A comprehensive foundation in Indian payroll covering the payroll function, employment setup, pay components, statutory deductions, payroll processing, controls and Full & Final Settlement across 8 exhaustive modules.
Payroll is far more than salary disbursement. It is a complex, multi-stakeholder compliance function that intersects human resources, finance, taxation and labour law. This module builds a complete conceptual foundation for Indian payroll practice.
Payroll is the end-to-end process through which an employer calculates, validates and disburses compensation to employees, meets all statutory deduction and remittance obligations, maintains required records and produces regulatory filings — all within prescribed legal timelines. It is a compliance-driven, data-intensive, time-critical function that directly affects every employee in the organisation and is accountable to multiple government authorities simultaneously.
Many organisations treat payroll as a clerical function. At a professional level, payroll requires: knowledge of at least six major statutes, the ability to calculate 15+ pay components correctly, management of five statutory remittance deadlines per month, coordination with HR, Finance, IT and Banking partners — and accountability for accuracy at the level of individual rupees.
Payroll errors directly impact the P&L, employee compensation and statutory liabilities — all simultaneously
Six major statutes govern Indian payroll — EPF, ESI, Income Tax, Gratuity, Bonus and Labour Codes
Payroll handles PAN, Aadhaar, bank accounts and salary data — among the most sensitive data in any organisation
Accurate, on-time salary is a fundamental employer obligation. Payroll failure damages employee trust irreversibly
Payroll data drives headcount cost analysis, budgeting, attrition costing and compensation benchmarking
Non-compliance with payroll statutes can result in prosecution of responsible officers, not just the company
| Stakeholder | What Payroll Receives From Them | What Payroll Delivers To Them |
|---|---|---|
| HR Department | New joiner data, exits, increments, leave records, variable pay approvals | Payslips, salary registers, FFS computations |
| Finance/CFO | Payment authorisation, fund release, journal entry templates | Monthly payroll cost summary, statutory liability figures, payroll MIS |
| Operations/Business | Attendance data, overtime records, performance incentive amounts | Payroll confirmation, per-department cost allocation |
| Employees | Investment declarations, rent receipts, tax regime choice, loan requests | Payslips, Form 16, tax computation statements, FFS |
| EPFO | Accepts PF ECR filings and contributions | UAN records, member passbooks, settlement claims |
| ESIC | Accepts ESI contributions | IP coverage, medical and benefit access |
| Income Tax Department | Accepts 24Q quarterly TDS returns | Form 16, TRACES acknowledgements |
| State PT Authority | Accepts PT challans and returns | PT compliance certificates |
| Bank | Receives salary file (NEFT/RTGS) | Salary credit confirmation, payment advice |
The quality of payroll output is entirely dependent on the quality of inputs. The following must be collected by the payroll team before each monthly processing cycle:
The calculation engine applies:
| Obligation | Remittance Deadline | Filing Deadline | Penalty for Default |
|---|---|---|---|
| PF (EPF + EPS + EDLI) | 15th of following month via ECR | ECR is the return — filed with payment | Interest 12% p.a. + damages up to 100% under S.14B |
| ESI | 15th of following month | Half-yearly return | Interest 12% p.a. + prosecution |
| Professional Tax | Varies by state (usually monthly/quarterly) | Annual return in most states | State PT Act penalties |
| TDS (Salary — 24Q) | 7th of following month; 31st March same day | Quarterly 24Q; Q4 by 31st May | Rs. 200/day (S.234E) + up to Rs. 1 lakh (S.271H) |
| Statute | Year | What It Governs |
|---|---|---|
| Employees Provident Funds and Misc. Provisions Act | 1952 | EPF, EPS and EDLI contributions; administered by EPFO |
| Employees State Insurance Act | 1948 | Health and cash benefits for covered employees; administered by ESIC |
| Income Tax Act | 1961 | TDS on salary (Section 192), Form 16, 24Q, advance tax obligations |
| Payment of Gratuity Act | 1972 | Gratuity eligibility (5 years), calculation and payment on exit |
| Payment of Bonus Act | 1965 | Statutory bonus eligibility and computation (8.33%–20%) |
| Payment of Wages Act | 1936 | Timely payment of wages, permissible deductions |
| Minimum Wages Act | 1948 | Scheduled employment minimum wages (now subsumed in Code on Wages) |
| Code on Wages, 2019 | 2019 | Consolidates four wage laws; Universal Minimum Wage; awaiting full implementation |
| Maternity Benefit Act | 1961 | 26 weeks paid maternity leave; crèche obligations |
| Contract Labour (R&A) Act | 1970 | Regulation of contract labour; principal employer liabilities |
Several Indian payroll statutes provide for prosecution of the individuals responsible for compliance — not just the company. The EPFO can prosecute the employer or manager personally under Section 14 of the EPF Act. The Income Tax Act imposes personal liability for TDS shortfalls. A payroll professional who ignores compliance is potentially personally liable.
| Error Type | Financial Consequence | Reputational Consequence | Legal Consequence |
|---|---|---|---|
| Late PF remittance | Interest 12% p.a. + damages up to 100% of arrears | EPFO inspection and show-cause notices | Criminal prosecution possible under S.14 EPF Act |
| Incorrect TDS deduction | Interest u/s 201A at 1.5%/month | Employee unable to claim credit; files complaint | Penalty u/s 271C equal to TDS not deducted |
| Late salary disbursement | Payment of Wages Act violation | Employee grievances, union issues | Prosecution and fine under PWA |
| Missing statutory registers | No direct financial penalty | Inspection finding; show cause | Penalty under applicable labour law |
| Data breach of salary data | DPDPA penalties (proposed) | Severe reputational damage | Civil and regulatory liability |
Payroll is not a back-office function — it is the most consequential compliance process the organisation runs every month. It directly impacts every employee's financial wellbeing, the company's regulatory standing across six statutes, and in cases of wilful default, the personal liberty of responsible officers. Every payroll professional must start from this understanding of what is truly at stake.
