Every process within an organisation must evolve to keep up with the demands of modern business. Payroll, one of the most crucial functions of any organisation, is no exception. Traditionally, many companies in India have relied on manual payroll processing. Manual efforts are effective, especially in small settings, but they can be prone to errors, time-consuming, and costly. As India’s laws and tax regulations continuously evolve, businesses must implement a compliant payroll model. However, the manual payroll process may not be helpful for organisations to stay compliant, and it becomes a major bottleneck.
The digital shift to HR processes is an actual necessity for every organisation envisioning a futuristic business approach. This blog helps readers understand the complexities of manual payroll systems and how technology can eradicate such payroll pains.
Table of Contents
Breaking Down the Payroll Process
Employee Data Collection
- Staff Records: When an employee is hired, a company must acquire many details. From personal details to salary structure and designation, every piece of information is necessary to build a staff profile. Also, for salary processing, organisations require employees to submit Form 16 (for income tax purposes), Form 12B (for joining details), and Form 24Q (for tax deductions), if applicable.
- Data Confidentiality: Unique details like PAN number, UAN number, Aadhar, and bank details are also necessary. All these details should be stored securely, so manual processes like paperwork or Excel sheets can lead to data leaks.
Work Hours Tracking
- Timesheets/Attendance Records: In manual methods, employees will be logging their working hours either on paper or in spreadsheets. All details including attendance sheets, overtime records, or leave applications (sick leave, casual leave, earned leave, etc.) are collected. However, it might be difficult for the management team to process several spreadsheets for sorting through employees’ monthly attendance records.
- Leave Records: Leave entitlements such as earned leave (EL), casual leave (CL), sick leave (SL) and more. Holidays should also be tracked accurately for payroll calculation purposes.
Gross Pay Calculations
- Basic Salary: The calculation of an employee’s monthly salary (for salaried employees) or hourly wage (for hourly employees) is based on the hours worked and days present.
- Allowances: India’s salary packages also include allowances like House Rent Allowance (HRA), Special Allowance, Transport Allowance, Medical Allowance, etc. These allowances are added to the basic salary to compute the gross salary.
- Bonus: Some organisations also pay bonuses based on performance, annual earnings, or according to statutory requirements (like the Bonus Act).
Deduction Calculations
- Employee Provident Fund (EPF): A mandatory deduction for eligible employees (usually 12% of basic salary) towards the Employee Provident Fund. Both the employer and employee contribute to this fund.
- Professional Tax (PT): Employees are subject to Professional Tax (a state-level tax), which varies by income and location.
- Income Tax (TDS): Tax Deducted at Source (TDS) is calculated based on the employee’s salary and tax slab. This requires knowledge of tax exemptions, rebates, and deductions available under Section 80C (like investments in PPF, life insurance, etc.).
- Gratuity: For eligible employees, a contribution towards gratuity (as per the Payment of Gratuity Act) may be deducted if applicable.
- Other Deductions: Depending on the company’s benefits or any loans/emergency advances, additional deductions may be made, such as for insurance premiums, loans, or recovery of advances.
The common concern for HR or finance department is how they’ll bring all the components into a single sheet of paper with specific employee details and accurate calculations. Doing all these tasks in manual methods might be a catastrophe. So, it is important to bring in technology for simplifying the process.
Pay Slip Generation
A detailed pay slip is created with employee’s gross salary, allowances, deductions, and net pay. This is done manually in spreadsheets (like Excel) or on paper.
Payment Issues
- Bank Transfers or Cash: Employees may be paid through bank transfer (salary credited to their accounts) or by cash or cheque in smaller companies.
- Cheque Payments: The payroll manager issues individual cheques for each employee, ensuring they match the net salary calculated.
When done manually, cheques and cash are used for payroll processing. It might increase administrative burden and security risks. Bank transfers also pave the way for manual preparation of salary statements, which can delay payouts, especially for larger teams. Mistakes in bank details or salary amounts require additional time to rectify, leading to payment delays and employee dissatisfaction.
Know How Payroll Automation Can Save You Time and Reduce Errors
Filing and Reporting
- At the end of the financial year (March 31), the organisation prepares Form 16 for employees (summarising annual income and tax deductions).
Statutory Filings
- ESI (Employees’ State Insurance) Payments: For employees earning below a certain threshold, ESI contributions are deducted and remitted to the government.
- Provident Fund (EPF) Remittance: The employer needs to submit the total EPF contribution (employee and employer portions) to the Employees’ Provident Fund Organization (EPFO).
- Professional Tax: PT payments must be made monthly or quarterly, depending on the state.
- TDS Returns: The company submits quarterly TDS returns (Form 24Q) to the Income Tax Department.
Year-End Reports
- Form 16: This is a certificate issued to employees at the end of the financial year (April-March) which summarises their total salary and TDS deductions. It is used by employees to file their income tax returns.
- ESI/EPF Annual Reports: The company must also submit annual reports and remittances for employee social security benefits, such as EPF and ESI.
Record-Keeping and Audits
- Physical or Digital Filing: All payroll records (attendance, salary registers, tax filings, deductions, etc.) are kept in a secure system (either physical files or digital records).
- Compliance Audits: Regular audits are conducted to ensure compliance with Indian labour laws, such as the Payment of Wages Act, EPF Act, ESI Act, and Income Tax Act.
Also, read How Reports and Analytics in a Payroll Management System helps SMEs?
Wrapping Up
As businesses continue to grow and evolve, sticking with outdated, manual payroll processes can hold them back from achieving greater efficiency and compliance. Above all, digital payroll software are a seamless way to manage employee salaries, deductions, tax filings, and compliance—saving time, reducing human error, and providing valuable insights into business operations. The digital transformation of payroll is no longer a luxury but a critical step for businesses looking to stay competitive in a fast-moving world. It’s time to modernise your payroll process, improve efficiency, and take your business to the next level—embrace the future of payroll today.
Contact us for a free consultation to discuss your needs.
