Demystifying Payroll in India: Inclusions, charges & best practices

A payroll is the compensation an organisation must pay to its employees for a set period or on a given date. It ensures that the employees are paid accurately and on time and also helps organisations comply with the labour laws and tax regulations that are in place for payrolls in India.

Payroll processing involves tracking work hours, calculating pay and distributing payments via direct deposits or checks. Moreover, it requires payroll accounting to help record payrolls, the taxes withheld, bonuses and other variables like overtime and sick pay.

Although most small businesses may handle payrolls directly, most midsize and large organisations often outsource payroll processing and management to specialised firms or simply use cloud-based software for efficiency. Proper payroll management is crucial for maintaining employee trust and avoiding legal and financial consequences.

A payroll includes a comprehensive set of factors that contribute to an employee’s total compensation. Following are the factors that both HR professionals, as well as employees, must understand to ensure accurate payroll processing.

Bonuses and Commissions

Bonuses and commissions are performance-based incentives given to employees. Bonuses can be annual, linked to performance or project-specific. Commissions, on the other hand, are often related to sales performance. It is important to calculate and distribute these incentives fairly and in compliance with any legal requirements.

Employee Benefits

Employee benefits enhance the well-being of employees and help attract and retain talent within the organisation. These benefits usually include the following aspects:

Group Health Insurance Plans

• Retirement plans, contributions to provident funds and gratuity payments.

• Paid Time Off like sick leaves, paid vacations and personal leaves.

• Allowances for travel, meals, and children’s education.

• Fringe Benefits like company cars, club memberships, mobile phones, or subsidised meals.

• These benefits must be accurately calculated and deducted from paychecks to ensure employees receive the benefits they are eligible for.

Overtime Pay

When employees work beyond their regular hours, they may be entitled to overtime pay. This is usually calculated at a higher rate than regular wages. Compliance with overtime laws and regulations is necessary to ensure fair compensation for any additional hours that employees work.

Loans and Advances

Employers may offer salary advances or short-term loans to employees. These can be received through future salary deductions and must be managed carefully to ensure proper repayment schedules.

Reimbursements

Employers may reimburse employees for job-related expenses. Reimbursements are generally not taxable unless they exceed specified limits.

Severance Pay

In cases of termination or layoffs, some employers provide severance pay and one-time financial support. This is critical for helping employees transition during their job search period.

Taxes and Deductions

Payroll processing involves the calculator of various taxes and other withholdings. These include the following:

• Income Tax.

• Professional.

• Social Security Contributions.

• Optional deductions.

• Taxable Allowances

• Certain Allowances, such as house rent allowance (HRA) and children’s education allowances are taxable if they exceed the exemption limits. These allowances need to be included in the gross salary for income tax calculations.

Wages and Salaries

Wages and salaries are the primary aspects of employee compensation. This includes fixed monthly salaries for full-time employees and hourly wages for contractual, part-time, and daily workers. It is essential to ensure that employees are paid at or above the minimum wage and that salaries are competitive and fair for their job roles as per market standards.

Calculating payroll involves several key steps to ensure employees receive accurate compensation and the company records complaints with legal requirements. Here is how it is calculated:

Understanding Gross Pay

• Gross pay is the total amount an employee earns before any deductions.

• For hourly employees, it is calculated by multiplying the hourly rate by the hours worked during the pay period.

• For salaried employees, it is calculated by dividing the annual salary by the number of pay periods in a year.

• Gross pay includes taxable and non-taxable allowances and any applicable overtime pay, which is calculated at the overtime rate for hours worked beyond standard schedules.

• It also includes any performance-based bonuses or commissions as well as the taxable value of any taxable prerequisite.

Calculating Net Pay

• Net pay is the employee’s take-home pay after all deductions.

• Here you subtract income tax based on the employee’s gross income and applicable tax slabs provided by the government.

• Professional tax, as per state government regulations, is also deducted.

• Employee contributions to social security schemes like EPF are subtracted.

• Any voluntary deductions such as health insurance premiums or contributions to voluntary provident funds are also deducted.

• If applicable, instalments for salary advances or loans provided by the employee are also deducted.

Deductions and Taxes

• Income Tax is calculated based on government tax slabs for the financial year.

• Professional tax is calculated as levied by the state government.

• EPF Contribution which is typically around 12% of the employee’s base salary.