Continue to Module 2 to learn about employment types and payroll setup.
Before any salary can be computed, the employment relationship must be correctly established and all required data must be captured in the payroll system. This module covers worker classification, new hire onboarding data, CTC structuring and the payroll calendar.
| Worker Type | Employment Relationship | Payroll Treatment | Statutory Applicability |
|---|---|---|---|
| Permanent Employee | Open-ended employment contract | Full payroll processing monthly | PF, ESI, PT, Gratuity, Bonus — full coverage |
| Probationer | Trial period before confirmation — treated as employee | Full payroll from Day 1 | PF and ESI from Day 1 — probation does not delay statutory deductions |
| Fixed-Term Employee | Employment contract for a specific duration | Full payroll processing | PF, ESI, Gratuity (pro-rata if FTC allows); Gratuity after 5 years still applies |
| Part-Time Employee | Less than full working hours | Proportionate salary; deductions on actual wages | PF if Basic ≤ Rs. 15,000; ESI if Gross ≤ Rs. 21,000 |
| Apprentice (Apprentices Act) | Training under Apprentices Act, 1961 | Stipend — NOT salary; not on main payroll | Specifically excluded from EPF and ESI Acts |
| Contract Labour (via contractor) | Employed by contractor; deployed at principal employer premises | Principal employer does NOT process salary — contractor does | Principal employer liable if contractor defaults on PF/ESI |
| Consultant / Professional | Independent engagement; not employee | Paid via vendor payment; NOT on payroll | TDS under Section 194J at 10%; not Section 192 |
| Gig Worker / Platform Worker | Emerging category; not yet fully defined in law | Case-by-case — Code on Social Security has provisions pending implementation | Evolving statutory framework |
Misclassifying an employee as a contractor is a significant compliance risk. If EPFO or ESIC determines that a "contractor" is actually an employee of the principal employer, the principal employer faces: back payment of PF/ESI contributions for all periods, interest and damages, and potential prosecution. The test of "control and supervision" is used — if the principal employer controls how the work is done (not just the result), the worker is likely an employee.
| Data Element | Mandatory? | Payroll Use | Compliance Risk if Missing |
|---|---|---|---|
| Legal Name (as per PAN) | Mandatory | Payslip, Form 16, statutory returns | Form 16 name mismatch — TDS credit issue |
| PAN Number | Mandatory | TDS deduction; Form 24Q; Form 16 | TDS at 20% under Section 206AA if missing |
| Aadhaar Number | Mandatory for PF/ESI | UAN seeding; eKYC for EPFO/ESIC | PF settlement delayed without Aadhaar seeding |
| Date of Birth | Mandatory | Age verification; ESI eligibility; retirement planning | Incorrect DOB causes pension calculation errors |
| Gender | Required | Maternity benefit tracking; ESI records | Incorrect benefit application |
| Address | Required | Form 16 delivery; PT state determination | Wrong PT deduction if wrong state of residence |
| Data Element | Requirement |
|---|---|
| Bank Account Number | Savings account in employee's own name; joint accounts typically not accepted for salary |
| IFSC Code | 11-character code identifying bank branch; must be verified against RBI NEFT directory |
| Bank Name and Branch | For record and verification |
| Account Type | Savings account mandatory for salary credit; current account not accepted |
| Cancel Cheque / Bank Passbook | Original bank proof for verification — prevents fraud |
Bank account fraud — where a payroll employee substitutes their own account for a new joiner's — is one of the most common payroll frauds. Best practice: perform a penny-drop verification (send Re. 1 to the account and verify the name returned matches the employee record) before processing first salary.
| Data Element | Source | Action Required |
|---|---|---|
| UAN (Universal Account Number) | Previous employer or EPFO portal (new members get UAN on first registration) | Link to current employer; ensure Aadhaar seeding is complete before first ECR |
| Previous PF Member? | Form 11 Declaration | If never a PF member and Basic > Rs. 15,000, employee may opt out (Form 11) |
| ESI IP Number | Previous ESIC records if covered before | Link to current employer in ESIC portal |
| Form 12B (if mid-year joiner) | Previous employer | Required to integrate prior employer income into TDS calculation |
| Form 11 (PF declaration) | New employee fills on joining | Mandatory for all new joiners to declare prior PF membership status |
| Data Element | When Collected | Purpose |
|---|---|---|
| Tax Regime Choice (Old/New) | Beginning of financial year or at joining | TDS computation method differs significantly between regimes |
| Investment Declaration (Form 12BB) | April or at joining | Basis for TDS computation under old regime; 80C, 80D, HRA, home loan |
| HRA Exemption Details | If employee pays rent | Landlord name, address, PAN (if rent > Rs. 1 lakh/year), rent amount |
| Previous Employer Income (Form 12B) | At joining if mid-year | Prevents under-deduction of TDS when prior income not considered |
CTC (Cost to Company) is the total annual cost the employer incurs for an employee. It includes not just salary but also employer's statutory contributions. CTC is NOT the employee's take-home salary. Many employees confuse CTC with take-home — the payroll professional must be able to explain the full bridge from CTC to net pay.
