How to Process Payroll in India: Step-by-Step Guide (2026)

If you run an Indian SMB or startup, few operational tasks carry as much weight as paying your people correctly and on time. Learning how to process payroll in India is not just an administrative chore — it is a monthly commitment to accuracy, compliance, and employee trust. Payroll processing in India sits at the intersection of HR policy, tax law, labour regulation, and accounting, which is why so many founders find it intimidating at first. The good news: once you break the payroll cycle into clear, repeatable steps, it becomes a disciplined routine rather than a monthly fire drill.

This guide walks you through the entire monthly payroll process — from pre-payroll setup and input collection to salary calculation, statutory deductions, disbursement, compliance filings, and reconciliation. It is written for founders, HR managers, and payroll teams at small and mid-sized Indian businesses who want a practical, end-to-end playbook they can actually follow.

One note before we begin: statutory rates, wage ceilings, and due dates in India change from time to time through government notifications. Everything in this article describes general mechanics. Always verify current rates and deadlines on the official portals (EPFO, ESIC, the Income Tax Department, and your state government sites) or with a qualified professional before you file or deduct anything.

What Payroll Processing in India Actually Involves

At its simplest, payroll processing is the sequence of activities that converts an employee's agreed compensation into a net salary credited to their bank account, along with all the deductions, records, filings, and accounting entries that must accompany it.

In India, that sequence typically includes:

• Defining and maintaining salary structures (CTC breakups)
• Collecting monthly inputs: attendance, leave, new joiners, exits, variable pay
• Calculating gross earnings for the month
• Applying statutory deductions (EPF, ESI, professional tax, TDS, LWF where applicable)
• Applying other deductions (loans, advances, recoveries)
• Arriving at net pay and generating payslips
• Disbursing salaries through bank transfer
• Depositing deducted amounts with the respective authorities
• Filing periodic statutory returns
• Posting payroll to your books of accounts and reconciling everything

Miss any link in this chain and problems compound quickly: an unhappy employee, an interest-bearing late deposit, a notice from a department, or books that don't tie out at year-end. That is why mature teams treat payroll as a controlled monthly cycle with fixed checkpoints, not a last-minute scramble on the 30th.

The Three Phases of the Payroll Cycle

It helps to think of the payroll cycle in three phases:

1. Pre-payroll — one-time and ongoing setup: policies, salary structures, employee master data, statutory registrations.
2. Payroll run — the monthly loop: input collection, validation, gross-to-net salary calculation, review, approval, payslips, and disbursement.
3. Post-payroll — statutory deposits and returns, accounting entries, reconciliation, and reporting.

Most payroll errors trace back to weak pre-payroll foundations or sloppy input collection — not to the arithmetic itself. So we will spend real time on those phases, not just the calculation.

Phase 1: Pre-Payroll Setup — Build the Foundation Once

Before you run your first payroll (and periodically thereafter), get the following building blocks right. Strong setup makes every subsequent monthly run faster and cleaner.

Step 1: Complete Your Statutory Registrations

Depending on your size, industry, and state, an Indian employer may need:

• PAN and TAN — TAN is mandatory if you deduct TDS on salaries.
• EPF registration — generally applicable once an establishment crosses the employee-count threshold under the EPF Act (verify the current threshold and applicability for your business).
• ESI registration — applicable to covered establishments; employee coverage depends on the wage ceiling in force.
• Professional tax registration — in states that levy PT, you typically need both an employer registration and an enrolment certificate.
• Shops and Establishments registration — state-specific, usually a prerequisite for operating and often referenced in labour inspections.
• Labour Welfare Fund registration — in states where LWF applies.

Registrations are one-time, but applicability changes as you grow. A ten-person startup that crosses a headcount threshold mid-year may suddenly come under EPF or ESI. Review applicability at least annually and whenever headcount jumps.

Step 2: Design a Compliant Salary Structure

Your salary structure — the breakup of cost-to-company (CTC) into components — drives everything downstream: PF contributions, tax treatment, ESI eligibility, and even gratuity math. Typical components include:

• Basic salary — the anchor component; many statutory calculations reference basic (plus dearness allowance, where paid).
• House Rent Allowance (HRA) — can offer tax benefits to employees who pay rent and opt for the old tax regime (conditions apply; verify current income tax rules).
• Special allowance — a flexible balancing component.
• Statutory bonus — where the Payment of Bonus Act applies.
• Employer PF contribution and gratuity provision — usually shown as part of CTC but not part of monthly gross.
• Variable pay / performance bonus — paid per your incentive policy.
• Reimbursements — telephone, books, or other policy-based reimbursements, which have their own tax treatment.