• Other deductions may include health insurance premiums, loan repayments, and voluntary provident fund contributions.

Addressing Errors and Discrepancies

Human error during data entry or manual calculations can lead to discrepancies in payrolls. Incorrect tax calculations or missed payments can result in dissatisfied employees and potential legal issues.

To address these errors, it is important to have a clear process for identifying and correcting mistakes. Prompt and transparent communication with employees about payroll issues is also crucial to maintaining trust and satisfaction.

Dealing with Payroll Fraud

Payroll fraud can occur through various means, such as ghost employees, time theft, or manipulation of allowances. Detecting and preventing payroll fraud is challenging but necessary. Introducing robust internal controls, like multiple approvals for payroll transactions can help aid in mitigating risks.

Regular review of payroll reports and conduction of audits can help identify any unusual activities and ensure the transparency of the payroll management system.

Keeping Up with the Changing Tax Laws and Regulations

The Indian Tax landscape is known to have frequent updates and amendments. The payroll management system needs to stay informed regarding the changes to ensure compliance with the latest tax regulations.

Failure to adapt to new regulations can result in penalties and non-compliance issues. Collaborating with a trusted tax professional or payroll service provider can help organisations navigate through these changes effectively.

Managing Employee Records and Data

Accurate and up-to-date employee records are essential for smooth payroll processing. This includes maintaining information such as salaries, allowances, deductions, tax exemptions, and bank account details.

Inaccurate data can lead to errors in payroll calculations and delays in payments, causing frustration among employees. Utilising automated payroll systems can help streamline this process by tracking employee data and generating accurate reports for reference.

Automate Payroll Processes

Using payroll software to automate tasks like the calculation of taxes, deductions, and net pay can help streamline payroll operations significantly. Automation not only saves time but also reduces the risk of human error, which ensures accuracy in payroll processing. This allows organisations to allocate resources more efficiently to other critical operations.

Consider Outsourcing Payroll Management

Outsourcing payroll processing to reputable service providers can seem to be a wise choice, especially for organisations with complex payroll requirements or limited resources. This will allow companies to benefit from the expertise of professionals who are well-versed in current regulations and can handle all aspects of payroll efficiently. This can help reduce the burden on internal staff and ensure compliance with all regulatory requirements.

Invest in Payroll Security

Protecting sensitive employee-related financial information is of paramount importance. Implementing a secure payroll system with robust access controls and string password management protocols can safeguard the information against data breaches. This ensures that only authorised personnel can access the payroll date and also helps protect against internal fraud and external threats.

Maintain Accurate Records and Data

Accurate record-keeping is crucial for payroll complaints and resolving any potential disputes. Organisations should meticulously track all payroll-related information, including working hours, pirates, taxes, and deductions. This along with implementing regular data verification procedures helps mention the accuracy and reliability of records.

Stay Updated with Tax Laws and Regulations

Since Indian Tax laws keep changing, it is essential to stay updated to avoid compliance issues and potential penalties. Investing in continuous training and resources for the payroll team ensures that they are up to date with the current tax laws, social security regulations and other relevant compliance requirements.

Train Employees on Payroll Policies and Procedures

Providing thorough training on payroll policies and procedures helps ensure that all employees are aware of the expectations related to payroll processing. Regular, ongoing training sessions are beneficial to keep everyone updated on any changes or new implementations regarding the processing of payrolls. This reduces confusion and errors which helps foster smoother payroll processing.

Just like accurate payroll processing supports the financial stability of employees, group health insurance plays a vital role in maintaining the financial stability of both the employees and the organisation during challenging situations.

Investing in a group health insurance policy with a reliable insurance provider like Tata AIG offers comprehensive coverage with benefits that go beyond the standard health insurance advantages. It ensures a seamless rehabilitation process and stress-free reintegration into the workforce upon recovery.

Group health insurance plans are an important part of SME insurance investment. They serve as a financial safety net for the employees in the face of a healthcare crisis and ensure the reintegration of company talent into the workforce upon recovery.

Are expenses of transportation to the hospital also covered under a group health insurance policy?

Coverage for ambulance expenses is available only under policies where it is specifically opted for or is already a part of policy inclusions.

Does a group health insurance policy require a prior medical check-up?

No, a group health insurance policy typically doesn't require a prior medical check-up. However, it is always wise to get in touch with your employer or the insurance company for policy-specific details.