| CTC Component | Typical Structure | Tax Treatment | Compliance Notes |
|---|---|---|---|
| Basic Salary | 30–50% of CTC; employer's discretion (subject to minimum wage floor) | Fully taxable | Basis for PF (12%), HRA calculation, Gratuity (15/26 × Basic × years) |
| HRA (House Rent Allowance) | 40% of Basic (non-metro) or 50% of Basic (metro) | Partially exempt u/s 10(13A) — three-factor minimum | Exemption only if employee actually pays rent; if owns house, no HRA exemption |
| Special Allowance | Balancing amount to complete gross salary after fixed components | Fully taxable | No specific exemption — used to manage CTC totals |
| Leave Travel Allowance (LTA) | Fixed amount per company policy | Exempt for actual travel cost — twice in a 4-year block | Only domestic travel; only public transport costs; original bills required |
| Meal Allowance | Fixed monthly amount | Exempt up to Rs. 50 per meal × 2 meals × working days | Must be meal-specific; cash equivalent is taxable |
| Employer PF Contribution | 12% of Basic (employer share) | Not taxable in employee's hands when contributed; PF withdrawal rules apply | Employee also contributes 12% — this is a deduction from gross, not part of gross |
| Employer ESI Contribution | 3.25% of Gross (if ESI applicable) | Not taxable in employee's hands | Applicable only for employees with Gross ≤ Rs. 21,000/month |
| Gratuity Provision | 4.81% of Basic (actuarial provision by employer) | Gratuity received is exempt up to Rs. 20 lakh | Not paid monthly — payable on exit after 5 years of service; employer provisions it as a liability |
| Activity | Typical Cut-off / Deadline | Owner | Consequence of Missing |
|---|---|---|---|
| Attendance and leave data freeze | Last calendar day of payroll month OR 1st of following month | HR / Attendance system | Payroll processed with incorrect LOP; errors to correct next month |
| New joiner data submission | By 2nd of following month | HR / Recruitment | Joiner missed from current payroll; arrears next month |
| Exit and FFS data submission | By 2nd of following month | HR | FFS delayed; statutory remittances on time still required |
| Salary revision data | By 2nd of following month | HR / Compensation | Arrears accumulate; complex retroactive calculation |
| Variable pay / bonus approval | By 2nd of following month | Business / HR | Payment deferred to next cycle |
| Payroll processing completed | 3rd–5th of following month | Payroll team | Ripple effect — disbursement and compliance both delayed |
| Payroll register review and approval | 5th–6th of following month | Finance / HR leadership | Payment cannot be released without approval |
| Salary disbursement | 6th–7th of following month (policy-dependent) | Finance / Bank | PWA violation if beyond 7th for establishments ≤ 1,000 employees |
| TDS remittance (Challan 281) | 7th of following month | Payroll / Finance | Interest 1.5%/month u/s 201A from deduction date |
| PF ECR filing and remittance | 15th of following month | Payroll | Interest 12% p.a. + damages; UAN passbooks not updated |
| ESI remittance | 15th of following month | Payroll | Interest + prosecution under ESI Act |
| PT remittance | Varies by state — typically 15th of following month | Payroll | State PT Act penalty |
Payroll setup is where most downstream errors originate. Incomplete employee master data — a missing PAN, wrong bank account, absent Form 12B from a previous employer — creates compliance failures and employee dissatisfaction that are difficult and embarrassing to correct after the fact. A robust, checklist-driven onboarding-to-payroll process is the payroll professional's first line of defence.
The earnings side of an Indian payslip contains multiple components, each with its own regulatory basis, tax treatment and compliance implication. This module covers every major pay component, the HRA exemption calculation in depth, perquisites and the difference between old and new tax regimes.
| Component | Regulatory Basis | Standard Range | Tax Treatment in Old Regime | Tax Treatment in New Regime |
|---|---|---|---|---|
| Basic Salary | Company policy (floor = Minimum Wage) | 30–50% of CTC | Fully taxable | Fully taxable |
| HRA (House Rent Allowance) | S.10(13A) + Rule 2A | 40–50% of Basic | Partially exempt (three-factor test) | No exemption — fully taxable |
| Special Allowance | Company policy | Balancing figure | Fully taxable | Fully taxable |
| LTA (Leave Travel Allowance) | S.10(5) | Defined by policy | Exempt for actual travel — twice per 4-year block | No exemption — fully taxable |
| Medical Allowance | Company policy | Rs. 1,250–1,500/month historically | Fully taxable (medical reimbursement with bills differs) | Fully taxable |
| Conveyance Allowance | Company policy | Varies | Rs. 19,200/year exempt under old regime for transport | No exemption |
| Children Education Allowance | S.10(14) | Up to Rs. 100/child/month (2 children) | Exempt up to Rs. 100/child/month for 2 children | No exemption |
| Hostel Expenditure Allowance | S.10(14) | Up to Rs. 300/child/month | Exempt up to Rs. 300/child/month for 2 children | No exemption |
| Uniform Allowance | S.10(14) | Varies by company | Exempt for official uniform cost | No exemption |
| Night Shift / Overtime Allowance | Company policy | Varies | Fully taxable | Fully taxable |
HRA exemption under Section 10(13A) is the minimum of three amounts, computed annually:
The total HRA received from employer during the year
50% of annual Basic for Metro cities (Delhi, Mumbai, Chennai, Kolkata)
40% of annual Basic for all other cities
(Annual rent paid) − (10% × Annual Basic). If this is negative (rent paid less than 10% of Basic), it becomes zero and HRA exemption is also zero.
