Payroll- An Introduction

By- FCMA GAURAV KUMAR

What is Payroll?
 Payroll is a list of employees who get paid by the company. Payroll also refers to the total amount of money
employer pays to the employees. As a business function, it involves:
 Developing organization pay policy including flexible benefits, leave encashment policy, etc.
 Defining payslip components like basic, variable pay, HRA, and LTA
 Gathering other payroll inputs (e.g., organization’s food vendor may supply information about the amount to be
recovered from the employees for meals consumed)
 The actual calculation of gross salary, statutory as well as non-statutory deductions, and arriving at the net pay
 Releasing employee salary
 Depositing dues like TDS, PF, etc. with appropriate authorities and filing returns
 In short, we can say that payroll process involves arriving at what is due to the employees also called as ‘net
pay’ after adjusting necessary taxes and other deductions.
The equation for calculating the net pay
 Net pay = Gross income - gross deduction
Where,
 Gross income or salary = All types of regular income + allowances + any one-time payment or benefit
Gross deduction = All types of regular deductions + statutory deductions + any one-time deductions
Payroll Process
3 Stage of Payroll
Statutory compliance in Indian payroll
A Brief Introduction of Various
Acts under Payroll
Payment of Wages Act, 1936
 The Payment of Wages Act, 1936 regulates the payment of wages to direct and indirect employees. The act
warrants payments of wages on time and without any deductions except those authorized under the Act.
According to this act, the payment should be made before 7th of every month where the no. of workers
are less than 1000 and on the 10th day if greater than 1000.
 The Payment of Wages Act, 1936 regulates the payment of wages to employees (direct and indirect). The
Payment of Wages Act regulates the payment of wages to certain classes of persons employed in industry,
and its importance cannot be underestimated. The Act guarantees payment of wages on time and without
any deductions except those authorized under the Act. The wage period shall not exceed 1 month.
 The Payment of Wages Act does not apply to employees whose wage is Rs. 10000 or more per month. The
Act also provides to the effect that a worker cannot contract out of any right conferred upon him under the
Act.
 Under the act, the payment has to be made in cash. Cheque payment or crediting wages to a bank account is
allowed with the consent of employee in writing. The deduction made by the employer should be made by
this act only.
 Under the act, payment has to be made in currency notes or coins. Cheque payment or crediting to bank
account is allowed with the consent in writing by the employee. (Section 6)
 This Act includes fines for (Section 8), absence from duty (Section 9), Damages or loss (Section 10),
deduction for services (amenities) given by employer (Section 11) recovery of advances and loans (Section
12, 13) and payment to cooperative society and insurance (Section 13).
Minimum Wages Act, 1948
 Minimum wages rates in India are fixed under the Minimum wages Act, 1948 and is determined both by
the Central Government and the Provincial governments. Minimum wages rates may be established for
any region, occupation, and sector and declared at the national, state, sectoral and occupational levels.
The minimum wages is determined by considering cost of living.
 While fixing the minimum wages rate, it may be set for different work classes in the same scheduled
employment or set for different scheduled employment. It may also be fixed by hour, day, month or any
other wage period.
 Under the Minimum Wages Act, both the Central and State Governments may notify the scheduled
employments and fix/revise minimum wage rates for these scheduled employments.
 There are two methods for fixing/revising minimum wages:
 Under the committee method, the government sets up committees and subcommittees to hold inquiries
and recommendations for fixing and changing minimum wages.
 In the notification method, government proposals get published in the Official Gazette for persons who
are likely to be affected and specifies a date (not less than two months from the time of the notification)
where the proposals are taken into consideration.
 The government after considering the advice of committees and all the representations received by the
specified date, fixes /revises the minimum wage of the concerned scheduled employment which comes
into force after three months from the date of its issue.
The Payment of Bonus Act, 1965
 The Payment of Bonus Act provides an annual bonus to the employee in the certain establishment-
including factories and establishments employing 20 or more persons Under the Act, The bonus is
calculated by the employee’s salary and the profits of the establishment.
 Employees drawing ₹21000 per month or less (basic + DA, excluding other allowances) and have
completed 30 working days in that financial year are eligible for the bonus payment.
 Salary or wages include only basic and DA for the bonus payment, and the rest of the allowances (e.g.,
HRA, overtime, etc.) are excluded. Bonus should be paid at a minimum rate of 8.33% and maximum
rate of 20%. It needs to be paid within 8 months from the close of the accounting year.
 Employees can be disqualified from bonus payments if they are dismissed by fraud, misconduct, or
even absenteeism. The employer needs to ensure that on dismissal, the procedures of domestic inquiry,
proper documentation and employee acceptance of the misconduct are all carried out as per the
standing orders before disqualifying the bonus payment.
Amendments to Maternity Benefit Act, 1961
 The Maternity Benefit (Amendment) Act 2016, was passed by the Rajya Sabha in August 2016 and
Lok Sabha in March 2017, Under the Law:

 The maternity leave is increased to 26 weeks, and the prenatal leaves are also extended from 6 to 8
weeks.
 A woman is entitled to 12 weeks of maternity leave if she already has 2 or more children and in this
case, the prenatal leaves remain 6 weeks.
 The act also provides adoption leave of 12 weeks for a woman who adopts a child below 3 months.
 Female civil servants are entitled to maternity leave for 180 days for their first two live-born children.
 Also, a commissioning mother gets about 12 weeks of leave when the child is handed over to her.
 The act also further requires an employer to inform women about her rights under this act during her
appointment day. This must be given to her in writing and also in the email.
 Only on completion of at least 80 days in an establishment in the 12 months before her delivery date,
the maternity leave is awarded full pay. Apart from 12 weeks of salary, a female worker is entitled to a
medical bonus of 3,500 Indian rupees.
Professional Tax
 Professional Tax is levied by the state government. This tax is paid by every individual who earns. The
limit is Rs.2500 per year and the calculation and amount collected may differ from one state to
another.
States which impose Professional Tax in India

 Andhra Pradesh, Assam , Bihar ,Gujarat ,Jharkhand ,Karnataka ,Kerala ,Madhya Pradesh ,Maharashtra
,Manipur ,Meghalaya ,Mizoram ,Nagaland ,Odisha ,Pondicherry, Sikkim ,Tamil
Nadu ,Telangana ,Tripura ,West Bengal
 Since it is a tax that is levied by the state government, it tends to differ from one state to another. Each
state has a slab set, and the professional tax is deducted based on these slabs.
 PT is collected by the employers from employees monthly salaries, and it then paid to the government.
Failure to collect or to pay professional tax may result in penalties.
 Also if you're not working for an employer, you are liable to pay the professional tax yourself. For
professionals, not working with any employer, can register by applying through a form. Once the form
is received, a registration number will be issued to the individual. Payment of the professional tax can
be made under these registration numbers at banks.
Shops & Establishments Act
 The Shop and Establishment Act is to regulate the employment condition of workers in shops and
establishments. This includes work hours, rest intervals, overtime, holidays, termination of service,
etc.
 Registration needs to be done within 30 days from the date of commencement of business. Even if
there is no employee, the entity has to get registered under this act.
 An application has to be submitted along with the fee and the scanned documents online. Within 15
days of successful document submission, the department approves the registration. The registration
certificate can be downloaded from the portal.
 A registration certificate is valid for 5 years and should be renewed after that.
 In case of a change in address, status, partners intimation has to be given to the department within 30
days of change through an online application.
The registration fee depends on the number of employees hired by the entity. Additional fee has to be
paid through filing an online application when there is an increase in headcount, pay, etc.
 The annual return should be filed online in Form U on or before 31st January of the subsequent year.
The Employees' State Insurance Act, 1948
 The ESI Act provides certain benefits to employees in case of sickness, maternity and employment
injury. The act applies to non-seasonal factories & establishment having employing more than 10.
 The limit is applicable to those establishments having 10 or more employees who draws a monthly
wages up to Rs. 21,000 earlier it was 15,000(Rs.25,000 if the Person is disable) has to mandatorily
register itself with the Employees’ State Insurance Corporation(ESIC ) and provide the ESI benefits to
its employees.
Rate:
 The rates of contribution are revised from time to time. Currently, the employee’s contribution rate is
0.75% (Earlier it was 1.75%) of the wages and that of employer’s is 3.25% (Earlier it was 4.75%) of
the wages paid/payable in respect of the employees in every wage period effective from 01.07.2019.
 Employee Share:- 0.75%
 Employer share:- 3.25%
 Time Limit:
 Every employer who deducts the ESI amount (including Employee’s and Employer’s contribution)
must deposit the amount to the ESIC within 15 days from the last day of the Calendar month in which
the contributions is made.
Employees Provident Fund (PF) and Miscellaneous Provisions Act, 1952

 The Employee Provident Fund (PF) and Miscellaneous Provisions Act, 1952 is created for the social
welfare of an employee. When one begins the employment, they are expected to contribute monthly to
their PF funds. The employer is also expected to contribute to its employee retirement fund.
 Any factory or establishment having 20 or more employees directly or through contract is liable to be
covered under this act.
 The PF contribution is calculated on the basic wages and the dearness allowance. It doesn't include
food allowance, House Rent allowance, overtime allowance, bonus, commision, etc.
 The wage limit to be covered under this Act is Rs.15,000/- per month.
Contribution Rate for Employee’s Salary up to Rs.15,000
 Employee contribution to EPF: 12% of salary.
 Employer contribution to EPF: 3.67% of salary.
 Employer contribution to EPS: 8.33% of salary subject to a ceiling of Rs. 15,000 salary, i.e. Rs. 1,250.
In total:
 Employee:- 12%
 Employer:- 12% +1.61%( 1.1%- Administrative charges, 0.5%- Employee deposit linked
Tax Deduction at Source (TDS)
 TDS is deducted from the payments made by the individuals as per Income Tax Act. It is managed by
the Central Board of Direct Taxes (CBDT), which comes under the Indian Revenue Services (IRS).
 Under TDS, when an assessee gets his income, there will be a TDS deduction by the person (deductor)
paying the assessee and is submitted to the income tax department.
 The assessee then files the TDS return and the tax calculated from his income will be deducted and the
final amount will be refunded.
 TDS is exempted in the following 2 cases:
 If the receiver gives a self-declaration saying that he had made the required investments in FORM
15G/15H
 If there is a certificate of exemption provided by the Assessing Officer The TDS certificate will be
given as
 Form 16 for the people receiving the salary
 Form 16A for the people receiving income from any other source
 Form 16B- TDS on sale of any immovable property
 For late filing of TDS return, there is a penalty of Rs. 200 per day or the amount of TDS payable
whichever is lower out of the two.
Thanking YOU
FCMA GAURAV KUMAR