An Ultimate Guide to the Process of Payroll System in India 2024

Payroll processing is a crucial and complicated business process. Today’s leaders must understand the payroll’s complexities because it is one of the largest chunks of expenses. Many companies strive to carry it out in the most efficient way, but mistakes occur, which might lead to serious consequences. To ensure that businesses remain compliant and attract and retain employees, it is vital for businesses to gain a better understanding of the entire payroll process. 

There is a considerable amount of background work involved to accomplish these tasks. Payroll activities are more than simple calculations; they require different teams to work in tandem. However, this complexity can be managed through the standardization of processes, choosing the right service delivery model, and using modern technology to control the operation. 

How is Payroll calculated in India? 

For calculating the Payroll in India, companies use one formula. It depends on the gross salary and gross deductions. When you deduct the number of gross deductions from gross salary, the amount you get is called as the net salary. 

Net Salary = Gross Salary – Gross Deductions 

The formula for calculating gross salary 

Gross salary = Basic salary + All types of allowances + HRA + Arrears + Reimbursements + Bonus

Gross deductions = Professional tax + Income tax + Public provident fund + Insurance + Loan Repayments + Leave adjustments

Phases of processing payroll in India 

The company has many tasks to do for Payroll, including ongoing activities that require dedication and constant monitoring of transformation for the contribution to social security funds, withholding, etc. The whole procedure is divided into three phases:

1. Pre-payroll Activities
2. Actual Payroll Procedure, and
3. Post-payroll Activities. 

Pre-Payroll Activities: This phase consists of three activities: 

1. Including Payroll Policy Accurately:

The amount of a salary is determined by multiple factors. Such as pay, benefits, leave, and attendance policies have to be well defined, approved by management, and implemented uniformly to standardize the processing of Payroll. 

2. Inputs Collection:

The payroll process involves communication with various departments and staff, such as Human Resources and payroll staff. In smaller organizations, fewer teams often receive salary revision data and attendance data easily. However, in the case of large organizations, gathering all this information can seem overwhelming. A company can avoid the input collection process altogether by using modern payroll software with integrated features. 

3. Inputs Verification:

After receiving employee information, you should check that it meets the company policy, the authorization matrix, and other requirements. Ensure that active employees are included on the list and that inactive employees are not. 

Actual Payroll Procedures: It consists of only one activity which is the Calculation of the Payroll. 

1. Calculation of Payroll:

Payroll is processed in the payroll system after the data has been verified and validated. After taxes and other deductions, the net pay is the amount that you will receive in your bank account. You should also check the values and accuracy verification to avoid errors. 

Post-Payroll Activities: It consists of 3 activities: 

1. Salary Payments:

Payroll is a complex process that involves the calculation of salaries and taxes. After calculating the Payroll, the next step is to send the advice to your bank to disburse the salary. If you use software, you can automate this kind of work with one click. 

2. Payroll Accounting:

As part of maintaining the organization’s accounts, you should ensure that the salaries of employees are recorded to keep track of the organization’s finances. 

3. Payroll Reporting and Compliance:

At the time of processing payroll, statutory deductions such as Tax Deductibility at Source (TDS), Employees’ State Insurance (ESI), and Employee Provident Fund (EPF) are automatically deducted. After making deductions, the organization must remit the amounts to the respective government agencies. The due dates for each deduction vary, and after the dues are recorded with the government, businesses can file their return form; for example, for filing a PF return, an electronic challan is generated and filed. 

Methods of Managing Payroll  

There are three popular methods for payroll management that companies use. These methods vary on the size of organizations and the number of employees working. 

1. Managing the payroll data on spreadsheets:

Businesses with few employees often find spreadsheet-based payroll management convenient in their early stages of operation. This method involves calculating salaries and compliance payments using standard templates, which have mathematical formulas for such computations.
While this is a cost-effective method, it’s not suitable for businesses with a large number of employees. The high opportunity cost of using traditional methods over automated ones is justified in these circumstances. 

