Payroll Processing in India: A Step-by-Step Guide for Employers

# Payroll Processing in India: A Step-by-Step Guide for Employers

## Introduction

Payroll is more than paying salaries. Every month, employers in India have to calculate pay for each employee, account for attendance and leave, deduct PF, ESI, professional tax and TDS, pay employees on time, deposit statutory dues and file returns, all against fixed deadlines.

Get it right and nobody notices. Get it wrong and you face unhappy employees, interest and penalties from authorities and hours of rework.

This guide walks through payroll processing in India step by step, from setting up the basics to paying employees and staying compliant, with a worked example and a compliance calendar you can follow every month.

## Before you run payroll: Set up the basics

A smooth payroll run depends on getting the groundwork right. Before processing salaries for the first time, make sure you have the following in place.

**Statutory registrations:** Depending on your size and location, you may need:

- **EPF registration** once you have 20 or more employees (voluntary below that).

- **ESI registration** once you have 10 or more employees in a notified area.

- **Professional tax registration** in states that levy it.

- **TAN (Tax Deduction Account Number)** to deduct and deposit TDS on salaries.

- **Labour Welfare Fund registration** in states where it applies.

**Salary structures:** Define how each employee's CTC is split into components such as basic pay, HRA, allowances, and employer contributions.

**Payroll policies:** Document your pay cycle, pay date, attendance cut-off date, leave rules, overtime, reimbursements, and bonus policy.

**Employee data:** Collect each employee's PAN, Aadhaar, UAN, ESI number (if applicable), bank account details, tax regime choice and investment declarations.

## The monthly payroll process, step by step

1. **Collect payroll inputs:** Gather attendance, leave, overtime, new joiners, exits, salary revisions, bonuses and reimbursement claims for the month, up to your cut-off date.

2. **Calculate paid days:** Work out each employee's payable days after accounting for leave without pay (LOP) and mid-month joining or leaving.

3. **Calculate gross salary:** Apply each employee's salary structure, prorated for paid days and add variable pay, overtime, arrears and approved reimbursements.

4. **Calculate statutory deductions:** Deduct the employee's share of PF and ESI, professional tax and TDS on salary based on their tax regime and declarations.

5. **Apply other deductions:** Deduct salary advances, loan EMIs and any other approved recoveries.

6. **Calculate net pay:** Net pay is gross salary minus all deductions. This is what the employee receives.

7. **Review and approve:** Check totals against the previous month and investigate any large changes before approving.

8. **Disburse salaries:** Transfer net pay to employees' bank accounts on or before the pay date.

9. **Share payslips:** Give every employee a payslip showing earnings, deductions and net pay.

10. **Deposit statutory dues:** Pay PF, ESI, professional tax and TDS by their due dates, including the employer's contributions.

11. **File returns and keep records:** File the required returns and keep payroll registers and records for inspections and audits.

## Worked example: From gross salary to net pay

Let's take an employee in Maharashtra with a monthly gross salary of ₹40,000, who took 2 days of leave without pay in a 30-day month.

On top of the employee's salary, the employer also contributes ₹1,800 towards PF. This is part of the employee's CTC, but not their take-home pay.

Some employers calculate PF on the full basic pay instead of the ₹15,000 ceiling. Both are allowed, but the choice must be applied consistently.

## Payroll compliance calendar

Missing a deadline means interest, late fees or penalties. These are the key dates most employers need to track.

Due dates can be extended by the authorities and state rules vary, so keep a calendar that's reviewed and updated regularly.

## Laws that govern payroll in India

Payroll in India is shaped by a mix of central and state laws.

**The four labour codes:** The Code on Wages, the Code on Social Security, the Industrial Relations Code and the Occupational Safety, Health and Working Conditions Code came into effect in November 2025. They replace 29 older labour laws, including the Payment of Wages Act, the Minimum Wages Act, the EPF Act, the ESI Act and the Payment of Gratuity Act. State rules under the codes are still being rolled out, so some older procedures continue in the meantime.

**The 50% wages rule:** Under the Code on Wages, if allowances (excluding certain items like HRA and conveyance) exceed 50% of total pay, the excess is added back to "wages". This affects PF, gratuity, and other calculations, and has pushed many employers to raise basic pay.

**Income tax:** Employers must deduct TDS on salaries and issue Form 16. From 1 April 2026, the Income-tax Act, 2025 replaced the Income-tax Act, 1961. Section numbers and some form names have changed, but the core process of deducting tax from salary works the same way.

**State laws:** Professional tax, Labour Welfare Fund and Shops and Establishments Acts vary by state and set rules for working hours, holidays and leave.

Because these laws are changing, check the latest rules with your CA or labour law consultant.

## Common payroll mistakes to avoid

- **Late attendance and leave inputs:** Last-minute changes lead to wrong paid days and incorrect salaries.

- **Wrong LOP calculations:** Mixing up calendar days and working days or applying LOP inconsistently.

- **Missing salary revisions or arrears:** Increments that aren't updated on time create arrears and frustrated employees.

- **Incorrect PF or ESI wages:** Calculating contributions on the wrong components, or ignoring the 50% wages rule.

- **Wrong TDS:** Not updating the employee's tax regime choice, investment declarations or income from a previous employer.

- **Missing statutory deadlines:** Late deposits of PF, ESI or TDS attract interest and penalties.

- **Misclassifying workers:** Treating employees as contractors to avoid statutory contributions can lead to heavy liabilities later.

- **Poor record-keeping:** Missing registers and records make inspections and audits difficult.

- **Running payroll on spreadsheets:** Formulas break, versions multiply and errors slip through as your team grows.

## How Mocha HRMS simplifies payroll

Mocha HRMS brings attendance, leave and payroll together, so salaries are calculated from accurate data without manual copying between systems.

- **Configurable salary structures:** Set up CTC components once and apply them to employees or groups.

- **Attendance and leave built in:** Paid days and LOP flow straight into payroll.

- **Automatic statutory deductions:** PF, ESI, professional tax and TDS calculated for every employee.

- **One-click payroll runs:** Review, approve and process payroll for your whole team together.

- **Digital payslips:** Employees can view and download payslips from the Mocha HRMS employee app.

- **Payroll reports:** Get salary registers and statutory reports ready for filing.

- **Employee self-service:** Employees can submit tax declarations, apply for leave and check attendance on their own.

With Mocha HRMS, payroll becomes a routine monthly task instead of a week-long scramble.

## Conclusion

Payroll in India follows a clear monthly rhythm: collect inputs, calculate pay and deductions, pay employees, deposit statutory dues and file returns. The rules are detailed, but with good processes and the right tools, they're entirely manageable.

**Ready to run payroll in minutes, not days?** Book a free demo of Mocha HRMS and see how easy compliant payroll can be.

## Frequently asked questions

### How often should payroll be processed in India?

Most businesses run payroll monthly. Weekly or fortnightly cycles are common for daily-wage and contract workers.

### Is PF mandatory for every employee?

PF is mandatory for establishments with 20 or more employees, for employees earning up to ₹15,000 a month in PF wages. Employees earning more can join voluntarily.

### What's the difference between CTC, gross salary, and net pay?

CTC is the total cost to the company, including employer contributions. Gross salary is what the employee earns before deductions. Net pay is what they take home after deductions.

### Do I have to deduct TDS for every employee?

Only when the employee's estimated taxable income for the year exceeds the tax-free limit under their chosen regime.

### Should I outsource payroll or use software?

Small teams often start with an accountant or outsourced provider. As you grow, payroll software gives you more control, fewer errors and faster processing at a lower cost.