Keep three principles in mind:

• Don't suppress basic artificially. Wage definitions under Indian labour law have been tightening, and structures where basic is a tiny slice of CTC attract scrutiny. Keep the basic proportion reasonable and revisit your structure when the new labour codes' wage definition provisions are enforced in your state — check the current implementation status, as rollout has been staggered.
• Standardize by grade or band. Ad-hoc, negotiated structures for every hire create chaos. Define bands with fixed component percentages.
• Document it. A written compensation policy prevents disputes and makes audits painless.

Step 3: Write Down Your Payroll Policies

Payroll runs on policy decisions that must be made once and applied consistently:

• Pay period and pay date. Most Indian companies pay monthly, crediting salary on the last working day or the 1st–7th of the next month. Note that laws such as the Payment of Wages Act prescribe outer time limits for wage payment for covered employees — verify what applies to you.
• Attendance cutoff. For example, attendance from the 21st of the previous month to the 20th of the current month, so the team has time to process before pay date. Or a full calendar-month cycle with estimated attendance for the last few days, trued up next month.
• Leave policy. Types of leave, accrual rates, carry-forward, encashment, and what counts as loss of pay (LOP).
• LOP calculation basis. Per-day salary computed on calendar days, working days, or fixed 30 days — pick one method and apply it uniformly.
• Overtime, shift allowance, and holiday pay rules, if relevant to your workforce.
• Advance and loan policy. Whether you offer salary advances, recovery schedules, and interest treatment.
• Full-and-final settlement (FnF) policy. Notice-period recovery, leave encashment on exit, and settlement timelines.

Write these into an employee handbook. Ambiguity here is the root cause of a huge share of payroll disputes.

Step 4: Build a Clean Employee Master Database

Your employee master is the single source of truth for payroll. For every employee, capture and verify:

• Full legal name (matching bank and PAN records)
• Date of joining and employment type
• PAN, Aadhaar, UAN (PF), and ESI number where applicable
• Bank account number and IFSC (verified — ideally via a penny-drop test or a cancelled cheque)
• Salary structure and current CTC
• Tax regime election and investment declarations for TDS
• Emergency contact and statutory nominee details

Data hygiene rules that save you later:

• Collect documents at onboarding, not at year-end.
• Re-verify bank details whenever an employee reports a change — in writing.
• Keep an audit trail of every change to the master (who changed what, when).
• Never store this data in loose spreadsheets emailed around the company.

With registrations, structures, policies, and master data in place, you are ready for the monthly loop.

Phase 2: The Monthly Payroll Run, Step by Step

Now for the heart of the matter — the repeating monthly payroll process steps. Treat these as a numbered runbook your team executes every cycle.

Step 5: Collect and Validate Payroll Inputs

Payroll inputs are all the month-specific facts that change an employee's pay. Garbage in, garbage out: input quality determines payroll quality. Every month, gather:

1. Attendance and LOP data — days present, approved leave, unapproved absence, and any late-coming or half-day deductions per policy.
2. New joiners — joining date, salary structure, bank details, statutory numbers, and TDS declarations.
3. Exits — last working day, notice-period status, leave balance for encashment, recoveries, and FnF instructions.
4. Salary revisions and arrears — increments effective this month or retroactively.
5. Variable pay and incentives — approved amounts from sales, ops, or management.
6. Reimbursement claims — approved, bill-backed claims payable through payroll (or separately, per policy).
7. One-time earnings — referral bonuses, awards, festival bonuses.
8. One-time deductions — advance recoveries, canteen/asset recoveries, notice-period recovery.
9. Investment declaration updates — mid-year changes that affect TDS estimates.
10. LOP reversals — corrections for leave wrongly marked as LOP in a prior month.

Use a standard input template with named owners and a hard deadline. A simple input checklist looks like this:

Then freeze inputs. After the freeze, no changes enter the current cycle — late items go into next month's payroll as arrears or adjustments. An input freeze is the single most effective discipline for on-time payroll.

