What is Payroll? - Basics, Process, Compliances and Methods

By Mayashree Acharya


Updated on: Jun 14th, 2024


3 min read

Payroll means the company’s financial record of payments made by the employer to the employees, including wages, bonuses, salaries, incentives, etc. The company must prepare an employee’s payroll for all its employees from the time they are hired till retirement/resignation. Processing payroll without delays in accordance with various statutory compliances is a significant activity of a company.

In India, payroll processing refers to the steps involved in calculating the total remuneration of each employee of the company/organisation. It is an overwhelming process as it consists of calculation of gross salary, bonuses, net salary, daily wages, Provident Fund (PF) payment, professional tax payment, Tax Deduction at Source (TDS), allowances, etc., that are part of each employees’ monthly salary payment. 

Payroll processing is one of the essential yet complicated business processes. Thus, errors might happen while processing and executing salaries that might hamper the employees’ morale and productivity. Employees rely on the company’s process to get paid without delays, irrespective of the organisation’s size. Payroll plays a crucial role in a company’s Human Resource Management (HRM).


What is Payroll?

Payroll is defined as the process of paying salary to the employee of a company/organisation. It starts with preparing the list of employees to whom salaries must be paid and end with recording those expenses.

The payroll process involves calculating what is due to the employees for a specific payroll cycle after adjusting the required deductions like employees’ PF contribution, TDS, meal coupons, etc. The payroll cycle is the gap between two salary disbursements of an employee. Generally, payroll is processed every month in India. 

The payroll process requires different teams, such as HR, payroll and finance, to work together. However, due to modern technology, businesses can effortlessly manage all the payroll processing complexities.

Payroll Processing in India

The following stages are involved in the payroll processing of employees:

Pre-Payroll Activities

The pre-payroll activities involve the following steps:

Step 1: Onboarding employees

The first step of payroll processing is onboarding employees and preparing the list of employees to be paid salaries. 

Step 2: Defining payroll policy

Companies should define their payroll policies and get them approved by the management for processing standard payroll execution.  Every company has their own approach to employee engagement, philosophy and work culture. A company needs to define the below policies for standardising payroll processing:

  • Pay policy.
  • Employee benefits policy.
  • Leave and attendance policy.
  • Salary components, including deductions.
  • Pay schedule policy.

Step 3: Gather employee inputs

Employee inputs like bank account details, PAN, address, income tax declarations, proof of investment, etc., are essential for payroll processing. Usually, the companies collect these inputs from employees at the time of their joining/onboarding by the concerned department/team. Each department/team will collect and maintain employee inputs necessary for processing payroll, such as:

  • The finance team maintains information about every employee’s variable pay, bonus, commission, deductions, payments, income tax declarations, etc.
  • The HR team maintains every employee’s information about the leave, attendance, overtime work hours, loss of pay reports, employee exit date, salary revision, etc.
  • The admin team maintains information about employee-related bills, transportation bills, reimbursement of expenses, etc.

Step 4: Validate employee inputs

After the inputs are compiled from the information provided by the employees and different teams, the validity of their details must be checked for accuracy and correctness before using it for the actual payroll process. All active employees must be considered for validating data, and former employees must not be included in salary and compliance payments. Validation of employee inputs eliminate the risk of committing mistakes in the payroll processing, and the consequences faced while rectifying them.

Actual Payroll Activities

The actual payroll activity involves mainly only one step, which is as follows:

Step 5: Calculation of payroll

The validated inputs of employees should be fed into the system maintained by the company for processing payroll to calculate every employee‘s paycheck. This results in the net salary payment of each employee after adjusting the necessary deductions and taxes due. Net salary is usually arrived at by deducting the gross deductions from an employee’s gross salary. The payroll calculations are done using spreadsheets or through payroll software. 

The essential elements of salary structure for calculating the net salary include the following:

  • Cost to Company (CTC).
  • Allowances.
  • Prerequisites.
  • Arrears.
  • Professional tax, PF, insurance deductions.
  • Leave adjustment.
  • Payslip.
  • Form-16.
  • Reimbursements.
  • Bonus, incentives, expenses and one-time payments. (if any)
  • Employee financial details.
  • Employee investment declarations.
  • Loan repayment. (if any)

Post-Payroll Activities

The post-payroll activities involve the following steps:

Step 6: Accounting

The salaries paid to employees must be recorded as they are the biggest expenses for a company. Payroll accounting involves maintaining the company accounts with regard to employees’ salaries.

Step 7: Pay employee salaries

The company must first ensure that its bank account has sufficient funds to make the salary transfers to its employees. The companies will send the salary bank advice statement to the concerned bank directing it to disburse salaries from the salary bank account. However, the company can automate this salary payment process to employees through software with an in-built direct deposit feature. The companies must also distribute payslips to each employee either individually or through automated software.

Step 8: Compliance and reporting 

During payroll processing, all statutory deductions of an employee such as TDS, PF, Employees State Insurance (ESI) and professional tax are deducted. These payments should be made to the appropriate government departments within the respective due dates. The deductions must be reported to the government departments by filing the respective forms prescribed by each department.

Statutory Compliances for Payroll Management

In India, companies have to follow the legal regulations in their payroll management while disbursing salaries to their employees. There are many statutory requirements that Indian companies must adhere to, and they must ensure compliance with these legal regulations. If companies fail to adhere to these statutory compliances, they will have to face heavy penalties.

Thus, detailed knowledge of legal expertise and compliance is required to minimise the risk associated with the non-compliance of statutory requirements. The general statutory compliances that every company has to follow for their payroll management in India are:

  • ESI fund and PF funds
  • Professional tax
  • TDS (Tax Deduction at Source)
  • Gratuity

Payroll Processing Methods


Many companies that are at their initial stage of operations make use of spreadsheet-based payroll management. It is convenient to use spreadsheets because they will have only a handful of employees to manage at the initial stage. Spreadsheet-based payroll management involves calculations using standard templates that contain set mathematical formulas for the salary and compliance payment computations. 

Though it is cost-effective, it is not suitable for companies when they expand and have more employees or for medium and large-sized companies. Additionally, the opportunity cost is very high when using a traditional system over automated methods. It is also difficult to reconcile and verify the values to avoid any errors in this method.


Payroll outsourcing means entrusting the company’s payroll execution to an outside or third-party agency. Many companies that do not have dedicated personnel for payroll management opt for outsourcing. Based on the company’s payroll cycle, they provide the outsourced agency with salary information and other data such as leaves, attendance, reimbursement details, etc., of their employees every month. The outsourced agency calculates dues and is also responsible for complying with statutory compliances.


Many payroll automation software and tools are available that carry out payroll computations and reduce manual efforts while increasing efficiency. Automated payroll software solves the challenges faced while using spreadsheets or outsourcing it.  It eliminates the risk of mathematical or clerical errors. However, the software needs to be updated with the latest compliance laws.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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I am an advocate by profession and have a keen interest in writing. I write articles in various categories, from legal, business, personal finance, and investments to government schemes. I put words in a simplified manner and write easy-to-understand articles. Read more


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