Monthly Payroll Checklist for Indian Companies

If you have ever found yourself staring at spreadsheets at 11 PM on salary day double checking if you calculated everyones Tax Deducted at Source correctly you know that doing payroll in India is really tough. There are many things to think about like Employees Provident Fund, Employees State Insurance, professional tax and Tax Deducted at Source calculations. Payroll in India is a responsibility. One small mistake with payroll in India. You are either dealing with angry employees or worried about penalties for not following the rules. Payroll, in India can be very stressful.

Here is the thing most people do not know that payroll does not have to be so stressful. Payroll can be a lot easier, with the system and a simple monthly routine. You can actually change payroll from something you hate doing into something that just works. This guide will tell you what you need to do with your payroll each month to keep it running smoothly.

Week 1: Get Your Data House in Order

Big mistakes with payroll happen because the data is a mess. You cannot give people the salary if you do not know who started working at the company last week who is on leave without getting paid or whose loan payments should start this month. The payroll mistakes are big. They happen because of this messy data. You have to know about the people who work at the company like who joined week who is on leave, without pay or whose loan payments should start this month to give them the right salary.

Update Employee Records First

Start by looking at what's different in your organization. When new people join you need to make sure you have all of their information in the system. This includes things like how they get paid their bank account details. Double check that account number to make sure it is correct. And other important numbers, like their PF and ESI numbers and the taxes they pay. For the people who left their jobs you have to take care of their payment, which includes getting back any money they owe for not giving enough notice and paying them for any leftover vacation time.

People often forget about promotions and transfers. When someone gets a promotion like in January their new salary should start from January. It should not start from February or March just because the human resources department was slow to update the system. These kinds of delays cause frustration and extra work, with promotions and transfers on.

Sort Out Attendance and Leaves

Get your attendance information from the place where you keep track of it. New systems make this simple with things, like integration or mobile apps but you can even use manual registers if you do it every time. For each employee count the days they actually work and do not forget about weekends, holidays and times when the company is closed for reasons.

We need to process all the approved leaves. This includes earned leave, casual leave and sick leave. We also have to deal with leave without pay, which is often called LOP. If an employee has taken leaves than they have earned we will have to calculate the deductions for leave without pay.

We should also think about overtime hours. This is for employees who're eligible, for overtime pay.

Track Variable Pay and Reimbursements

Find out about the bonuses that people get. This includes incentives and commissions. Maybe the sales team did a job and hit their targets.. Maybe someone finished a project and gets a performance bonus. It is an idea to get this information early. That way you do not have to deal with minute surprises, about bonuses and incentives and commissions.

We need to collect all the reimbursement claims for things like travel expenses and medical bills and phone bills. We have to make sure that the employees have sent in the receipts for these reimbursement claims. It is really bad when we have to turn down someones reimbursement claim on the day they get their salary just because they forgot to add the receipt for their hotel bill to their reimbursement claim, for travel expenses.

You should check if you have any money that you still need to pay, which is called arrears. This can happen when your salary is revised and the change is applied to months. Salary revisions are sometimes backdated so you will have to pay the difference for the months when your salary was lower. You need to pay this difference, for the salary revisions that are backdated.

Week 2: The Number Crunching Begins

Now we get to the part where we have to be very careful. This is the part where we figure out how money each person really gets and how much is taken away, from the salary of each person. We are talking about the earnings of each person and what gets deducted from the earnings of each person.

Calculate Gross Salary

To figure out your salary start with the salary, which is usually around 40 to 50 percent of your total salary.

Then you need to add the house rent allowance.

This is important because it works differently in cities like Mumbai, Delhi, Kolkata and Chennai where you can get 50 percent exemption and in smaller cities, where you can get 40 percent exemption.

After that you can add things like a special allowance and the money your company gives you to travel to work, which is not taxed if it is one thousand six hundred rupees or less, per month.

You should also add any allowance and other fixed components that your company offers, like the special allowance.

