How to Run Payroll in India: Complete Step-by-Step Guide (2026)
Running payroll for an Indian business involves more than calculating gross earnings and transferring money. Between central provident fund rules, Employees' State Insurance limits, diverse state-level Professional Tax acts, dual-regime TDS tax slabs, and real-time biometric attendance reconciliation, even minor oversights can lead to statutory penalties, interest, and employee dissatisfaction.
Table of Contents
1. Designing the Salary Structure (CTC Breakdown)
Cost to Company (CTC) represents the total amount an employer spends on an employee per annum. However, CTC is not what lands in the bank account. It is divided into three buckets:
Direct Gross Earnings
- • Basic Salary (40–50% of CTC)
- • House Rent Allowance (HRA - 40–50% of Basic)
- • Special Allowance / Balance
- • Conveyance / Medical Allowances
Employer Statutory Share
- • Employer EPF (12% of Basic + DA)
- • Employer ESI (3.25% of Gross if applicable)
- • Gratuity provision (4.81% of Basic)
- • Statutory Insurance / Benefits
Employee Deductions
- • Employee EPF (12% of Basic + DA)
- • Employee ESI (0.75% of Gross)
- • Professional Tax (State Slabs)
- • Income Tax (TDS / Sec 192)
💡 Compliance Note on Code on Wages:Basic Salary must generally constitute at least 50% of the employee's total remuneration under proposed labor reforms to prevent artificial depression of statutory benefits.
2. Attendance Reconciliation & Loss of Pay (LOP)
Before computing salary numbers, you must freeze attendance data. Most Indian SMEs follow one of two attendance cycle models:
- Calendar Month Cycle (1st to 30th/31st): Payroll processed on the 1st of next month. Late punches on the 31st can delay disbursement.
- Cutoff Cycle (21st to 20th or 26th to 25th): Leaves 5-7 working days to review biometric exceptions, overtime approvals, and unpaid leave claims.
Standard Loss of Pay (LOP) Deduction Formula
Example: If Gross Salary is ₹45,000 in a 30-day month and the employee had 2 LOP days, deduction = (45,000 / 30) × 2 = ₹3,000. Earned Gross becomes ₹42,000.
3. Statutory Deductions: EPF, ESI & Professional Tax
A. Employees' Provident Fund (EPF) Rules (2026)
Mandatory for establishments with 20 or more employees. Applicable on Basic + DA.
| Component | Rate | Statutory Ceiling | Fund Account |
|---|---|---|---|
| Employee Contribution | 12.00% | ₹1,800/mo (on ₹15,000 cap) | EPF A/c No. 1 |
| Employer EPF Share | 3.67% | ₹550.50/mo | EPF A/c No. 1 |
| Employer EPS Share | 8.33% | ₹1,249.50/mo (Capped) | Pension A/c No. 10 |
| EDLI & Admin Fees | 1.00% (0.5% + 0.5%) | Employer pays directly | A/c No. 2 & 21 |
B. Employees' State Insurance (ESI)
Mandatory for establishments with 10+ (or 20+ in certain states) employees earning Gross Salary up to ₹21,000/month(₹25,000 for employees with disabilities).
- • Employee Share: 0.75% of Gross Wages
- • Employer Share: 3.25% of Gross Wages
- • Total Statutory Contribution: 4.00%
C. Professional Tax (PT) Slabs Across Key States
State-levied deduction with an annual cap of ₹2,500 under Article 276(2) of the Indian Constitution.
| State | Salary Threshold | Monthly Deduction | Special Rule |
|---|---|---|---|
| Maharashtra | > ₹10,000 (Men) / > ₹25,000 (Women) | ₹200/month | February deduction is ₹300 |
| Karnataka | ≥ ₹15,000 | ₹200/month | Flat rate, ₹2,400 per year |
| Telangana / AP | > ₹20,000 | ₹200/month | Tiered slabs starting at ₹15,000 |
| Delhi / Haryana | Any salary | ₹0 (No PT enacted) | Zero professional tax liability |
4. Tax Deducted at Source (TDS under Section 192)
Under Section 192 of the Income Tax Act 1961, employers must estimate the employee's annual taxable income at the beginning of the financial year and deduct average monthly TDS.
New Tax Regime (Default)
Lower slab rates, standard deduction of ₹75,000, zero exemptions for HRA/80C. Rebate under 87A makes income up to ₹7,75,000 effectively zero tax.
Recommended for employees without home loans or high rentOld Tax Regime (Opt-In)
Standard deduction of ₹50,000. Allows Section 80C (up to ₹1.5L), 80D health insurance, HRA exemption under Section 10(13A), and home loan interest (up to ₹2L).
Requires proof declaration (Form 12BB) verification5. Payroll Lock, Bank Advice CSV & Payslips
Once calculations are verified:
- Freeze/Lock the Batch: Prevents any accidental changes to leave records, basic pay, or tax declarations.
- Generate Bank Advice File: Export pre-formatted CSV/TXT file compatible with corporate banking portals (HDFC Enet, ICICI Corporate, SBI CIMS).
- Publish Digital Salary Slips: Deliver password-protected PDF payslips via email and self-service employee portals as mandated by the Payment of Wages Act.
What happens when a late punch arrives after disbursement?
In legacy desktop software, handling a missing attendance punch on the 31st requires either voiding the entire company run or manually tracking Excel arrears for next month. Modern HRMS platforms like MicroPlesk solve this through Post-Lock Delta Payroll:
- You select only the impacted employee without opening the company batch.
- The engine recalculates earned days, computing the exact net differential.
- Produces a standalone Supplementary Payslip Addendum for compliance audits.
7. Monthly Indian Payroll Compliance Calendar
| Statutory Due Date | Obligation | Governing Portal |
|---|---|---|
| 7th of Every Month | Salary disbursement (establishments < 1,000 workers) & TDS remittance (Challan 281) | NSDL / e-Tax Portal |
| 15th of Every Month | EPF monthly contribution deposit & ECR filing | EPFO Unified Portal |
| 15th of Every Month | ESI monthly contribution deposit & filing | ESIC Portal |
| Last Day of Month (State-specific) | Professional Tax remittance & monthly return | State Commercial Tax Department |
| Quarterly (31st Jul/Oct/Jan/May) | Form 24Q Quarterly TDS Return Filing | TRACES / Income Tax Portal |
Automate Indian Payroll in Under 3 Minutes
Why calculate EPF, ESI, state PT slabs, and biometric attendance logs by hand? MicroPlesk automates the entire lifecycle with zero configuration headaches.