A perquisite is any non-cash benefit provided by the employer that has monetary value. Under the Income Tax Act, perquisites are taxable in the employee's hands. The employer must: (1) compute the perquisite value, (2) add it to the employee's salary income for TDS computation, (3) deduct TDS accordingly. This process must happen every month if perquisites are provided regularly.
| Perquisite | Valuation Method | Tax Treatment |
|---|---|---|
| Company Accommodation (employer-owned) | 15% of salary for cities with population > 25 lakh; 10% for 10–25 lakh; 7.5% for below 10 lakh. Where salary = Basic + DA + Bonus + Commission | Taxable — add to salary; TDS applies |
| Company Accommodation (leased by employer) | Lower of: (i) actual lease rent paid, or (ii) 15%/10%/7.5% of salary as above | Taxable |
| Company Car (with driver) for private use | Engine ≤ 1,600cc: Rs. 2,700/month + Rs. 900 for driver = Rs. 3,600/month. Engine > 1,600cc: Rs. 3,300/month + Rs. 900 = Rs. 4,200/month | Taxable — add to salary |
| Company Car for official use only | Nil — if employer certifies all use is official and maintains log | Exempt |
| Interest-free or concessional loan | Difference between SBI prime lending rate and actual interest — computed on outstanding monthly balance | Taxable if loan > Rs. 20,000 and not for medical treatment |
| Gift vouchers / non-cash gifts | Taxable only if aggregate exceeds Rs. 5,000 per year — excess over Rs. 5,000 is taxable | Exempt up to Rs. 5,000; excess taxable |
| Employer-paid personal mobile/telephone | Taxable in full if for personal use; exempt if used for official duty | Official use: Exempt; Personal use: Taxable |
| Meal coupons / canteen | Exempt up to Rs. 50 per meal for up to 2 meals per working day | Beyond limit: Taxable |
| ESOP — perquisite at exercise | FMV on exercise date minus exercise price × number of options exercised | Fully taxable as salary; TDS required at exercise |
From FY 2023-24, the new tax regime is the default. If an employee does not explicitly opt for the old regime, TDS is computed under the new regime. This changes how pay components are structured — under the new regime, most allowance exemptions disappear, making CTC structuring less effective for tax optimisation.
| Exemption / Deduction | Old Regime | New Regime |
|---|---|---|
| Standard Deduction | Rs. 50,000 (FY 2023-24); Rs. 75,000 (FY 2024-25) | Rs. 75,000 (FY 2024-25) |
| HRA Exemption (S.10(13A)) | Available — three-factor minimum test | NOT available |
| LTA Exemption (S.10(5)) | Available — twice per 4-year block | NOT available |
| Section 80C (PF, LIC, ELSS etc.) | Up to Rs. 1,50,000 | NOT available |
| Section 80D (Health Insurance) | Up to Rs. 25,000 / Rs. 50,000 | NOT available |
| Home Loan Interest (S.24) | Up to Rs. 2,00,000 on self-occupied property | NOT available |
| NPS deduction (S.80CCD(1B)) | Additional Rs. 50,000 | NOT available (employer NPS contribution exempt under S.80CCD(2) — available in both regimes) |
| Conveyance, children education allowances | Various exemptions available | NOT available |
| Method | Denominator | Usage |
|---|---|---|
| Calendar Day Method (most common) | Actual number of calendar days in the month (28/29/30/31) | Most Indian organisations; gives different per-day rate each month |
| Fixed 26 Day Method | Fixed denominator of 26 days regardless of month | Some organisations; simpler; gives consistent per-day rate |
| Working Day Method | Actual working days in the month (varies) | Some manufacturing/shift-based organisations |
Whichever method the organisation adopts, it must be consistently applied. Switching methods between employees or months creates legal risk. The payroll policy must define the denominator explicitly, and the payslip should reflect the calculation transparently so employees can verify their own pro-rata.
If total deductions + exemptions exceed ₹3.75 lakh, old regime usually saves more. Below that, new regime's lower slab rates win — especially for income below ₹10 lakh.
Every pay component on an Indian payslip has a specific tax identity — taxable, partially exempt, or fully exempt — and the treatment differs between old and new regimes. A payroll professional must know not just what to put on a payslip but why, and must be able to calculate HRA exemption, perquisite valuations and pro-rata amounts accurately in any scenario.
Deductions transform gross salary into net pay. In Indian payroll, deductions span statutory obligations (mandated by law), semi-statutory amounts (employer-contributed above the minimum) and voluntary deductions authorised by the employee. Every deduction must be correctly calculated, legally grounded and properly documented.
Under the Payment of Wages Act, 1936 and the Code on Wages, 2019, an employer cannot deduct any amount from wages except those specifically authorised by law OR expressly consented to in writing by the employee. Deductions beyond these categories are illegal — even if the employer claims a business reason.
| EPF Component | Contribution | Basis | Rate | Remittance |
|---|---|---|---|---|
| Employee PF | Deducted from employee's salary | 12% of Basic + DA | Mandatory | Part of ECR |
| Employer EPF | Paid by employer (part of CTC) | 3.67% of Basic + DA | Mandatory | Part of ECR |
| Employer EPS (Pension) | Paid by employer (part of CTC) | 8.33% of Basic + DA, capped at Rs. 15,000 Basic | Mandatory | Part of ECR |
| EDLI (Insurance) | Paid by employer | 0.50% of Basic + DA, capped at Rs. 15,000 Basic | Mandatory | Part of ECR |
| Admin Charges | Paid by employer | 0.50% of Basic + DA, minimum Rs. 75/month per establishment | Mandatory | Part of ECR |
EPS is capped at 8.33% of Rs. 15,000 = Rs. 1,250/month regardless of actual Basic salary. If Basic > Rs. 15,000, the employer contributes Rs. 1,250 to EPS and the balance of their 12% goes to EPF. The employee always contributes the full 12% to EPF only — not to EPS directly.