So your total salary is made up of the salary, house rent allowance, special allowance and other allowances.

Don't forget variable pay—bonuses, incentives, or commissions earned this month go here too.

Work Out Statutory Deductions

Provident Fund (PF)

Provident Fund is something that companies have to do for their employees who are covered under the Employees Provident Fund. So for these employees the company has to deduct twelve percent of the salary plus the dearness allowance.

The company also has to put in another twelve percent. This twelve percent is split between the Employees Pension Scheme and the Provident Fund.

It is important to remember that the Provident Fund is mandatory for employees who earn up to fifteen thousand rupees as their salary. For employees who earn, than fifteen thousand rupees the Provident Fund is voluntary unless they are already members of the Provident Fund.

Employee State Insurance (ESI)

For people who work and get a salary of, up to ₹21,000 every month we need to take out 0.75% for the Employee State Insurance. The company that these people work for also puts in 3.25% for the Employee State Insurance. The Employee State Insurance is really useful because it gives coverage to the employees and their families. It also gives them benefits when they are sick when they have a baby and in situations. The Employee State Insurance is a thing because it helps the employees and their families in many ways.

Professional Tax (PT)

Professional Tax is different in every state. In Maharashtra people have to pay up to ₹2,500 every year. This means they pay ₹200 every month for eleven months and ₹300 in the month of February. The rates are different, in Karnataka.. In Delhi there is no Professional Tax at all. You have to follow the rules of your state when it comes to Professional Tax. Make sure you are doing it correctly for your states Professional Tax.

Calculate Income Tax Right

This is where things get tricky. First we need to find out which tax system each employee has chosen. The system or the new system. The old system has a lot of things you can deduct from your taxes. The tax rates are higher. The new system has tax rates but you can deduct fewer things from your taxes. Both the old and the new tax system offer a deduction of ₹50,000.

Under the old regime, calculate HRA exemption, Section 80C deductions (PPF, life insurance, ELSS, home loan principal—up to ₹1.5 lakh), Section 80D for health insurance, Section 24 for home loan interest, and other applicable deductions.

To get the details of the investments made by the employees you need to fill out Form 12BB. This is where the employees declare their investments.

Now if an employee joins your company in the middle of the year they have to give you Form 12B.

This form has the salary they got from their employer and the tax that was deducted.

You need this information to make the calculations, for Form 12BB so you should get Form 12B from the employee who joined mid-year.

Handle Other Deductions

When you are figuring out the salary you need to subtract the loan payments that employees have to make every month. You also have to subtract the money that the company gave to employees in advance and any corrections that need to be made for the months when employees got much money.

If your company has a canteen or transport service that employees have to pay for you need to subtract those costs from their salary

For employees who leave the company without finishing their notice period or who lose something that belongs to the company the company needs to get the money it lost. The company should do this according to the rules, in the employment contract. The company should make sure it has all the paperwork to prove everything.

Validate Everything

Before we finalize everything we need to run some checks. We have to make sure that the number of working days does not go over the number of days in the month. We also need to verify that the statutory deductions are, within the limits allowed for these deductions. It is also very important to confirm that no one has a net pay. We have to validate the bank account numbers and the IFSC codes for each bank account to make sure they are correct.

This month needs to be compared to month. If someones salary has suddenly jumped up or dropped down a lot without a reason we need to look into it. We have to make exception reports for people who are getting zero salaries or for people who have much money being taken out or if some information is missing. Finding mistakes now will save us a lot of trouble later. We should really check the salaries. Make sure everything is okay. This will help us catch any problems with the salaries like if someones salary is zero or if someone is having much money taken out or if we are missing some information, about someones salary.

Week 3: Process and Get Approvals

You have done the groundwork. Now it is time to actually run the payroll and get the sign-offs for the payroll. Running the payroll is the step. You need to get the sign-offs, for the payroll.

