5 Things You Must Not Forget When Running Payroll
Managing payroll services in India is more than issuing salaries—it's making sure you're a step ahead with tax regulations, deductions, employee documentation, and government regulations. A single mistake can cause non-compliance, penalties, or upset staff.
Following five areas are most important to remember to have well-oiled, complaint payroll service processing:
1. Structure Salaries Sensibly for Tax Efficiency
Salary structuring is the secret to effective payroll service management. Not only does properly structured salary benefit employees with tax savings, but it also ensures firms conform to regulatory requirements.
Essential Salary Components:
- Basic Salary: Forms the base, typically 35–50% of CTC. It affects a range of benefits like provident fund and gratuity.
- House Rent Allowance (HRA): Gives relief from tax when employee pays rent and meets requirements under Section 10(13A).
- Leave Travel Allowance (LTA): Exempt from tax for travel within the country, admissible twice in a 4-year slab (present slab: 2022–2025).
- Special Allowance: Fully taxable and often used to cover the shortfall of remaining CTC.
- Gratuity & Bonus: Governed by labour legislation; qualifying conditions on the basis of service length and salary structure.
Why it is important: Savvy salary design will minimize the tax burden of the employee and allow you to maintain payroll expenses under control.
2. Legal Deductions & Contributions You Have No Choice On
Statutory compliance is absolutely essential. All payrolls are to have deductions and contributions as mandated by law.
a. Provident Fund (EPF):
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Applicable to: Companies with 20 and above employees
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Employee contribution: 12% of Basic + DA.
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Employer contribution: 12% (8.33% to Pension Scheme, 3.67% to PF).
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Interest –25: 8.25%.
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Payment Due: 15th of next month.
b. Employee’s State Insurance:
- Applies to Organizations with 10 plus workers with ≤ ₹21,000/month salary.
- Contribution from Employees: 0.75%
- Contribution from Employers: 3.25%
- Due Date for payment : 15th of next month.
c. Professional Tax:
- Levied in certain states on income slabs.
- Max annual deduction: ₹2,500.
d. TDS on Salaries (Section 192):
- Employers must calculate the estimated annual income and deduct TDS monthly.
- Form 16 should be given within June 15 of the following financial year.
- Employees can submit Form 12BB for exemption statements.
Income Range: Tax Rate
Up to ₹3,00,000: Nil
₹3,00,001 – ₹6,00,000: 5%
₹6,00,001 – ₹9,00,000: 10%
₹9,00,001 – ₹12,00,000: 15%
₹12,00,001 – ₹15,00,000: 20%
Above ₹15,00,000: 30%
3. Tax Regimes & Slabs: Know Your Numbers
India has two tax regimes, and employees must opt for one at the beginning of the financial year.
a. New Tax Regime
- Standard Deduction for salaried individuals is ₹75,000.
- Section 87A Rebate: Up to ₹25,000 if income ≤ ₹7 lakh.
b. Old Tax Regime
- This scheme allows employees to avail exemptions such as HRA, LTA, Section 80C investments, etc.
Tax slabs:
- Upto ₹2.5 lakh : Nil
- ₹2.5–5 lakh: 5%
- ₹5–10 lakh: 20%
- ₹10 lakh and above: 30%
- Note: Employees must notify their preferred tax regime at the start of the year so employers may calculate TDS accordingly.
4. Maintain Clean and Centralized Employee Data
- Exhaustive employee detail is essential for effective payroll processing, tax deduction, and statutory compliance.
- Key Employee Information:
- Permanent Account Number, Aadhaar, and bank account information
- Joining and leaving dates
- Salary framework and tax regime choice
- Leave, attendance, and Leave of Period (LOP) details
- Investment declarations (in the case of the old regime)
- Pro Tip: Invest in a good HRMS or payroll service software. It automates calculations, ensures data accuracy, and makes generation of pay slips, Form 16, and statutory returns simple.
5. Handle Final Settlements with Care
When an employee resigns, his exit and full-and-final settlement must be handled professionally and according to labor laws.
a. Gratuity
- Eligibility: On completion of 5 years of continuous service.
- Formula: 15 days' last drawn wages × number of years of service.
- Tax Exemption is available upto ₹20 lakh under Section 10(10) of Income Tax Act.
b. Bonus
- Applicable to those employees who earn upto ₹21,000 per month.
- Rate: 8.33% to 20% of salary.
- Deadline for Payment: Within 8 months of financial year closure.
c. Leave Encashment
- Paid for unused earned leave at the time of exit.
- Tax exemption is available up to ₹3 lakh in case of non-government employees.
Final Settlement Should Contain:
- Instrument of pending salary
- Incentives & reimbursements
- Gratuity, bonus, and leave encashment
- TDS calculation
- Issue of Form 16 and relieving letter
- Settlement on time consolidates your employer brand and places you legally safe.
Conclusion
Payroll service processing in India is a complicated process—it intertwines tax expertise, legal regulation, and the expectations of workers. For AY 2025–26, employers are required to:
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Develop tax-effective salary designs
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All PF, ESI, and tax deadline compliances
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Latest tax regime rules compliance
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Records precise and ready for audit
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Final settlements happen smoothly
Whether you process payroll services internally or using third-party software, these five pillars guarantee compliance, reduce risk, and facilitate a happy workforce.