Core components of payroll processing in India
The monthly salary and wages disbursement have several key components structured together in every payroll. Within and between gross and net salary, there are several ‘components’ that make a salary package. These are essential for the employers and employees to calculate taxes, provident fund (PF), medical expenses, benefits, travel allowance and so on.
Framing the salary components is often one of the biggest challenges in every payroll management system. Every salary consists of ‘taxable’ and ‘tax-exempt’, variable, constant pay, some allowances, some deductions. This is one of the strong reasons that most of the organizations opt for Payroll Outsourcing Services.
The two main objectives of every payroll processor are to make the payroll tax efficient and compliant with government norms.
There are four major components in the Payroll Management System in India.
This is an employee’s salary before deductions, every month. Calculated on a yearly basis, this is often referred to as the CTC or Cost to the company.
All the other components such as:
- Professional Tax (PT),
- Provident Fund (PF)
- Employee State Insurance (ESI)
- Conveyance charges (common recurring deductions)
are deducted from the gross salary. Employers often contribute to employees PF, apart from what’s deducted from the employee’s gross salary. PT and PF are government deductions, that are compulsory (depending on the company’s size), based on their pay scale. Apart PF, employees also have the option of Voluntary Provident Fund (VPF) or Public Provident Fund (PPF) – which offers tax benefit. ESI offers employees medical benefits including paid medical leave. (In certain cases)
Net Salary is what employees get upon these deductions. Components of net salary in India include:
- Other components:
- Basic pay
- Housing Rent Allowance (HRA)
- Dearness Allowance (DA) – Subject to the city of employment
- Transport allowance
- Special allowance
- Food allowance
- Leave Travel Allowance (LTA)
- Uniform Exemption
- Children Education Allowance
- Mobile and Telephone allowance
- Fuel allowance (apart from travel allowance, in certain cases)
- Car maintenance allowance
- Labour Welfare Fund
Some of these net salary components are flexi-benefit options that the employees can choose annually, half-yearly or quarterly, depending on the company’s policy. These flexi-benefit options give employees the leeway to choose a portion of their pay to make it exempted from tax. The components in the net pay are paid irrespective of the employee incurring them.
These include one-off or occasional pay such as annual bonus, incentives (based on performance), festival advance (some companies offer quarterly deductions – periodical before a major festival season) or leave encashment. Companies further offer salary/wage-advance on a per request basis, which are also considered as ad-hoc pay.
Apart from PT and PF, benefits such as Gratuity, retirement plans, medical insurance and family insurance cover are long term benefits that both employer and employee contribute to. Often, these long-term benefits are settled when an employee retires or resigns.
Deductions paid to the government:
PF: A saving tool for employees, available in companies that employ more than 12/20 people. Can be withdrawn under special circumstances
PPF/VPF: Voluntary contribution to the PF, gives employees tax benefits
ESI: State insurance that offers subsidised treatment and full pay during medical leave (depending on the job profile and company policy)
PT: All professionals such as financial advisors, journalists, teachers are entitled to contribute to a fund called Professional Tax. The amount is a compulsory deduction which offers an employee tax exemption, however, it is not refundable.
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