Payroll is the total compensation that a business pays to its employees on a given date or for a certain period of time.
Payroll expense is always a deductible business expense and hence is an important function for any organization. Payroll can vary from one pay period to another because many factors are to be made while determining monthly payroll, for example the number of working days, leaves, allowances, reimbursements, adjustments for Tax withholding (TDS), Employee provident fund etc.
A payroll cycle is the time gap between two salary disbursements. Businesses can opt to pay salaries on a weekly, bi-weekly, or monthly basis. Typically, it is processed every month in India.
Payroll function includes the following:
Defining your payroll policy
Businesses define their payroll policies to ensure standard payroll execution protocols are in place. These policies include pay policy, leave and attendance policy, employee benefits policy, etc.
Employee background verification is an important of aspect of Payroll and entails the verification of the following documents:
Calculation of payroll
Net payable salary is calculated after considering the number of working days, leaves, allowances, reimbursements and making necessary deductions such as Tax withholding (TDS), Employee provident fund etc.
Disbursement of salaries
The net payable salary is disbursed to employees through bank transfer / cheque in the first week of the following month.
Payment of statutory dues/Payroll compliance
At the time of payroll processing, all statutory deductions such as Provident Fund (PF), Tax Deducted at Source (TDS), Employee State Insurance (ESI) and Professional Tax (PT) are deducted, after which, these statutory payments are deposited with the appropriate government authority as per the respective due dates.
Provision of Salary Slip
A Salary slip or payslip is a summary of the monthly Salary paid to an employee and it contains the breakdown of salary and deduction for the given month.. A salary slip enables employees to plan their personal taxes, avail loans and subsidies and furnish proof of employment.
Payroll Compliance or Statutory Dues can be largely divided in to 4 parts.
Employee Provident Fund (EPF)
The EPF scheme was introduced in 1952 by the Employees’ Provident Fund Organization (EPFO) of India for the welfare of employees in India. This scheme is governed by the Employees Provident Fund Act 1952 Is one of the key schemes that help employees build a retirement corpus.
Under the EPF scheme, both employer and employee contribute equally to the EPF account every month. However, it is the employer’s responsibility to deposit the whole amount to the EPF account. After which the employee’s share is deducted from their monthly salary. The EPF scheme mandatorily applies to all the establishments that have employed a minimum of 20 people. The business must obtain EPF registration within 1 month of attaining this employee count of 20. Businesses with less than 20 employees can also opt for voluntary registration. All employees of such an establishment will be eligible for EPF right from the beginning of their employment.
Employee State Insurance (ESI)
Employees’ State Insurance (ESI) is a Social Security Scheme designed to provide socio-economic protection to employees. It is governed by the Employees State Insurance Act, 1948 and is governed by the Employees' State Insurance Corporation. It protects employees against sickness, maternity, disablement, and death as a result of a work-related injury, as well as provides medical care to insured employees and their families.
This scheme is applicable to all factories and other establishments where the employee count is 10 or more, however, In case of businesses the employee count threshold is 10 or 20 depending on the state laws. Employees with monthly wages of Rs 21,000 or less are covered under the ESI Act. It is the employer's responsibility to enroll eligible employees in the ESIC program.
The ESI Scheme is financed by contributions from employers and employees. The rate of contribution by the employer is 4.75% of the wages payable to employees. The employees' contribution is at the rate of 1.75% of the wages payable to an employee.
Professional Tax (PT)
Professional tax is a direct tax that applies to individuals earning an income by way of employment, practicing their profession or trading. A practicing professional includes a lawyer, teacher, doctor, chartered accountant, etc. Unlike other schemes mentioned above, PT is a tax levied at the State level, hence it is only applicable in some states and the Tax rate also varies from state to state.
In case of a salaried employee, the employer must deduct PT from their salary every month and deposit it to the government. The employer needs to get a Registration Certificate from the concerned authorities to deposit the deducted tax.
In case of self-employed professionals, they must deposit PT directly with the state government. Such a professional is required to obtain a “Certificate of Enrolment” from the concerned state’s prescribed authority.
Tax withheld or Tax Deducted at Source
According to section 192 of the Income Tax Act, an employer is required to deduct TDS on salary at the time of disbursing salary payments. An employer has to deposit TDS with the Tax Information Network of the Income Tax Department If the employee’s annual income is beyond a certain threshold i.e. Rs 2,50,000 per annum.
The TDS rate on salary depends on the amount of salary payable to the employee, which is based on the different tax slab that the employee falls in. According to the tax slabs, the rate for TDS deduction on salary ranges from 10% to 30%.
Two things to note here are:
(a) that the liability of deducting and depositing TDS falls on the employer and if the employer fails to do the needful he/she is liable to pay late fee/ penalties.
(b) The PAN number of the employee determines the eventual tax liability for the employee and also is required when depositing the employees’ TDS. In case the employee does not have a PAN number the employer is required to deduct a flat 20% plus 4% cess.