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Core components of Payroll | The Actual Payroll Process

9 min read

Payroll is a financial record of compensation paid to an employee as salaries, wages, bonus, or deduction. It is given for the work done during a particular period of time. Payroll processing is referred to as the administration of an employee’s financial records as well as involves tedious routine work.

Payroll processing is a significant business function that involves reaching at the ‘net salary’ of the employees after the adjustment of necessary taxes and deductions. For an efficient payroll management process, the payroll administrator needs to plan the payroll process step-by-step.

What is Payroll Processing?

Payroll Processing is the methodology that involves reaching at the ‘net pay’ of employees after defining the salary structures, components, deductions, allowances and setting up the necessary policies with respect to taxes and other adjustments.

In simpler words, payroll is defined as the total amount of compensation paid by the employer to the employee towards the month-end and the detailed steps associated with the calculation of the accurate amount is known as payroll processing.

Here’s the formula,

Net Pay= Gross Income-Gross Deductions

In depth explanation:

Salary = Basic + HRA + Transport Allowance + Reimbursements + Arrears + Bonus + FBP Allowance + Bonus – Professional Tax -Provident Fund – Income Tax – Insurance-Leave Adjustments (If any)- Loan Repayments (if any)

The entire payroll procedure is divided into 3 stages:

  • Pre-Payroll Activities
  • Actual payroll process
  • Post-Payroll Activities

In this article, we are going to discuss the second phase; the actual payroll process.

The Actual Payroll Process

During the pre-payroll phase, policies are defined such as pay policy, attendance policy, leave and benefits policy, and more. Parallelly, data is gathered from various departments to ensure accurate calculation of payroll. 

Running the payroll data

This is the stage where actual work towards reaching the net pay of employees takes place, after completing the pre-payroll activities. This is the time when already gathered payroll data (Leave & Attendance data, shift wise calculations, tax and Deductions, Expenses, Incentives) during pre-payroll activities will have to run.

Once you feed the verified data into the system, the result you will get will be the net pay after the adjustments of necessary taxes and deductions. In this stage, you also verify the information to achieve accuracy.

Calculation of new employee pay-outs and full & final settlement of employees who recently took an exit

This calculation involves evaluating the pay-out of employees who have recently joined the company but not at the start or end of the month, but, somewhere in the middle of the month. The company’s policy decides whether to pay the salary calculated till the last day of the month or to add the calculated amount as an arrear in next month’s pay-out.

This stage also includes F&F (Full and Final) settlement of the employees who recently took an exit. The whole objective is to be ready with all factors needed while calculating the actual salary.

Statutory Compliances In India

Statutory compliance in HR refers to the lawful structure and regulations within which organizations must operate while dealing with their employees. Detailed knowledge of legal compliances and expertise is required to minimize the risk associated with the non-compliance of statutory requirements. Each nation has different sorts of compliance requirements.

There are a number of statutory requirements for Indian companies and they have to spend a significant amount of time in their payroll management to ensure that they are compliant with the legal regulations. If companies fail to adhere to statutory compliances, they may need to confront heavy penalties which are several times more than complying with legal guidelines.

The most common Statutory requirements that companies have to follow for their payroll management in India are:

ESI fund and PF (Provident Funds)

ESI maintained by ESIC is applicable to employees earning INR 21,000 or less per month to provide the cash and medical benefits to them and their families. Provident Fund consists of the money saved throughout the working years of an employee. Provision of the Provident Fund ensures income when the employee retires from his job. If the employee, unfortunately, meets early death, the PF gets passed on to his/her family.

According to the Employees’ Provident Fund (EPF) Act, 1952, 12% of an employee’s basic salary and dearness allowance has to be invested into EPF and the employer needs to invest an equal amount. If an employee earns more than ₹15,000 per month in basic salary plus dearness allowance, Employers can limit the PF deduction to 12% of ₹15,000 (INR 1,800) under the provision to Para 26A of the Employees Provident Fund Scheme, 1952.

Professional Tax

Professional tax or employment tax is a state-based tax. It is one of the statutory deductions from the gross income before computing the tax. The tax and the calculation differ from state to state. A few states in India do not charge PT (Professional Tax). 

TDS (Tax Deduction at Source)

When an employee receives a payment, his/her TDS gets deducted under the Income Tax Act. The salary elements that impact the TDS deductions are

    • Medical Allowance 
    • HRA
    • Special Allowance
    • Leave & Travel Allowance
    • Education
    • Investments

Gratuity amount

In India, under the Gratuity Act, 1972, an amount is calculated under the gratuity rules and regulations when the employee leaves the company. An employee has to complete a minimum period of five years to become eligible for gratuity. Gratuity in India is calculated using the formula:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service

  • The ratio 15/26 represents 15 days out of 26 working days in a month
  • Last drawn salary = Basic Salary + Dearness Allowance.
  • Years of Service are rounded down to the nearest full year. For example, if the employee has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the calculation.

Payroll Calculation

After the necessary deductions are made. Information is uploaded in the system; the end amount to be paid to the employee gets calculated. Most Often, calculating the payroll is done through three methodologies:

Payroll Software

Payroll software is a cloud-based system that helps companies to oversee HR and entire payroll activities within their organizations. These systems are quick, reliable and safe. The cloud-based HR and payroll solutions help in streamlining the business at core. When it is about automation, cloud-based HR and payroll software solutions are considered on top priority. 


Here, organizations give their entire month’s payroll data to the experts in the market and they take care of the payroll management. This way organizations pick expertise for their payroll process. Since it is a delicate task and needs high accuracy, this is an option for many organizations. 

Manually through spreadsheets

This is the traditional way of working. It involves dependency and more amount of time and energy as compared to the above two ways. However, many organizations still consider spreadsheets but in the long run, automation is a must to bring productivity.

Table of Contents

    Meet the author

    Keka Editorial Team

    A bunch of inspired, creative and ambitious youngsters- that’s Keka’s editorial team for you. We have a thirst to learn new subjects and curate diverse pieces for our readers. Our deep understanding and knowledge of Human Resources has enabled us to answer almost every question pertaining to this department. If not seen finding ways to simplify the HR world, they can be found striking conversations with anyone and everyone , petting dogs, obsessing over gadgets, or baking cakes.


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