What Is Payroll in India?

When a company pays its employees is known as payroll. It is also the total amount of money the
employer pays to the employees. As a business function, it consists of,
• Developing organization policies like pay policy including leave encashment policy, flexible benefits,
etc.
• Defining components in payslip like basic, variable pay, LTA, and HRA.
• Other payroll inputs such as meal allowances, etc
• The actual calculation of gross salary, statutory as well as non-statutory deductions, and arriving at the
net pay
• Releasing employee salary
• Depositing dues like TDS, PF, etc. with appropriate authorities and filing returns
Payroll is the process by which employers pay an employee for the work they have completed .

The term " payroll actually refers to the list of employees that receive compensation from a company .
However , most companies generally use the term to refer to the money that is paid to the employees .

The payroll process typically includes calculating employee pay , recording payroll transactions , and
determining and paying payroll taxes and statutory dues
How Is Payroll Calculated in India?

The payroll process involves, at what is due to the employees, which is also called as 'net pay' arrived after
adjusting the required taxes and other deductions,

The equation for calculating the net pay is,

Net pay = Gross Income- Gross Deduction

Where,

Gross Income or salary = All types of regular income + allowances + any one-time payment or benefit.

Gross Deduction = All types of regular deductions + statutory deductions + any one-time deductions.
What Are the Important Elements of Salary Structure in India?
In every payroll in India, the monthly salary and wages disbursement has many vital components structured together that make a salary
package. These elements are essential for both employers and employees to calculate taxes, PF, ESI, benefits, LTA, etc.
 JOURNAL ENTRY

Basic Salaries a/c dr Employer's contribution in EPS / EPF / ESIC:

Allowance a/c dr
To ESI employee contribution a/c
To EPF employee contribution a/c
To EPS employee contribution a/c
TO ESIC contribution Credit a/c
To PF employee contribution a/c
To TDS payable on salaries a/c
To salaries payable a/c
Company Contribution to EPF/EPS/ESIC expense a/c Dr.
To Company's contribution EPF/EPS/ESIC Payable a/c
Cr
TDS on salary payable entry
TDS on salary a/c dr
To bank a/c

Salary payable entry

Salaries payable a/c dr
To bank a/c

Salary advance entry
Salary advance to employees a/c dr
To bank a/c
When salary is processing
Salary a/c dr
To salary advance to employee a/c
To PF/ESI/ESIC/ employee contribution a/c
To professional tax a/c
To TDS on salary a/c
To bank a/c
 COMPUTATION UNDER HEAD OF SALARY IN
INCOME TAX
Particulars Details Amount

Basic Salary *****

Fees *****
Commission *****
Bonus *****
Gratuity *****
Leave Encashment *****
Pension *****
Retrenchment Compensation *****
Compensation received under Voluntary Retirement Scheme *****
Allowances:
Dearness Allowance (DA) /Dearness Pay (DP) *****
House Rent Allowance *****
Children EducationAllowance *****
Children Hostel Allowance *****
Entertainment Allowance *****
Medical Allowance *****
Conveyance Allowance *****
City Compensatory Allowance *****
 Uniform Allowance *****
Professional Development Allowance *****
Transport Allowance *****
Other Allowances ***** *****
Perquisites u/s 17(2)
Any Obligation of Employee paid by Employer *****
Accommodation *****
Shares and securities issued under ESOP *****
Employer’s Contribution to Superannuation Fund *****
Gas, Electricity & Water *****
Medical Facility *****
Other fringe benefits ***** *****
Leave Travel Concession *****
Contribution of Employer to Provident Fund *****
Interest on Recognised Provident Fund *****
Any other item *****
Gross Salary *****
Less: Deduction u/s 16
(ia) Standard Deduction ****
(ii) Entertainment Allowance ****
(iii) Tax on employment/Professional tax **** ****