Step 6: Calculate Gross Earnings

For each employee, compute the month's gross:

1. Start with the monthly fixed gross from the salary structure (basic + HRA + other fixed allowances).
2. Prorate for payable days. If an employee has LOP or joined/exited mid-month, multiply each component by payable days ÷ total days (using your chosen day basis).
3. Add arrears — differences owed from earlier months due to revisions or corrections.
4. Add variable earnings — incentives, bonuses, overtime.
5. Add taxable reimbursements or perquisite values, if processed through payroll.

The result is monthly gross earnings — the top line of the payslip.

Step 7: Apply Statutory Deductions

From gross, you now compute the employee-side statutory deductions. India's main salary-linked statutory items are summarized below. Treat the figures as commonly known reference points, not advice — verify current rates, ceilings, and applicability on the official portals before processing.

A few practical notes on each:

• EPF. Employee and employer contributions are computed on PF wages. The employer's share is a cost above the employee's gross (or inside CTC, depending on how you structure offers). You will need each employee's UAN, and new employees must be registered before the first contribution. Decide and document whether you contribute on actual basic or restrict to the statutory ceiling — apply the choice consistently.
• ESI. Applicability is establishment- and wage-based. Coverage decisions happen at defined contribution periods, so an employee who crosses the wage ceiling mid-period generally continues to contribute until the period ends — check the current rules on this.
• Professional tax. Because PT is a state levy, a company with employees in multiple states must apply each state's slab and remit to each state separately. Slabs and due dates differ; verify per state.
• TDS. This is the most calculation-heavy deduction. You estimate each employee's annual taxable salary (based on their chosen tax regime, declarations, and projected earnings), compute annual tax, and deduct roughly one-twelfth each month, adjusting as estimates change. Collect proof of investments and rent before the year closes, and true-up TDS in the final months so employees don't face a March shock.
• LWF. Small amounts, easily forgotten, state-specific. Put it on your compliance calendar for the states where it applies.

Step 8: Apply Other Deductions

After statutory items, deduct:

• Salary advance or loan EMIs per the recovery schedule
• Notice-period or asset recoveries (for exits)
• Voluntary deductions (e.g., voluntary PF, if offered)
• Any court-ordered or authorized deductions

Be mindful that wage laws restrict how much of an employee's wages can be deducted in aggregate for covered employees — sanity-check that total deductions remain lawful and reasonable, and stagger large recoveries if needed.

Step 9: Arrive at Net Pay — A Worked Example

Net pay = Gross earnings − (statutory deductions + other deductions).

Here is a fully worked, purely illustrative salary calculation for one employee in one month. The numbers are generic examples chosen for easy arithmetic — they are not advice, and real rates/ceilings must be verified for your period and state.

Scenario (illustrative): Priya has a monthly fixed gross of ₹60,000 (basic ₹30,000, HRA ₹15,000, special allowance ₹15,000). The month has 30 calendar days and she has 2 days of LOP. She also earns a ₹5,000 incentive this month. Her employer computes PF on capped PF wages of ₹15,000; her gross is above the ESI ceiling, so ESI does not apply to her; her state's PT is ₹200 for her slab; her estimated monthly TDS is ₹3,500 (from her annual projection); and she repays a ₹2,000 salary advance instalment.

Separately, the employer bears its own contributions (employer PF on ₹15,000 in this example, plus admin charges, and ESI/LWF where applicable). Those are employer costs — they appear in your payroll cost reports and journal entries, not as deductions on Priya's payslip.

Notice two things in the example. First, proration touched only the fixed components; the incentive was paid in full because it is not day-linked. Second, PF was computed on capped wages regardless of LOP because capped PF wages (₹15,000) remained below her prorated basic — if LOP had pushed prorated basic below the cap, PF would follow the lower figure. These little interactions are exactly where spreadsheets go wrong and payroll software earns its keep.

Step 10: Review, Verify, and Approve

Never disburse the first output. Run a structured review:

• Headcount tie-out. Employees processed = last month's count + joiners − exits. Every name accounted for.
• Variance report. Compare each employee's net pay to last month. Investigate every variance beyond a threshold (say, a few percent) that isn't explained by a known input (LOP, incentive, revision).
• Zero and negative checks. Any zero-net or negative-net rows need explicit explanation (usually heavy recoveries or unpaid leave).
• Statutory sanity checks. Total PF, ESI, PT, and TDS versus prior months; sudden swings signal input or mapping errors.
• New joiner / exit spot checks. Recalculate two or three prorated salaries by hand.
• Maker–checker sign-off. The person who processed payroll should not be the sole approver. Get written approval (email or in-system) from finance or a founder before disbursement.

