Pocket HRMS
Payroll Feature Guide
What is Payroll Management?
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.
Classifying the Salary Components
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:
- Earnings 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:
- Basic Salary 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.
- Net 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.
- Gross Salary 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.
- Allowances & Bonuses
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.
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- Dearness Allowance
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.
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- House Rent Allowance 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.
- Hostel Expenses Allowance 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.
- Child Education Allowance 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.
- Travel Allowance 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’.
- Other Allowances 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.
- Deductions
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.
- Employees’ Provident Fund 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.
- Professional Tax 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 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.
- Employee State Insurance 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.
- Statutory Compliances
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.
- Bonus
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.
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- Pension
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.
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- Gratuity 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.
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Stages of Payroll Process
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.
- Pre-payroll Functions
In this section, we will take a look at the various steps involved with calculating the payroll verifying it.
- Data Collection
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:
- Attendance data such as working hours, overtime, leaves, etc.
- Payroll deductions such as loan EMIs, recoveries, etc.
- Additional pay such as overtime payment, reimbursements, etc,
- Investment declarations
- Tax regime which individual employee falls under
- Previous month arrears
- Salary revisions, if any.
- Data Verification 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.
- Processing Payroll In this section, we will take a look at the various tasks which are undertaken to distribute the payroll.
- Data Collection
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:
- Payroll Calculation 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.
- Compliance Check 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.
- Payslip Generation 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.
- Salary Pay-out 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.
- Post-payroll Functions
The following activities are undertaken after the salary distribution and they are mainly required for statutory compliance and accounts maintenance.
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- Accounting
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.
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- Reporting 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.
- Statutory Duties 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.
Types of Payroll Management Software
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:
- Cloud-based
A cloud-based payroll management system is ideal in cases where you require a ‘set it and forget it’ approach. In this system, you simply use the services provided by an online cloud-based system and pay for the same using a subscription model. In this case, it becomes very easy to update it as well as add and remove users since the entire software and hardware maintenance is undertaken by the software vendor. The end-user will also be able to access it anywhere using any smart device as the only requirement one needs to have, is an internet browser. One need not be concerned about data theft too with the added security of high-level encryption available in such software. - On-premise
An on-premise payroll management system is used in cases wherein the company is concerned more about the data being handled, such as the BFSI sector, FMCG, E-commerce, government undertakings, etc. In these business verticals, people are still apprehensive about the security provided by the internet-based software deployment models and hence, they prefer having an in-house server. The software is developed in house and deployed on the server. As a result, the company needs to maintain both the software and the hardware and hence, the associated costs are also borne by the company itself. - Outsourced
If a company needs to fully remove the burden of handling the payroll woes, they outsource it to any relevant service provider. The provider will handle all the relevant tasks associated with payroll management for pre-defined fees, while the company is free to allocate its resources on its core business tasks. In this scenario, the company is giving the service provider full access to the employee data and hence, they need to choose the service provider wisely. In this case, the company is least bothered about whether the service provider is using dedicated software or whether the payroll is managed manually. Their sole concern would be smooth and timely salary disbursement with zero errors and the safety of their employee database.
