Webinar Alert!
Breaking Down Payroll and Taxes: From Confusion to Clarity
The entire payroll cycle has three segments or stages; pre-payroll Activities, payroll and post-payroll activities. The pre-payroll is most significant on the grounds as it builds up the “data”, which gets moved to the next step that is actual payroll processing. The pre-payroll activities are the base of the entire payroll story.
Gathering data is a major task in pre-payroll activities. The most crucial data to be collected as part of pre-payroll is the information regarding payments and deductions to be made to employees. While attendance data answers the question – who will be paid salary and on what basis? Payment and deductions data for the specified period helps determine how much is to be paid as salary to an employee.
Understanding Payments and Deductions:
Payments
Payments in each payroll cycle include recurring payments such as salary, reimbursements, bonus, incentives, and various salary components. Along with these cyclical pay-outs, non-recurring and one-time payments also must be tracked and collected accordingly.
Salary
This is the monthly compensation that includes all the fixed salary components such as basic and the specified allowances (house rent allowance, special allowance, leave travel allowance, educational allowance etc.) This is a recurring payment in payroll that does not usually change in a given period of time.
However, any special cases where the employee is absconding also must be considered. In such instances the “salary is put on hold”. Depending on the scenario, the salary process might be put on hold or salary is processed but “the payment is on hold” (in which case the statutory payments must be made).
Increments/Revisions
Any modifications or revisions to the components of the salary structure, if any, must be incorporated into the salary payments. Similarly, increments, raises or salary hikes must be monitored to ensure correct pay-outs.
Arrears
Arrears refers to payment for compensating the salaries left, which should have been given earlier. Employees are paid arrears when they get a salary hike in one month but receive the amount in some other month. In this case, the company due to its employees and the due amount which is paid at a later date is termed as arrears. For example, pay revisions, which are effective from previous periods, will lead to arrears in the current payment period. Any such payments due in the current pay cycle have to be accounted for.
Payroll Reimbursement
Reimbursement is the amount that the employee will get only after they have spent it. For an employee to claim the reimbursement, it should be defined by the company. In many cases, the employee has to produce the necessary bills to claim it. But first, the employee has to pay the expenditure on such heads and then a claim can be possible. If reimbursements are defined as a part of the salary, then to be able to get tax exemptions, producing the bills is necessary.
Usually, a fixed amount is paid as part of the salary irrespective of the amount spent for the specified purpose. For example, every month fixed fuel expenses can be paid to the employees. However, bills have to be submitted to claim any tax exemption, else the amount becomes taxable.
Bonus
This is the payment made to reward performance or achievement of goals, where the amount and the time of payment is usually declared beforehand. Hence any payment of Bonus declared during the payment cycle should be considered.
One-time payments
Cash Incentives or other performance-related cash awards, if announced for the given period should also be included in the payments to be made.
Recommended Read: Components of salary in India; Taxable, Non-taxable and Partially Taxable elements.
Payroll Deductions
It is a general guideline from the Government of India that if a company crosses the employee strength of 20, it is time the employers should bring some statutory deductions in the payroll process.
While some of these like mandatory deductions are recurring in nature, few of them may be one-time deductions or specific deductions only for a short period of time. Statutory deductions are recurring in nature and include Provident Fund, ESI, Professional Tax and TDS. Companies may also deduct a specified amount for facilities provided such as transportation services, mess facility etc. Another category of deductions such as loss of pay, loan repayments or other one-time deductions are non-recurring in nature.
Employees’ Provident Fund (EPF)
EPF has traditionally been the most popular device for most Indians, particularly for the salaried class, so that they can save their retirement corpus. When employees change their jobs, they generally either withdraw their EPF accounts or just ignore these, if the profit is not much, and continue the same account in their next organization. This is a recurring statutory deduction where both the employee and the employer make an equal contribution.
EPF contributions may vary from company to company. These are some of the logics applied:
- Flat 12% of Basic salary
- Some companies also calculate EPF based on salary range – For employees having salary Rs. 15k per month it is flat Rs.1800.
- There is also an option of Voluntary Provident Fund (VPF), where employees may choose an amount to contribute for his/her EPF.
Income Tax (IT) deduction of TDS
Under Section 192, the employer is needed to deduct TDS while making the payment month-on-month salary for any financial year to the employees. Tax returns must be listed every year for a person or business that received income through the year, whether by regular income like wages, dividends, interest, capital gains, or other profits. Tax deductions on income are to be strictly followed as per the slabs defined by the Government of India. TDS is thus a recurring deduction.
Professional Tax (PT)
Professional Tax is the tax duty on professions & trades in India. It is the state-level tax & has to pay imperatively by every member employed in private organizations.
Business owners, merchants, working individuals, & people carrying out different occupations come under the range of this tax type. PT is mostly under the scope of the commercial tax department of the corresponding states. It is the source of revenue for state governments. There are fixed slabs for the deduction of PT based on the salary of the employees. However, the maximum PT to be paid is Rs.2500 per year. PT paid by an employee is qualified for Income Tax deduction.
ESI
This is a recurring deduction calculated on the employees’ gross pay. Employee State Insurance Corporation (ESIC) is a social security scheme that covers the medical expenses of employees and their dependents. Both employer and employee make a contribution to this scheme.
Other recurring deductions: Companies may also deduct a fixed amount for providing facilities such as canteen/mess or for cab services to commute to and from the office. These are also charged and deducted on a monthly basis from the salary.
Loan repayments
In some instances, companies offer an advance on salary or loans to employees at low or nil interest rates. These loans are offered for a short period, usually not for more than a year. When employees avail of such loans, they are repaid through monthly installments deducted from salary.
Leave on loss of pay
When an employee avails of leaves more than those stipulated or allowed in a given period, a certain amount is deducted from the salary. This is a non-recurring deduction and is done only when the situation arises.
Other one-time deductions
In some instances, there may also be deductions made for recovery of loss of office assets/equipment, etc. All these deductions have to be taken into account and data regarding the same has to be accurately collected for error-free payroll.
Collecting such a huge amount of data is behind the picture of the pre-payroll process. Once the information on the various payments and deductions is gathered, the next step in pre-payroll is to collect the tax information of the employees.