Once approved, lock the payroll run. Post-lock corrections go through next month's cycle as arrears/adjustments, preserving your audit trail.

Step 11: Generate and Distribute Payslips

Payslips are both a legal expectation and an employee-experience touchpoint. A good payslip shows:

• Employer name and address; employee name, code, and designation
• Pay period, payable days, and LOP days
• Statutory identifiers (UAN, ESI number, PAN as applicable)
• Component-wise earnings and deductions
• Net pay in figures (and ideally words)
• Year-to-date figures for earnings and TDS (very helpful at tax time)

Distribute payslips through a secure channel — an employee self-service portal is ideal; password-protected PDFs by email are a workable minimum. Avoid circulating unprotected salary PDFs. Deliver payslips on or very shortly after pay date, every single month, without being asked.

Step 12: Disburse Salaries

For most SMBs, salary disbursement means a bulk bank transfer:

1. Generate the bank transfer file (each bank has its own template — typically employee name, account number, IFSC, and amount) from the locked payroll register.
2. Verify the file total equals the payroll register's total net pay — to the rupee.
3. Upload to your corporate banking portal (or hand off to the bank per your arrangement) and authorize per your bank's maker–checker workflow.
4. Schedule credits for your committed pay date; NEFT/RTGS/IMPS timing differs, so upload with buffer.
5. Handle rejections (closed accounts, wrong IFSC) the same day: correct details, re-verify with the employee in writing, and reprocess.
6. Keep the bank acknowledgment and final credit confirmation with the month's payroll records.

Fund your salary account a day or two early. A payroll that is calculated perfectly but credited late still reads as "payroll failure" to employees.

Phase 3: Post-Payroll — Compliance, Accounting, and Reconciliation

Salary credit is the halfway point, not the finish line. The post-payroll phase is where compliance and financial integrity are secured.

Step 13: Deposit Statutory Dues on Time

Every rupee you deducted (and every employer contribution) must reach the right authority within its due date. Broad, commonly known norms — verify each on the official portal for your period:

• EPF: contributions are generally due by the 15th of the following month, deposited via the ECR process on the EPFO portal.
• ESI: contributions are also generally due by the 15th of the following month via the ESIC portal.
• TDS on salary: tax deducted is generally due by the 7th of the following month (with a different norm for March) via challan.
• Professional tax and LWF: due dates and frequencies vary by state — map them state by state.

Late deposits attract interest and damages, and can affect the tax deductibility of employer contributions. Set calendar reminders several days before each due date, and don't let bank holidays surprise you.

Step 14: File Statutory Returns

Beyond deposits, there are periodic filings — commonly:

• Quarterly TDS returns for salary TDS, followed by issuing Form 16 to employees annually after year-end.
• ESI and PF return processes, which are now largely integrated with the monthly contribution filings on the respective portals.
• PT returns on the schedule your state prescribes (monthly, quarterly, or annually by state).
• Registers and returns under state shops-and-establishments and labour laws, where applicable.

Maintain a compliance tracker listing every applicable filing, its frequency, owner, and proof of submission. When (not if) a department asks for evidence years later, this tracker plus a well-organized document folder is what saves weeks of panic.

Step 15: Post the Payroll Journal Voucher (JV)

Payroll must land accurately in your books. A typical monthly payroll JV looks like:

• Debit: Salary and wages expense (gross earnings), employer PF/ESI/LWF contribution expense, and related payroll costs
• Credit: Net salaries payable (cleared when the bank transfer executes), and separate liability accounts for TDS payable, PF payable, ESI payable, PT payable, LWF payable, and advance/loan recovery accounts

Good practices:

• Post payroll at cost-center or department level so your P&L is analyzable.
• Clear each statutory liability account when you make the deposit; any balance lingering after due dates is a red flag.
• Accrue for earned-but-unpaid items (e.g., bonus provisions, leave encashment liability) with your accountant's guidance.

If your payroll system can export a ledger-ready JV that maps to your accounting software's chart of accounts, you eliminate an entire category of manual posting errors.