| ESI Element | Detail |
|---|---|
| Coverage threshold | Establishments with 10 or more employees (20 in some states); employee earning Gross ≤ Rs. 21,000/month |
| Employee contribution | 0.75% of Gross wages |
| Employer contribution | 3.25% of Gross wages |
| Employee contribution if daily wage ≤ Rs. 137 | Employer pays BOTH shares — employee share is also borne by employer |
| Contribution period | April–September (Period 1) and October–March (Period 2) |
| Benefit entitlement period | October–March (for Period 1 contributions) and April–September (for Period 2 contributions) |
| Once covered, always covered during period | If employee's gross crosses Rs. 21,000 mid-period, ESI continues until end of the period — coverage doesn't stop mid-period |
| Exemption | Establishments in areas not yet notified for ESI; employee gross consistently > Rs. 21,000 at start of period |
An employee earns Rs. 20,000 gross in April (start of contribution period) — ESI applies. In July, they get a salary revision to Rs. 22,500 gross. Their gross now exceeds Rs. 21,000. What happens? ESI contributions CONTINUE until 30th September (end of the current contribution period). Coverage does not stop at the point the salary crosses Rs. 21,000. Only from October (start of next period) will ESI not apply if the new gross remains above Rs. 21,000.
| State | Monthly Salary Slab | Monthly PT Deduction | Annual PT | Filing Frequency | Notes |
|---|---|---|---|---|---|
| Maharashtra | Up to Rs. 7,500: Nil; Rs. 7,501–10,000: Rs. 175; Rs. 10,001+: Rs. 200 (Feb: Rs. 300) | Rs. 200 (Feb: Rs. 300) | Rs. 2,500 | Monthly (20+ employees); quarterly (fewer) | Rs. 300 in February makes annual total Rs. 2,500 |
| Karnataka | Up to Rs. 15,000: Nil; Rs. 15,001–25,000: Rs. 150; Rs. 25,001–35,000: Rs. 175; Rs. 35,001+: Rs. 200 | Rs. 200 (max) | Rs. 2,400 | Monthly | Separate employer PT registration required |
| West Bengal | Up to Rs. 10,000: Nil; Rs. 10,001–15,000: Rs. 110; Rs. 15,001–25,000: Rs. 130; Rs. 25,001–40,000: Rs. 150; Rs. 40,001+: Rs. 200 | Rs. 200 (max) | Rs. 2,500 | Monthly | PT authority: Directorate of Commercial Taxes |
| Andhra Pradesh / Telangana | Up to Rs. 15,000: Nil; Rs. 15,001–20,000: Rs. 150; Rs. 20,001+: Rs. 200 | Rs. 200 (max) | Rs. 2,400 | Monthly | Separate registration for AP and TG offices |
| Tamil Nadu | Biannual slabs — Rs. 21,001–30,000 half-yearly: Rs. 1,250; Rs. 30,001–45,000: Rs. 1,875; Rs. 45,001+: Rs. 2,500 | Varies | Up to Rs. 2,500 | Half-yearly (April–September; October–March) | Different collection cycle from other states |
| Gujarat | Up to Rs. 12,000: Nil; Rs. 12,001+: Rs. 200/month | Rs. 200 | Rs. 2,400 | Monthly | Gujarat PT is called 'Professional Tax' — same concept |
| Madhya Pradesh, Rajasthan, UP | No PT | — | — | — | States without Professional Tax |
For employees working remotely, PT applies in the state where they are actually working (i.e., their state of residence from which they work). For a Maharashtra-based employee working from home in Pune, Maharashtra PT applies. The employer must obtain PT registration in each state where they have employees working — including remote workers residing in PT-applicable states.
Under the Payment of Wages Act, no deduction from wages is permissible unless: (1) authorised by an applicable law, OR (2) the employee has consented in writing in advance. Without this, any deduction — however reasonable — is illegal and the employee is entitled to recover it.
| Voluntary Deduction Type | Required Authorisation | Recovery Limit | Notes |
|---|---|---|---|
| Salary advance | Signed advance request form from employee; HR approval | Full recovery over agreed EMIs; cannot deduct more than agreed | Must document repayment schedule; recovery cannot exceed outstanding amount |
| Company loan EMI | Signed loan agreement; HR/Finance approval; documented EMI schedule | Monthly EMI as per agreement only | Loan register must be maintained; outstanding balance confirmed before FFS |
| VPF (Voluntary PF) | Employee's written election for VPF % | No legal limit on VPF contribution beyond 12% | VPF qualifies for 80C; excess PF interest over Rs. 2.5 lakh taxable |
| Canteen deduction | Company canteen policy; employee-specific usage | Actual canteen usage only | Must reflect actual consumption; cannot be a uniform flat deduction without basis |
| Welfare fund / employees association | Employee consent form | Amount specified in consent | Separate register for each deduction type |
LOP reduces the actual salary for the month. Since PF is on Basic and ESI is on Gross, both statutory deductions are also reduced proportionally when LOP is applied. The per-day rate method means the base for both PF and ESI is the actual wages paid, not the contractual monthly amount. For TDS purposes, LOP reduces the month's taxable income — the annual TDS projection must be recalculated.
Deductions are the most compliance-intensive part of payroll. PF, ESI, PT and TDS each have their own applicability rules, computation methods, remittance deadlines and penalty structures. Voluntary deductions must always be backed by written employee consent. A payroll professional who masters deductions — and the exceptions, edge cases and multi-state variations — is mastering the core technical competency of the role.
TDS on salary under Section 192 is the most technically demanding computation in Indian payroll. It requires the payroll professional to project annual income, apply deductions and exemptions, compute tax liability, and spread the deduction evenly across the remaining months — recalculating every time anything changes.
