution and they are mainly required for statutory compliance and accounts maintenance.
Since salary is a financial aspect of the company, it is required by law to maintain the files and records for a specified period. It is also beneficial for the internal company audits, and hence companies maintain their financial records even after the required time frame is completed.
Based on what we have discussed until now, it is clear that payroll management is a complex process. It involves various departments and a huge amount of data manipulation. Similarly, due to its complexity, errors can creep in easily and being a repetitive process, it also becomes fairly monotonous.
Hence, it is suggested to implement a good payroll management software as it has multiple advantages over the manual process. It can transform your entire payroll management strategy right from the way the finances are handled to the way the reports are visualized, while also being much more efficient than the manual method. Modern payroll software even takes the help of predictive analysis of artificial intelligence to analyse and predict various patterns such as leave trends, the likelihood of attritions, etc. which can be acted upon to minimize their effects on the business.
So, let us take a closer look at the ways that payroll management software can be deployed:
We simply cannot discuss payroll management without mentioning payroll software nowadays. With so many advanced features, it will help you with anything and everything related to salary management and then some more!
So, let us take a look at some of the features which make having software such an incredible tool for any HR:
Now that we have understood the several features of payroll software, let us take a look at the benefits that deploying an efficient payroll management system will have on your company:
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