Step 16: Reconcile Everything

Reconciliation is the monthly proof that payroll, bank, and books all agree. At minimum:

1. Payroll register vs bank statement. Total net pay disbursed matches the bank debit(s); every rejection is traced to a reprocessed credit.
2. Deduction registers vs challans. PF, ESI, PT, and TDS deducted per the register equal amounts actually deposited, challan by challan.
3. Payroll register vs general ledger. The JV totals tie to the register; liability accounts clear to zero after deposits.
4. Headcount reconciliation. Payroll headcount matches HR records and PF/ESI member counts (joiner/exit reporting on statutory portals often lags — chase it).
5. Month-on-month cost movement. Explain the total payroll cost delta versus last month using joiners, exits, LOP, increments, and one-offs. If you can't explain it, something is wrong.

Do reconciliation within days of disbursement, while memories are fresh. A 30-minute monthly reconciliation habit prevents multi-day year-end forensic exercises.

A Practical Monthly Payroll Calendar

Anchoring activities to dates turns theory into routine. Here is an illustrative payroll calendar for a company that pays on the 1st (adapt the dates to your own cutoff and pay-date choices):

*Commonly known norms; always confirm current statutory due dates on official portals.

Handling Payroll Edge Cases

Standard months are easy. Competence shows in the exceptions.

Mid-Month Joiners

• Prorate fixed components for days from the joining date to month-end, using your documented day basis.
• Register the employee for PF/ESI before the first contribution run; generate or link the UAN early.
• Collect the tax regime election and investment declaration in week one, so the first month's TDS isn't guesswork.
• If the joiner's details arrive after input freeze, pay them in the next cycle with a clearly labeled arrear — and tell them proactively.

Mid-Month Exits and Full-and-Final Settlement

An exit triggers a small project:

1. Confirm the last working day and prorate earnings up to it.
2. Compute leave encashment per policy on the eligible balance.
3. Apply notice-period recovery if the employee is not serving full notice (per appointment terms).
4. Recover advances, loans, and asset dues.
5. Include gratuity if the employee meets eligibility under the Payment of Gratuity Act (verify current eligibility and calculation norms).
6. Re-run the TDS computation on final annual figures — one-time payments like encashment change the tax picture.
7. Report the exit on statutory portals (PF date of exit, ESI, etc.).
8. Pay the settlement within your policy timeline (and be aware that wage-payment laws and the newer labour codes speak to settlement timelines — verify what binds you), and issue the final payslip and settlement statement.

LOP Reversal

When leave marked as LOP in a previous month is later approved:

• Compute the reversal as an arrear earning in the current month: the previously deducted per-day amounts, component-wise.
• Recompute statutory deductions on the arrear correctly — PF treatment follows PF wages, and TDS simply flows through the annual projection.
• Label it clearly on the payslip ("LOP reversal – June") so the employee understands the credit.

Arrears from Salary Revisions

For a raise effective retroactively (say, effective April but processed in June):

• Calculate the component-wise difference for each affected month.
• Pay the accumulated difference as arrears in the current month, shown as distinct payslip lines.
• Apply PF on arrears per PF rules, and let TDS adjust through the revised annual projection.
• Keep the approval letter and calculation sheet on file — arrears are a favorite audit question.

Manual vs Spreadsheet vs Payroll Software: Choosing Your Method

How should an SMB actually execute all this? There are three broad approaches, and the right one depends on headcount, complexity, and risk appetite.

Honest guidance:

• Spreadsheets are fine at the very beginning — if one careful person owns them, formulas are reviewed, and headcount is small and stable.
• The breaking point arrives quickly: multi-state PT, your first PF/ESI applicability, a few mid-month exits, and one retroactive increment will together consume more founder hours than software costs.
• Payroll software for SMBs (whether standalone or part of an HRMS) pays for itself mainly through error prevention and compliance discipline, not just time savings. Platforms built for Indian SMBs — CozyHR is one example designed around Indian statutory workflows — bundle attendance, leave, payroll runs, payslips, and compliance outputs so inputs flow into calculations without rekeying.
• Whatever you choose, the process discipline in this guide still applies. Software automates a process; it cannot substitute for one.