Section 192 of the Income Tax Act, 1961 obliges every employer paying salary to deduct tax at source. The key features:
| Feature | Rule |
|---|---|
| Who must deduct? | Every person responsible for paying salary — the employer (or the person making salary payments on behalf of the employer) |
| When to deduct? | At the time of payment of salary — typically each month on the salary credit date |
| Rate of deduction? | At the average rate of tax on the employee's estimated annual taxable salary income |
| What if employee has multiple employers? | Employee must inform the current employer of income from previous employer (Form 12B); current employer integrates all salary income |
| What if TDS is short due to employee failure? | Employer is still liable u/s 201 for any shortfall — employer must deduct TDS regardless of employee cooperation |
| Remittance? | By 7th of the month following the month of deduction (31st March — same day) |
| Return? | Form 24Q — quarterly TDS return on salary |
| Certificate? | Form 16 issued by 15th June for preceding financial year |
| Step | Action | Details |
|---|---|---|
| 1 | Estimate Annual Gross Salary | Project salary for the full financial year including expected variable pay, arrears |
| 2 | Reduce Exempt Allowances | Subtract HRA exemption, LTA, other exempt allowances (old regime only) |
| 3 | Apply Standard Deduction | Rs. 75,000 (FY 2024-25) for both regimes — directly from gross |
| 4 | Apply Other Deductions (Old Regime) | 80C up to Rs. 1.5 lakh; 80D; 24(b) home loan; 80CCD(1B) NPS; others |
| 5 | Compute Taxable Income | Net taxable income after all exemptions and deductions |
| 6 | Apply Tax Slabs | Apply applicable slab rates (old or new regime) to taxable income |
| 7 | Apply Rebate u/s 87A | Old: Rebate up to Rs. 12,500 if taxable income ≤ Rs. 5 lakh. New: Rebate up to Rs. 25,000 if income ≤ Rs. 7 lakh |
| 8 | Add Surcharge (if applicable) | 10% surcharge on income Rs. 50 lakh – Rs. 1 crore; 15% on Rs. 1–2 crore; others |
| 9 | Add Health & Education Cess | 4% on (tax + surcharge) |
| 10 | Compute Monthly TDS | (Annual Tax − TDS Already Deducted) ÷ Remaining Months in FY |
| Income Slab | Old Regime Rate | New Regime Rate |
|---|---|---|
| Up to Rs. 2,50,000 | Nil | — |
| Up to Rs. 3,00,000 | — | Nil |
| Rs. 2,50,001 – Rs. 5,00,000 | 5% | — |
| Rs. 3,00,001 – Rs. 7,00,000 | — | 5% |
| Rs. 5,00,001 – Rs. 10,00,000 | 20% | — |
| Rs. 7,00,001 – Rs. 10,00,000 | — | 10% |
| Rs. 10,00,001 – Rs. 12,00,000 | 30% | 15% |
| Rs. 12,00,001 – Rs. 15,00,000 | 30% | 20% |
| Above Rs. 15,00,000 | 30% | 30% |
| Rebate u/s 87A | Up to Rs. 12,500 if income ≤ Rs. 5 lakh | Up to Rs. 25,000 if income ≤ Rs. 7 lakh |
| Standard Deduction | Rs. 75,000 (FY 2024-25) | Rs. 75,000 (FY 2024-25) |
| Health & Education Cess | 4% on tax + surcharge | 4% on tax + surcharge |
| Month | Activity | Payroll Action |
|---|---|---|
| April | Collect investment declarations (Form 12BB) from employees | Enter declared amounts; compute TDS under chosen regime; set monthly TDS |
| April–December | Monitor salary changes (increments, bonus, variable pay) | Recalculate TDS each month as salary changes |
| January | Collect actual investment proofs from employees | Cross-verify proofs against declarations; disallow unsupported claims |
| February | Finalise TDS on the basis of actual proofs | Adjust TDS — shortfall deducted over Feb-Mar; excess refunded |
| March | Year-end TDS reconciliation | Ensure annual TDS matches tax liability exactly |
| May (following year) | Issue Form 16 by 15th June | Part A from TRACES; Part B prepared by employer |
| Element | Form 16 Part A | Form 16 Part B |
|---|---|---|
| Source | Downloaded from TRACES portal | Prepared by employer |
| Content | Quarter-wise TDS deducted and deposited; TAN of employer; PAN of employer and employee | Detailed salary breakup: all components, exemptions, deductions; computation of taxable income and tax |
| Mandatory? | Yes — cannot be hand-written; must come from TRACES | Yes — employer prepares as Annexure |
| Issued By? | 15th June of the following financial year | Along with Part A |
| When no TDS deducted? | Part A still must be issued with zero TDS if employer paid salary | Part B still required |
TDS on salary is a living calculation — not a fixed monthly amount. Every increment, bonus, variable pay, proof submission or regime change recalibrates the annual tax projection and the monthly deduction. The payroll professional must approach TDS as a continuous estimation process, not a one-time April exercise.
Indian payroll must simultaneously comply with multiple labour statutes, each with distinct applicability criteria, computation rules, remittance timelines and record-keeping requirements. This module covers the four principal statutory obligations — PF, ESI, Gratuity and Bonus — and the full annual compliance calendar.