Taxable Salary *****

 PROVIDENT FUND

Provident fund scheme is a saving device in the hands of salaried class. It is a retirement benefit scheme.
Underthis scheme, a stipulated sum is regularly deducted from the salary of the employee as his
contribution towards thefund. The employer also, generally, contributes a similar amount out of his pocket
to the fund. The employer’s and employee’s contribution are together invested in such fund. Interest
earned thereon is also credited to the fund of the employee. Thus, provident fund scheme is a great
media to initiate and mobilise small savings to a large scale. On termination of service or retirement,
employee receives the whole accumulated fund, subject to certain conditions. Hence, provident fund has
four components i.e. Employer’s contribution; Employee’s contribution; Interest on employer’s
contribution; and Interest on employee’s contribution.
Provident fund is of four types, viz:

Statutory Provident Fund (SPF): Statutory provident fund is set up under the provisions of the Provident
Funds Act, 1925. Government and Semi-Government organisations, local authorities, railways, Universities and
recognised educational institutions maintain Statutory Provident Fund.

Recognised Provident Fund (RPF): The provident fund scheme is framed under the Employee’s Provident
Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred as PF Act). The PF Act covers any
establishment employing 20 or more persons. However, any establishment employing less than 20 persons
can also join the scheme provided employer and employee both agree to do so. Further, if an employer creates
his own scheme for provident fund then he can do so subject to recognition from the Commissioner of Income
tax.
Unrecognised Provident Fund (URPF): If a provident fund scheme is created by an employer, which
is not recognised by the Commissioner of Income tax, then such fund is known as Unrecognised
provident fund.

Public Provident Fund (PPF): The Central Government has established a fund for the benefit of public
to mobilise personal savings. Any member of the public, whether salaried or self-employed, can
contribute to the fund by opening a provident fund account at any branch of the State Bank of India or
its subsidiaries or other specified bank. Even a salaried employee can simultaneously become a
member of employee’s provident fund (whether statutory, recognised or unrecognized) and public
provident fund. Any amount in multiple of ` 5 (subject to minimum of ` 500 and maximum of ` 1,50,000
p.a.) may be deposited in this account. Interest is credited every year but payable only at the time of
maturity. Interest earned on this fund is exempt from tax
TAXABILITY

Particulars SPF RPF URPF PPF

Exempted up to 12% of Salary (here,

Employer’s Not taxable salary means Basic + DA# + Not taxable Not
Contribution Commission as a fixed percentage on Applicable
Turnover

Employee’s Eligible for Not eligible for Eligible for

Contribution deduction u/s Eligible for deduction u/s 80C deduction u/s deduction
80C 80C u/s 80C

Exempted @ 9.5% p.a. (Interest rate),

Interest Not Taxable any excess interest will be taxable as Not Taxable Not taxable
salary.

Lump Sum Not Taxable Not taxable (Subject Note 1 Not taxable
withdrawal to Note 2)
Lump sum amount withdrawn from URPF

Particulars Tax treatment

Accumulated employer’s contribution Fully taxable under the head Salaries

Accumulated employee’s contribution Not taxable

Accumulated interest on employer’s Fully taxable under the head Salaries

contribution
Accumulated interest on employee’s Fully taxable as income from other
contribution sources
1. Lump sum amount withdrawn from RPF
a) Amount withdrawn from RPF is not taxable, if

❖ Employee retires or terminates job after 5 years of continuous service; or

❖ Employee has resigned before completion of 5 years and joins another organization
(who also maintains recognized provident fund and his fund balance with current
employer is transferred to thenew employer).
❖ The entire balance standing to the credit of the employee is transferred to his account
under New Pension Scheme as referred u/s 80CC
❖ Employee retires or terminates job before 5 years of continuous service -
❖ by reason of ill health; or
❖ by reason of contraction or discontinuance of employer’s business; or
❖ any other reason beyond the control of employee.