Common Payroll Errors — and How to Prevent Them

Most payroll incidents fall into a handful of predictable patterns:

1. Wrong or stale bank details. Prevention: verified capture at onboarding, written change requests, penny-drop or cancelled-cheque verification before first payment.
2. Attendance/LOP mismatches. Prevention: hard attendance cutoffs, employee regularization windows before the freeze, and manager sign-off on LOP lists.
3. Missed joiners or exits. Prevention: headcount tie-out every cycle (last month ± movements) before locking.
4. Incorrect proration. Prevention: one documented day-count basis, applied by formula or software — never mental math.
5. Statutory misconfiguration. Wrong PF wage base, missed ESI coverage after a wage change, wrong state PT slab. Prevention: annual configuration review, and rechecks after any rate notification.
6. TDS shocks in Q4. Under-deduction all year, then a brutal March. Prevention: monthly annualized projections, mid-year proof collection, and employee communication in December–January.
7. Late statutory deposits. Prevention: calendar with alerts days in advance; pre-funded compliance payments; a named owner per due date.
8. Arrears computed on net instead of gross. Prevention: always compute arrears component-wise from gross, then run deductions.
9. Unlocked payrolls edited after disbursement. Prevention: lock on approval; corrections only via next cycle with documentation.
10. Key-person risk. The only person who understands payroll leaves. Prevention: documented runbook (this article is a starting template), shared credentials vault, and cross-training.

Internal Controls and Audit Trail for Payroll

Payroll moves money and sensitive data every month, so it deserves real controls even in a 20-person company:

• Segregation of duties. The person who edits the employee master should not solely approve payroll; the person who processes should not solely authorize the bank transfer. In tiny teams, at minimum add a founder review step.
• Maker–checker on money movement. Two-person authorization on bank uploads, always.
• Change logs. Every change to salary, bank details, or structure should record who, what, when, and on whose approval. Software gives you this automatically; in spreadsheets, keep an explicit change register.
• Access control. Payroll data on a need-to-know basis; role-based access in systems; no salary sheets on shared drives with company-wide access.
• Document retention. Keep payroll registers, payslips, challans, returns, approval trails, and FnF settlements organized by month and year. Statutory and tax record-retention expectations run to several years — verify specifics, and when in doubt, retain longer.
• Periodic self-audit. Once or twice a year, pick a random month and re-verify five employees end-to-end: inputs → calculation → payslip → bank credit → challans → ledger. It is remarkable what a two-hour self-audit surfaces.
• Data privacy. Salary and identity data fall squarely within India's data protection expectations under the DPDP framework. Encrypt, restrict, and share payslips only through secure channels.

Your Monthly Payroll Checklist

Print this payroll checklist, or rebuild it in your task tool, and run it every cycle:

Before the run - [ ] Input deadline announced; attendance regularization window closed - [ ] Attendance and LOP data exported and validated - [ ] Joiners added with verified bank details, statutory numbers, structures - [ ] Exits captured with last working day and FnF instructions - [ ] Revisions, arrears, variable pay, reimbursements, recoveries collected with approvals - [ ] TDS declaration changes recorded - [ ] Inputs frozen

During the run - [ ] Gross-to-net calculated; proration and arrears verified for movers - [ ] Headcount tie-out completed (last month ± joiners/exits) - [ ] Variance report reviewed; all exceptions explained - [ ] Statutory totals sanity-checked against prior months - [ ] Approval obtained; payroll locked

Payout - [ ] Bank file total matches register net pay to the rupee - [ ] Salary account funded; file uploaded and dual-authorized - [ ] Credits confirmed; rejections fixed and reprocessed - [ ] Payslips released securely

After the run - [ ] TDS deposited within due date (verified for the period) - [ ] PF and ESI deposited within due dates (verified) - [ ] PT and LWF handled per state schedule - [ ] Payroll JV posted; liability accounts tracked to clearance - [ ] Register–bank–ledger reconciliation completed - [ ] Statutory portal joiner/exit reporting updated - [ ] Documents filed in the monthly compliance folder

FAQ: Payroll Processing in India

What are the basic steps to process payroll in India?

In brief: maintain accurate employee and salary-structure data; collect monthly inputs (attendance, LOP, joiners, exits, variable pay); calculate gross earnings with proration and arrears; apply statutory deductions (EPF, ESI, PT, TDS, LWF as applicable) and other recoveries; review and approve; disburse via bank transfer and issue payslips; then deposit statutory dues, file returns, post accounting entries, and reconcile. The full cycle above expands each of these into a repeatable runbook.