Run the Payroll

If you are using payroll software like LEDGERS this is really easy. You just have to click one time. The system does all the calculations for the salary, allowances, deductions, TDS, PF, ESI and professional tax.

The system always has the information so you do not have to change the tax rates every time there is a new budget. This makes it a lot simpler for you when it comes to LEDGERS payroll software and tax calculations for things, like TDS, PF and ESI.

Generate your payroll register showing complete breakdowns for every employee—earnings, deductions, and net pay.

Get Management Approval

Prepare a summary report showing total payroll cost by department, location, and employee category. Include variance analysis comparing this month to last month and budget. Highlight anything unusual—new hires, exits, big increases, one-time bonuses.

You need to get approval, from your HR head to make sure the information is correct. Your finance manager also has to approve it to confirm that you have money in the budget.

If the HR head or the finance manager finds any problems you have to fix them before you can move forward with the Human Resources and the finance manager.

Generate Payslips

We need to make sure our payslips are easy to understand. They should show everything that employees earn like their pay, HRA and any special allowances they get. We also have to show all the money that is taken out like EPF, ESI, PT, TDS and loan payments. It is important to include the pay, which is the amount of money employees actually take home.

We should also show the amount of money employees have earned so far this year. This will help them keep track of how much they have made.

Our company should also show how much we are paying towards EPF and ESI for each employee. This way everything is out, in the open. Employees can see exactly what is going on with their payslips and the money our company is paying on their behalf.

Prepare Bank Transfers

To make the salary payment you need to create the salary transfer file in the format that your bank requires. You should double and triple check that the account numbers and the IFSC codes and the names are the same as what is in the bank records. Make sure you have money in your salary account. Then schedule the upload so that the salaries get credited into the salary accounts on the date that you promised the salary will be paid. The salary transfer file should be made carefully so that the salaries credit, into the correct salary accounts.

Week 4: Pay Day and Distribution

This is the moment that everyone has been waiting for. The big moment that everyone has been waiting for is finally here. The moment that everyone has been waiting for is now.

Process Salary Transfers

You need to upload your file to the banking portal. If your payroll software works with the banking system, which it probably does then this is really easy to do. You can check on the status of your transactions at the banking portal. See what is happening with them in real-time. Just go to the banking portal. You can see the status of your transactions.

When payments do not go through it is usually because of account numbers or closed accounts or the name on the account does not match. The employees who have payments that do not go through need to be contacted away. We need to get the information from these employees and then process their payments as fast as we can. Salary day is very important to employees. Nobody wants to be the employee who does not get paid on salary day. Payments are very important, to employees so payments need to be done.

Share Payslips

You can email your payslips to your employees. Make sure they are password protected. There are platforms, like LEDGERS that let employees look at their payslips whenever they want to from their phone or computer. Employees can see their payslips and also look at old ones. They can even download tax documents when they need them.

People really want to see the payslips on or before the day they get their salary. They want to know the breakdown of their salary what they are getting and all that. The payslips should be sent on or, before the salary day so people can see the details of their salary. People like to look at the payslips to understand their salary.

Handle Employee Questions

You will get a lot of questions from people. They will ask you things like "Why's my Tax Deducted at Source higher this month?". How did you calculate my House Rent Allowance exemption?". Where is my reimbursement?" People will want to know about their Tax Deducted at Source and House Rent Allowance exemption. They will ask you "What is going on with my reimbursement?". Why is my Tax Deducted at Source higher this month?" You will have to answer these questions, about Tax Deducted at Source and House Rent Allowance exemption.

Please answer me away and make sure I understand what you are saying. If you need to do some math to figure it out then show me the work.

If you make a mistake just say so. Fix it fast.

Keep track of all the questions people ask you because this helps you see what keeps coming up and make things better.

Don't Miss These Compliance Deadlines

Missing these deadlines means penalties, interest charges, and legal headaches.