15 = number of days' wages paid per year of service as gratuity. 26 = statutory working days in a month (30 days minus 4 Sundays). This fraction gives approximately 15 days of monthly salary per year.
| Scenario | Rule |
|---|---|
| Minimum service for gratuity | 5 years of continuous service — no gratuity if service < 5 years |
| Service fraction > 6 months | Rounds up to next full year. E.g., 7 years 7 months → treated as 8 years for gratuity |
| Service fraction ≤ 6 months | Ignored. E.g., 7 years 3 months → treated as 7 years |
| Death or permanent disablement | 5-year minimum waived — gratuity payable regardless of service period |
| Maximum gratuity (statutory cap) | Rs. 20,00,000 (Rs. 20 lakh) — enhanced in 2018. Employers may pay more. |
| Tax exemption | Rs. 20 lakh exempt under Section 10(10) for covered employees |
| Payment timeline | Within 30 days of becoming payable — delay attracts simple interest at notified rate |
| Nominee vs legal heir | Gratuity payable to nominee registered in Form F; if no nominee, to legal heir |
| Provision | Detail |
|---|---|
| Applicability | Establishments with 20 or more employees; once covered, continues even if headcount falls below 20 |
| Eligible employees | Those who have worked for 30+ days during the accounting year and draw salary ≤ Rs. 21,000/month |
| Calculation salary cap | Salary or Rs. 7,000 per month (or minimum wage for the scheduled employment, whichever is higher) — whichever is lower. Bonus calculated on this capped amount. |
| Minimum bonus | 8.33% of eligible salary — the equivalent of one month's bonus payment |
| Maximum bonus | 20% of eligible salary — employers with allocable surplus above threshold must pay up to this |
| Payment timeline | Within 8 months of the close of the accounting year (i.e., by 30th November if accounting year is April–March) |
| Accounting year | April to March for most establishments |
| Set-on and Set-off | Surplus above 20% bonus threshold can be 'set on' to future years; deficiency can be 'set off' from past set-on |
| Deduction from bonus | Customary or interim bonus already paid can be deducted from the statutory bonus payable |
| Register/Record | Purpose | Retention |
|---|---|---|
| ECR (Electronic Challan cum Return) | Monthly contribution data for all PF members — filed digitally | 5 years minimum |
| Form 9 (Member Register) | Details of all PF members — joining date, wage, UAN | Throughout membership + 5 years after exit |
| Form 11 Declarations | New joiner PF status declaration | Permanently |
| Nomination Form 2 | PF and EPS nominee details | Permanently per member |
| Inspection Book | Entries by EPFO visiting officers | 5 years |
| Month | Compliance Activity | Statute |
|---|---|---|
| 7th of every month | TDS remittance via Challan 281 | Income Tax Act |
| 15th of every month | PF ECR filing and remittance | EPF Act |
| 15th of every month | ESI remittance | ESI Act |
| Monthly (state-specific) | Professional Tax remittance | State PT Acts |
| 31st July | 24Q for Q1 (April–June) | Income Tax Act |
| 31st October | 24Q for Q2 (July–September) | Income Tax Act |
| 31st January | 24Q for Q3 (October–December) | Income Tax Act |
| 31st May | 24Q for Q4 (January–March) | Income Tax Act |
| 15th June | Form 16 issued to all employees | Income Tax Act |
| 30th November (typically) | Statutory Bonus payment deadline (within 8 months of FY close) | Payment of Bonus Act |
| Annual | Return of contributions — ESI | ESI Act |
| Annual | PT annual return | State PT Acts |
| Annual | Labour Welfare Fund contribution (state-specific) | State Labour Welfare Fund Acts |
| As due | Gratuity payment within 30 days of eligibility | Payment of Gratuity Act |
Statutory compliance is the payroll function's non-negotiable obligation. Unlike salary calculations where an error can be corrected next month, missed remittances attract interest and penalties from the due date — there is no forgiveness for lateness. Building the compliance calendar into the payroll team's monthly rhythm — not as a checklist to be done reactively, but as a proactive schedule — is the hallmark of professional practice.
This module walks through the complete monthly payroll processing cycle — every step from input freeze to salary credit — with a focus on the controls that must be applied at each stage to ensure accuracy, prevent fraud and maintain compliance.
| Input | Source System/Team | Impact on Payroll |
|---|---|---|
| Attendance summary | Time & Attendance system / HR | LOP deductions; overtime additions |
| New joiner list | HR / Recruitment | Add to payroll with pro-rata first month salary |
| Exit list with LWD | HR | Remove from payroll; trigger FFS process |
| Salary revisions | HR Compensation | Update CTC master; compute arrears if retrospective |
| Approved bonus / variable pay | Business / HR | Add to gross; TDS recalculation |
| Investment proof updates (Jan-Feb) | Employee / HR | TDS recalculation for remaining months |
| Loan/advance requests and recoveries | Finance / HR | Add/modify deduction records |
| Confirmation of arrears from previous month | Payroll team | Process pending corrections |
| Variance Check | Flag Threshold | Likely Cause |
|---|---|---|
| Month-on-month total payroll cost | More than 5–10% change | Large batch of joiners/exits; bulk increment; bonus payment |
| Individual net pay change | More than 20% from prior month without input | Data entry error; duplicate payment; fraudulent change |
| Headcount change | Any unexplained increase | Ghost employee risk — verify against HRIS |
| Total PF contribution change | More than proportional to headcount change | PF basis error; missed employee |
| TDS total change | Unexplained jump or drop | TDS computation error; missing prior employer income |
| Payslip Line | Where It Comes From | Tax Treatment |
|---|---|---|
| Basic Salary | CTC structure — fixed component | Fully taxable |
| HRA | CTC structure — fixed component | Partially exempt under old regime (three-factor test) |
| Special Allowance | CTC balancing component | Fully taxable |
| LTA | CTC component — may be paid monthly or annually | Exempt for actual travel twice per 4-year block; else taxable |
| Total Gross Earnings | Sum of all earnings | — |
| Employee PF Deduction | 12% of Basic (max on Rs. 15,000 unless higher option elected) | 80C deduction for employee under old regime |
| Employee ESI Deduction | 0.75% of Gross (if applicable) | Not deductible — employee's cost |
| Professional Tax | Per state slab on monthly salary | Deductible under Section 16(iii) against gross salary |
| TDS (Income Tax) | Monthly TDS per Section 192 computation | — |
| Loan/Advance Recovery | Per approved schedule | Not a deduction for tax — balance sheet movement |
| Total Deductions | Sum of all deductions | — |
| Net Pay | Gross − Total Deductions — amount credited to bank | — |
| Employer PF Contribution (information) | 3.67% EPF + 8.33% EPS + 0.50% EDLI | Not taxable in employee's hands when contributed |
| YTD Gross / YTD Deductions | Year-to-date cumulative figures | Useful for employee tax monitoring |
A payslip is a legal document that evidences the employment contract, salary paid and deductions made. Employees need it for: loan applications, visa applications, tax filing, and in case of any salary dispute. Employers must issue payslips every month without fail — under some state Shops and Establishments Acts, failure to provide payslips is a violation.