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Using a Payroll Management Software
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:
- Compliance management
A good software development team would understand that payroll management software is not worth even a dime without a fully structured updated statutory compliant module. Hence, it needs to be built from the ground up to be easily updated as per the changes in the regulatory laws. This ensures that your payroll system is always updated as per the latest changes and any kind of new updates can be easily incorporated. - Advanced cloud security
With highly secure encryption standards available in modern payroll management systems, you can be assured that your data is in safe hands. In practice, this data is encrypted whenever it is stored in the cloud and decrypted whenever the user retrieves it. However, this process should be completely transparent to the user, which would ensure that anyone with the right credentials can access the data and use it even if they are not tech-savvy. - Mobile app
Having a dedicated mobile app is necessary nowadays due to the advancement of mobile internet technology and the ever-growing use of smartphones for internet usage. It also assures that your user can be connected with you anytime, from anywhere. That is why most modern payroll software has dedicated apps for accessing their data remotely as well as staying connected with timely updates and notifications. - Employee self-service
Employee self-service assures that the employees can view any pertaining information at any time using any internet-enabled device. This helps in keeping them engaged while also being transparent with them regarding their payroll, attendance, leaves, etc. They can also retrieve the same information at their fingertips with the aforementioned mobile app. - Highly customizable
No two organizations are the same and hence they would have different expectations and requirements from their payroll management software. Hence, it is ideal to have a modular payroll management system as it helps in scaling it as per your requirements while also ensuring that the modules can work independently. It is also beneficial to check for integrations with other commonly used applications so that you can seamlessly transfer data between them. - Real-time insights
It is beneficial if your payroll management system can showcase real-time insights using meaningful graphs to help you visualize the current scenario. You can act on those insights and take corrective measures just in time to ensure that your company remains running smoothly before any small issue balloons up. Along with this feature, creating custom reports is a necessity for any payroll solution and needless to say, modern payroll management systems have versatile report generation modules. - HR Chatbot
Having an HR chatbot on your phone is like having dedicated HR personnel at your disposal. You can communicate with it in normal language and it would use AI to understand your query and provide accurate relevant results. This feature helps redirect the common employee queries to the chatbot, thus saving HR from repeatedly answering the same doubts and queries, which eats up almost 40% of their usual working hours. - Fully paperless
Let’s face it! It is the 21st century and going digital is more of a necessity than a luxury. However, it is a sad reality that even today, there are companies that are still using physical paper to conduct various payroll related activities. Along with wasting the precious resources of the planet, this is also making the office look cluttered. Modern offices should be a minimal space where things are arranged aesthetically, which helps the brain function well and having a paperless office sure helps a lot.
Benefits of Payroll Management with a Dedicated System
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:
- 24/7 Availability Anywhere
With a cloud-based software model, you will be able to access it anywhere anytime using any browser on any platform. Cloud-based software is developed considering the different ways we interact with our digital life and hence, it does not matter which device you are using, as long as it has an internet browser and internet connectivity, you are good to go. - Save Time, Efforts & Money
With most of the HR and payroll-related tasks automated, HR will be able to spend their valuable working hours developing employee engagement programs while the software does the heavy lifting. It also helps save money by lowering the costs associated with record-keeping, payslip generation and distribution, etc. as well as eliminating the additional costs incurred due to incorrect calculations. You can also remain at ease knowing that the latest statutory compliances are updated as soon as they are implemented. This saves a lot of paperwork and hassle usually seen around the implementation of such laws. Similarly, the calculations which used to take days and even weeks can be completed within a day owing to the automated calculations done by the software. - Automate Statutory Compliances
The statutory compliances have had an impact on the calculation of employee payroll since the advent of employment laws. There are lots of different legislations to be considered while deciding the payroll of an employee. On one hand, it needs to be cost-effective for the company while on the other, it has to be highly competitive in the job market for recruiting talented employees. In this scenario, good payroll software will be able to showcase the projected salary figures for new designations. Moreover, any changes in the existing statutory laws can be easily implemented by simply updating it once in the system as the same will be reflected elsewhere. - Track Employee Attendance Accurately
The payroll software helps in keeping an accurate track of the employee attendance and working hours as their payroll is calculated based on the same. Modern payroll solutions even take the help of smartphones in ensuring that the employee is at the required location using GPS and cameras. This kind of system ensures that you have precise attendance data of your staff and calculate payrolls down to the minute. Moreover, it can also be used to track the exact overtime data as well as late comings, which makes it highly compelling for jobs where the clock-in and clock-out timings are not fixed. - Have one-click wage payout
Employee wages disbursement is another feature of payroll software that makes it highly efficient. The employees would be able to choose whether they would like their wages deposited into their bank accounts or use payment cards or have cheques issued. Similarly, the payroll system can be configured to be more transparent by sending the payslips to every employee’s registered email ID.