TDS (Due: 7th of Next Month)

You have to deposit the Tax Deducted at Source by the 7th. You can do this using the challan ITNS 281. The Tax Deducted at Source can be paid through banks that are authorized or the TIN-NSDL portal. Do not forget to save the Bank Statement Reference code. You will need the Bank Statement Reference code, for the Tax Deducted at Source returns.

You need to file Form 24Q every quarter. The deadlines for filing Form 24Q are July 31 October 31 January 31 and April 31 has been replaced with May 31 in some cases but you should check to be sure. When you file Form 24Q make sure the challan details are the same, as the Form 24Q data. If the challan details and the Form 24Q data do not match you will get a notice from the Form 24Q people. So it is very important that the challan details match the Form 24Q data to avoid getting these notices. You should double check the Form 24Q data and the challan details to make sure they are the same.

EPF (Due: 15th of Next Month)

Pay EPF contributions by the 15th through the EPFO portal. Late payment costs you 12% annual interest (up to two months) or 18% beyond that.

Generate your ECR file showing member-wise details, upload it, and pay through the portal. Download payment receipts and ECR acknowledgments.

ESI (Due: 15th of Next Month)

To make ESI payments you need to do this by the 15th of every month. You will do this through the ESIC portal. The ESI payments have two parts. As an employer you will pay 3.25 percent. As an employee you will pay 0.75 percent. This is, for people who earn up to ₹21,000 every month. You have to make these ESI payments on time. The ESIC portal is where you will go to make the ESI payments.

Generate the challan, make payment, and file monthly returns with employee-wise details.

Professional Tax (Varies by State)

Most states want you to make a payment every month. You usually have to do this by the 15th or 20th of the month. To pay you can download the PT challan form from the website of your state. Then you can pay online. After that you have to file your tax returns like you are supposed to. You have to do all this for the PT challan and your tax returns.

Keep Your Records Organized

Having records is really important when you are being audited or when your employees need some kind of documentation. Good records are, like a safety net that helps you during these times. They are your records that help you stay on track and give you the information you need from your good records.

Save Everything

Keep monthly payroll registers for at least three years (Payment of Wages Act requirement). Store all statutory payment challans—EPF receipts, ESI confirmations, TDS challans with BSR codes, PT payment proofs.

Maintain employee files with joining documents, salary structures, Form 11 (EPF nomination), Form 1 (ESI nomination), bank details, PAN, Aadhaar, tax declarations, reimbursement claims, and loan agreements.

Good payroll software will keep track of every change that is made. It will tell you who made the change when they made the change and what exactly was changed. The payroll software keeps a record of all these changes, which's really helpful when you have questions, about something that happened months ago. This record is called an audit trail. It is very useful. The payroll software makes sure that the audit trail is accurate and complete so you can always go back. Check what happened to the payroll.

Critical Year-End Tasks

Form 16 (Due: June 15th)

We need to give Form 16 to all employees by June 15th. This Form 16 should have the salary and the amount of TDS that was taken out for the financial year. We should make sure the information on Form 16 matches what is on Form 26AS. If Form 16 and Form 26AS do not match the employees will have problems when they file their income tax return. So it is very important that Form 16 is correct and matches Form 26AS to avoid any issues, with the income tax return filing.

Investment Declarations

We need to collect declarations at the start of each year.

At the end of the year we have to collect Form 12BB with proof of the investments that the person made.

So if someone said they would invest ₹1.5 lakh but they only invested ₹50,000 we have to recover the TDS shortfall from the investments that the person did not make.

We have to make sure that the person pays the amount of TDS for their investments.

Annual Returns

You need to file returns with the Employees Provident Fund Organization and the Employees State Insurance. Also make sure you file all Tax Deducted at Source returns and reconcile them. This is very important for the Employees Provident Fund Organization and the Employees State Insurance. You have to file these Tax Deducted at Source returns every quarter and then reconcile them to avoid any problems, with the Employees Provident Fund Organization and the Employees State Insurance.