Dual sign-off for all joiner/exit/revision data; no unilateral changes
Person who enters payroll data ≠ person who approves the payroll register
Every month — flag any employee with >20% net pay change without approved input
Payroll system access on need-to-know basis; no shared login credentials
No bank file released until payroll register approved by designated authority
Monthly spot-check of 10–20 payslips for calculation accuracy
The monthly payroll cycle is a structured process with defined inputs, processing steps, controls and outputs. Every stage has a defined control point. The payroll professional who runs this cycle with discipline — validating inputs, reviewing variances before disbursement, obtaining documented approval and reconciling bank files — creates a payroll function that is not just accurate, but auditable and defensible.
Full and Final Settlement (FFS) is the most complex payroll transaction for any employee — it integrates pending salary, leave encashment, gratuity, notice pay adjustments, tax and loan recoveries into one final payment. This module also covers payroll record retention and what to maintain for statutory inspection readiness.
FFS involves at minimum 6–8 separate computations, each with its own rules. A payroll professional must work through each component systematically — computing, applying tax, and documenting — before arriving at the net FFS amount. No shortcuts.
| FFS Component | Computation Basis | Tax Treatment | Notes |
|---|---|---|---|
| Pending Salary | (Monthly CTC ÷ Calendar days) × Days worked in exit month | Fully taxable as salary | Include all fixed components: Basic, HRA, allowances |
| HRA Exemption on Pending Salary | Three-factor minimum for actual days worked in exit month | Exempt as applicable | Rent paid that month; days adjustment for pro-rata |
| Leave Encashment | (Basic ÷ 26) × Earned Leave Days Encashed | Exempt up to Rs. 25 lakh (lifetime aggregate) u/s 10(10AA) | Only earned/privileged leave; sick and casual leave typically lapse |
| Gratuity (if ≥ 5 years service) | Basic × 15/26 × Completed Years (rounded for fractions > 6 months) | Exempt up to Rs. 20 lakh u/s 10(10) | Not payable if < 5 years unless death/disability |
| Notice Pay Received (employer waives notice) | Salary for notice period paid by employer to allow early exit | Taxable as salary | Employer gives cash in lieu of notice service |
| Notice Pay Recovery (employee doesn't serve) | (Monthly CTC ÷ 30) × Days of Notice Not Served | Reduces taxable salary — it is a recovery, not income | Written clawback clause in employment agreement required |
| Bonus (if due) | As per company policy or Payment of Bonus Act | Fully taxable in year of receipt | Pro-rated for the period served if company policy allows |
| Salary Advance / Loan Recovery | Outstanding balance as per loan register | Not income — balance sheet movement | Cannot exceed outstanding amount; excess must be returned |
| Performance Incentive (if due) | Pro-rata per policy | Taxable; may attract Section 89(1) relief if relates to prior year | Approval from business required before including |
| Step | Action |
|---|---|
| 1 | Aggregate all income from April to last working date in current FY — salary, bonus, variable pay, perquisites |
| 2 | Add FFS taxable components: pending salary, notice pay received, taxable portion of leave encashment, taxable portion of any FFS bonus |
| 3 | Exclude exempt amounts: gratuity up to Rs. 20 lakh; leave encashment up to Rs. 25 lakh lifetime |
| 4 | Apply standard deduction (Rs. 75,000), investment declarations and proofs submitted by the employee |
| 5 | Compute annual tax on total taxable income |
| 6 | Subtract TDS already deducted in prior months of the same financial year |
| 7 | Balance = TDS to be deducted from FFS payment |
| 8 | If FFS amount is insufficient to cover TDS: recover the shortfall from the employee before releasing FFS or reach a written agreement |
| Record Type | Minimum Retention Period | Authority |
|---|---|---|
| Monthly Payroll Registers | 8 years | Income Tax Act + company policy |
| Individual Payslips | 5 years | Shops and Establishments Acts |
| Form 24Q (TDS returns) | 7 years after the return relates to | Income Tax Act |
| Form 16 copies issued | 7 years | Income Tax Act |
| Investment Declarations (Form 12BB) and Proofs | 7 years | Income Tax Act |
| PF ECR records | 5 years | EPF Act (Paragraph 38 — inspection readiness) |
| PF Form 11 (joiner declaration) | Permanently — per member | EPF Act |
| ESI contribution records | 5 years | ESI Act |
| Gratuity calculation and payment records | Permanently (or 10 years post-payment) | Payment of Gratuity Act |
| Bonus computation records | 8 years | Payment of Bonus Act |
| PT payment challans and returns | Per state PT Act — typically 5 years | State PT Acts |
| FFS settlement documents | 7 years post-settlement | Multiple Acts |
| Employment contracts | Permanently or 7 years post-termination | Legal prudence + labour law |
Full and Final Settlement is the last financial transaction between employer and departing employee. Done correctly, it reflects professional standards — accurate, compliant, timely and well-documented. Done poorly, it creates legal claims, TDS liability and reputational damage. Every payroll professional should master FFS because it integrates every concept from the course into one complex computation.
You have completed all 8 modules. You are now ready for the Certified Payroll Practitioner — India programme.