In any other case, amount withdrawn shall be taxable as in the case of URPF
 FRINGE BENEFIT

VALUATION OF PERQUISITES IN RESPECT OF INTEREST FREE LOAN OR CONCESSIONAL

RATE OF INTEREST
Perquisite in respect of interest free loan or loan at concessional rate of interest to the employee or any
member of his household by the employer or any person on his behalf, is not taxable if aggregate amount
of loan given by the employer (or any other person on his behalf) does not exceed ` 20,000. The taxable
value of such perquisite shall be determined as per the rate as on the 1st day of the relevant previous
year charged by the State Bank of India in respect of loans for the same purpose advanced by it.
Free Meals, Tea & Snacks
a) Snacks/ tea /other non-alcoholic beverages –
a. Provided in working hours in office/any place- Exempt
b. Provided in remote area, offshore installation in working hours –Not taxable

b) Food meal –

a. In office / other place – paid vouchers -- actual expense incurred by employer (-)
50/meal = taxable value of perquisite

a. Provided in remote area, offshore installation in working hours –Not taxable

Coffee/Non-alcoholic beverages/snacks in working hours/in over-time = Exempt

Any amount paid by employee to employer should be subtracted from perquisite value
GIFT, VOUCHER OR TOKEN GIVEN BY EMPLOYER

The value of any gift, voucher, or token (in lieu of which any gift may be received) given to the employee
(or any member of his household) on ceremonial occasion or otherwise by the employer shall be taxable
in the hands of all employees. However, gift, voucher or token upto ` 5,000, in aggregate, during the
previous year, shall be exempted.
Notes:
a) Where worth of gift is in excess of ` 5,000 then amount in excess of ` 5,000 shall be taxable.
b) No such exemption (` 5,000) is available on gift made in cash or convertible into money
VALUATION OF PERQUISITES IN RESPECT OF USE OF MOVABLE ASSETS

If employee (or any member of his household) uses any movable asset (other than the assets for which
provisions have been made) belonging to employer, then such facility is taxable in the hands of all
employees. The value of such benefit is determined as per the following table:
If the asset is owned by the employer 10% of the original cost of such asset.
If the asset is hired by the employer Charges paid or payable by the employer Notes:

a) Any sum charged from the employee shall be reduced from the value determined as above.
b) Use of computer, laptop, etc. (as discussed earlier) is exempted perquisite.
c) Here movable asset does not include car.
VALUATION OF PERQUISITES IN RESPECT OF MOVABLE ASSETS SOLD BY AN EMPLOYER
If the sale price is less than the written down value (calculated as per method and rate mentioned below)
then the difference would be treated as perquisite and taxable in the hands of all employees.
Rates and methods of depreciation for different types of assets are as follow:
Types of asset Rate of depreciation Method of depreciation
Electronic items#/Computer 50% Reducing balance
Motor car 20% Reducing b alance
Any other 10% Straight l ine
# Electronic items here means data storage and handling devices like computer, digital diaries and printers.
They do not include household appliances like washing machines, microwave ovens, mixers, etc.
QUESTIONS-

• Journalize the payment of the April 30 payroll on Page 6 of the General Journal provided. Use
• the current year. Check #315: Source documents are Check 315 and memorandum 135. (16
• pts.)
• Date of payment: April 30, 2009
• Total Payroll $2,971.00
• Federal Income Tax Withheld $ 268.00
• Social Security Tax Withheld $ 184.00
• Medicare Tax Withheld $ 43.08
• United Way Donations $ 10.00
• U.S. Savings Bonds $ 15.00
MCQ

• 1.The money paid for employee services

• a. Salary
• b.Total earnings
• c. Payroll
• d. Base earnings
• 2.The total amount of pay due to an employee for a pay period before any deductions are
• taken
• a. Salary
• b. Net Pay
• c. Gross Pay
• d. Total Pay
• 3. The maximum amount of earnings on which a tax is calculated
• a. Tax Base
• b.Tax Max
• c. Tax Limit
• d. Tax Level
• 4. A federal tax paid for old-age, survivors, and disability insurance
• a. Medicare Tax
• b. Social Security Tax
• c. Federal Income Tax
• d. State Income Tax
• 5. A federal tax paid for hospital insurance
• a. Medicare Tax
• b. Social Security Tax
• c. Federal Income Tax
• d. State Income Tax
• 6. The business form used to record details affecting payment made to an employee
• a. Employee Payroll Listing
• b. Employee Payroll Register
• c. Employee Earnings Record
• d. Employee Salary Report
• 7. Information used to prepare the payroll check is taken from the
• a. Payroll Register
• b. Payroll Earning Record
• c. Payroll Employee Salary Report
• d. Payroll Salary Report
THANK YOU