2. Payroll Outsourcing from external companies:

The organizations having no payroll managers chose payroll outsourcing to streamline the payroll activities. In this case, the companies give all the details related to the employees’ salary, attendance, reimbursements, and leaves based on their Cost to Company (CTC). These service providers handle all the calculations and other requirements mandated by law, allowing small business owners to focus on their core competencies. 

3. Use Payroll Software:

Payroll systems and tools are available to help employers perform payroll computations and reduce manual efforts while increasing efficiency. It automates the operations and allows employers to avoid the risk of mathematical or clerical errors. Cloud Payroll can be advanced in the sense that it automates payroll computation. It also works as an all-in-one solution for all HR needs like employee management, leaves and attendance management, etc. It serves the specific needs of your business. 

Challenges involved in processing payroll 

In the payroll process, considering many vital elements and managing benefits plans, taxes, calculation of expenses, payments, etc., is a highly complex task that needs proper concentration. If it cannot be done with proper efforts, it can become a bane for the entire workforce. Many HRs find the following challenges, which we have mentioned below: 

1. Coordination of the entire company:

Payroll staffs gather information from a variety of sources, including human resources, finance, expense management, and attendance records. Employees submit information such as receipts for reimbursement claims and other records to help with tax-saving strategies. Getting all the information together for monthly payroll management can be time-consuming and stressful for a small business owner. 

2. Stay compliant with payroll laws:

In India, companies must consider all the statutory computations and establishments. It is mandatory for every size the organization. If the company makes some mistakes related to tax components, it will face some severe issues. 

3. Understanding the morals of employees:

Everybody works to get a salary, and it is the main component on which their living depends. So, they expect the company will give salary on a decided date. The late payment of salary sometimes provokes employees to leave the organization. 

4. Depends on old-school methods:

Many companies believe that their old method is the right way for payroll activities. Sometimes makes it hard for payroll managers to adopt modern technologies. The organizations that believe in conventional ways are still facing the challenges of managing the records on different excel sheets and many more. Whereas companies are implementing hr and payroll software to do payroll processing in one click from anywhere. 

How can cloud payroll software reduce the complications of Payroll? 

When a strategic approach for Payroll can help companies process it, the payroll software saves your time and make the work easier for you by automating tedious and complex tasks. Good cloud payroll software reduces the burden of managing tasks manually. 

1. Increase efficiency:

Employees who are responsible for submitting their own payroll information can often save time by using an integrated payroll system. By delegating routine documentation tasks to employees and providing them with employee self-service portals, business owners can reduce the time burden even further. 

2. Easy compliance:

Software provides a means for employers that keeps them up to date about all the transformations in-laws. Employers can use these programs to create reports that make paying taxes easier and handle statutory deductions for employees. 

3. Accurate calculation:

The payroll system reduces the possibility of making mistakes when calculating paychecks. It can include all the bills for computation. It can also eliminate the requirement of manually calculating paychecks and checking formulas in a spreadsheet. 

4. Employee Self Service:

Top payroll software in India helps you manage all the bills of reimbursements and decrease the documentation of expenses submission. A payroll system with an employee self-service feature can protect you from chaos and enable employees to submit these bills by themselves. 

5. Easy to scale:

A scalable system that accommodates growth as your business expands can save time and expense by looking for conventional alternatives and can optimize the payroll. 

6. Secured management tools:

Payroll is a critical function of any business, but telling employees details of your financial statements is an unacceptable risk. A payroll system helps you give specific permissions to each employee. 

7. Integration with various systems:

For calculation, you need time, attendance, leave, and many more data. You can easily integrate the payroll software with other systems to bring the data. 

8. Liability reduction:

Employers have a responsibility to get payroll right. Employers who enlist payroll software help can reduce their workload and risk of liability by ensuring that their calculations are spot on. 

Wrapping up:

Hence, you have covered all the components concerned with the payroll. For eliminating the pain points of processing with different compliance laws and regulations you should implement a payroll software. Using a payroll system can truly take you to the next level by eliminating all the bottlenecks that transform it into pain every payday of the month and if you’re looking for a robust tool to track, calculate and process employee payrolls and their compliances, then it’s time to consult with our software experts. We’ll show you why and when you need payroll software in your business today.