Which statutory deductions apply to a small company's payroll?

It depends on headcount, wages, industry, and state. The usual suspects are EPF and ESI (once your establishment is covered and for employees within wage criteria), professional tax (in states that levy it), TDS on salaries (whenever estimated income crosses taxable thresholds), and LWF in applicable states. Applicability thresholds and rates change via notifications, so confirm your current obligations on the EPFO, ESIC, income tax, and state portals or with a professional.

How is net salary calculated from CTC?

CTC includes employer costs (employer PF, gratuity provision, sometimes insurance) that never appear in monthly gross. Monthly gross = fixed components + variable earnings for the month, prorated for payable days. Net = gross − employee-side statutory deductions (PF, ESI, PT, TDS) − other deductions (loans, recoveries). The worked example earlier in this guide shows the full arithmetic with illustrative numbers.

What is a payroll cycle and cutoff date?

The payroll cycle is the repeating period (almost always monthly in India) over which pay is computed. The cutoff is the date after which no new inputs enter the current run — for example, attendance counted from the 21st to the 20th, with an input freeze on the 24th. Anything arriving after cutoff is processed next month as an arrear or adjustment. A firm cutoff is what makes on-time salary credit possible.

How should we handle an employee who joins or leaves mid-month?

Prorate fixed salary components for actual payable days using your documented day-count basis. For joiners, complete statutory registrations and TDS declarations before the first run. For exits, prepare a full-and-final settlement covering prorated pay, leave encashment, recoveries, applicable gratuity, and a final TDS true-up, then report the exit on statutory portals. Details and sequences are covered in the edge-cases section above.

When are PF, ESI, and TDS payments due each month?

The widely known norms are: PF and ESI contributions by around the 15th of the following month, and salary TDS by around the 7th of the following month (March follows a different norm). These are general reference points — due dates can change and carry interest and penalties when missed, so verify the current dates on the EPFO, ESIC, and income tax portals and build reminders several days ahead.

Can a small startup run payroll on spreadsheets?

Yes — at very small, stable headcounts with a careful owner, spreadsheets work. But risk grows non-linearly: proration, arrears, multi-state PT, and TDS projections make formulas fragile, and there is no audit trail or maker–checker. Most teams find that somewhere between 10 and 20 employees, dedicated payroll software becomes cheaper than the errors, hours, and compliance risk of spreadsheets. See the comparison table above for a dimension-by-dimension view.

What records should we retain after each payroll run?

Keep the input pack (attendance, approvals), the locked payroll register, payslips, the bank file and credit confirmations, statutory challans and return acknowledgments, the JV and reconciliation workpapers, and any FnF settlements — organized by month. Retention expectations under tax and labour laws run to several years; verify specifics and err on the side of keeping more, for longer, in secure storage.

Conclusion: Turn Payroll into a Boring, Reliable Routine

The best compliment a payroll process can receive is that nobody notices it. Salaries land on the same date every month, payslips arrive without being asked, statutory deposits happen days before deadlines, and the books reconcile in one sitting. That reliability is not luck — it is the product of solid pre-payroll setup, disciplined input collection with a hard freeze, careful gross-to-net salary calculation, a genuine review step, and unglamorous post-payroll follow-through on deposits, filings, and reconciliation.

Start by writing down your policies and calendar. Adopt the monthly checklist. Run your first few cycles deliberately, fixing the process (not just the numbers) whenever something slips. And when the spreadsheet starts creaking — usually sooner than founders expect — move to a system built for Indian payroll realities. If you want a low-friction way to get there, take a look at CozyHR: an HRMS and payroll platform designed for Indian SMBs that connects attendance, leave, and payroll inputs to automated salary runs, payslips, bank files, and compliance-ready outputs, so your team spends its energy on people rather than proration formulas.

Payroll will never be glamorous. Done right, it becomes something better: a monthly promise your company quietly keeps.

Disclaimer: This article is general information, not legal, tax, or professional advice. Statutory rates, wage ceilings, thresholds, and due dates change through government notifications; always verify current requirements on official portals (EPFO, ESIC, Income Tax Department, and relevant state departments) or consult a qualified professional before acting.