Payroll processing for Indian employers involves multiple steps to ensure accurate and timely payment of salaries while complying with various labor laws and statutory obligations. It is a critical function that not only includes calculating salaries but also managing deductions, tax filings, and reporting.

Below is an overview of what is typically involved in payroll processing from an Indian employer's perspective:

1. Collection of Employee Data

Employee Details: Basic details like employee ID, name, date of joining, PAN (Permanent Account Number), Aadhaar, bank details, etc.
Salary Structure: Information about the employee’s salary components including basic pay, allowances (HRA, medical, special allowances), bonuses, and other benefits.
Attendance and Leave Records: Capturing attendance data, leave taken, overtime, and other factors impacting the salary for the pay period.

2. Salary Calculation

Gross Salary Calculation: Calculate the gross salary based on the agreed salary structure. This includes:

• Basic Salary
• Special Allowances
• Milk
• Performance Bonuses (if applicable)

Deductions: Various statutory and non-statutory deductions are calculated and subtracted from the gross salary. These include:

• Provident Fund (PF): Employee and employer contributions to the Employees’ Provident Fund Organization (EPFO) as mandated by the Employees' Provident Fund Act.
• Employee State Insurance (ESI): Deductions for ESI, applicable to employees earning below a certain threshold (₹21,000/month) under the ESI Act.
• Professional Tax: Applicable in certain states, professional tax is deducted from the salary based on state-specific regulations.
• Income Tax (TDS): Tax deducted at source (TDS) is calculated based on employee income and declared investments under the Income Tax Act.
• Loan or Advance Repayment: Any salary advances or loans taken by the employee are deducted.

Net Salary: Once all deductions are made, the net salary (take-home pay) is calculated. This is the amount credited to the employee’s bank account.

3. Tax Compliance

Income Tax Calculation: Tax deductions are calculated based on the employee’s income, investment declarations, and other exemptions under sections like 80C, 80D, and HRA exemptions.
Form 12BB Submission: Employees submit Form 12BB to declare their investments, which helps in accurate calculation of TDS.
TDS Filing: The employer is responsible for deducting and filing TDS with the income tax department. This is done monthly through Form 24Q and filed quarterly.

4. Statutory Contributions and Filings

Provident Fund (PF) Contributions: Both employer and employee contribute 12% of the basic salary to the Provident Fund. The employer must file the PF contributions with the EPFO each month through EPF returns.
Employee State Insurance (ESI): For employees earning below ₹21,000/month, ESI contributions are deducted (1.75% from the employee and 4.75% from the employer) and submitted to the ESI Corporation.
Professional Tax: This is deducted based on state-specific laws and deposited with the state government.
Gratuity: Employers should account for gratuity for employees who have completed 5 or more years of service. Though gratuity is paid upon resignation or retirement, it is calculated and provisioned during payroll.

5. Payroll Compliance with Labor Laws

Minimum Wages: Ensure that salaries adhere to the minimum wage laws set by the respective state governments.
Payment of Wages Act: Salary payments must be made within the legally mandated timeframes (usually the 7th or 10th day of the month for the previous month’s wages).
Leave Encashment: Leave balances are tracked, and any leave encashment (if allowed by company policy) is calculated and paid.
Maternity/Paternity Benefits: Payroll must account for statutory leave entitlements under the Maternity Benefit Act, where applicable.
Bonus Payments: Ensure compliance with the Payment of Bonus Act, which mandates a statutory bonus for eligible employees.

6. Generation of Payslips

Monthly Payslips: Detailed payslips are generated for each employee, outlining:

• Gross Salary
• Statutory and non-statutory deductions
• Tax deductions (TDS)
• Net Pay

Digital or Printed Payslips: Payslips can be shared digitally via email or company HR portals. Some companies may provide hard copies upon request.

7. Bank Transfer

Salary Disbursement: Once the net salary is calculated, it is transferred to employees’ bank accounts via direct bank transfer (NEFT/RTGS/IMPS).
Payment Confirmation: Confirmation of payment is shared with employees and the accounts department.

8. Post-Payroll Activities

Statutory Filings: Submit monthly and quarterly statutory filings for EPF, ESI, and TDS.
Form 16: Issue Form 16 annually, which details the TDS deducted and submitted to the government. This form is required by employees for filing their income tax returns.
Grievance Handling: Address employee queries or grievances regarding payroll discrepancies, incorrect deductions, or salary payments.

9. Record Maintenance

Payroll Records: Employers are required to maintain payroll records, including salary, tax deductions, and statutory contributions, for audit and compliance purposes.
Audit and Compliance Checks: Payroll records are subject to scrutiny during internal audits and government inspections to ensure compliance with Indian labor laws.

10. End of Service and Full & Final Settlement

Resignation and Settlement: When an employee leaves, a full and final settlement is processed, which includes:

• Unpaid salary for the last working month.
• Leave encashment.
• Gratuity (if applicable).
• Bonuses or other due payments.

Issuing Relieving and Experience Letters: After processing the final settlement, these letters are issued to the exiting employee.