How to Run Payroll in India: A Step-by-Step Guide for 2026

If you are wondering how to run payroll in India, you are not alone. Payroll processing in India sits at the intersection of salary structures, statutory deductions, labour law, and employee expectations — and getting it wrong is expensive in penalties, rework, and trust. This step-by-step guide walks HR managers, founders, and payroll teams through the complete Indian payroll process for 2026: from collecting inputs and structuring CTC to calculating PF, ESI, TDS and professional tax, disbursing salaries, and filing returns on time.

Whether you are running payroll for the first time at a ten-person startup or tightening the process at a 500-employee company, this guide gives you a practical, repeatable monthly workflow.

What Is Payroll Processing?

Payroll processing is the end-to-end activity of calculating what each employee has earned in a pay period, deducting what the law and company policy require, paying the net amount on time, and reporting those numbers to the government and to the employees themselves.

In the Indian context, a single payroll cycle typically involves:

• Collecting attendance, leave, and other monthly inputs
• Calculating gross earnings based on the salary structure
• Applying statutory deductions such as Provident Fund (PF), Employees' State Insurance (ESI), professional tax, and Tax Deducted at Source (TDS)
• Applying voluntary deductions such as loan recoveries or salary advances
• Disbursing net salaries through bank transfer
• Generating payslips and registers
• Depositing the deducted amounts with the respective authorities and filing returns

Each of these steps has its own deadlines, rules, and failure modes, which is why payroll is best treated as a documented, calendar-driven process rather than a month-end scramble.

The Three Stages of the Payroll Cycle

It helps to think of payroll in three stages.

Stage 1: Pre-payroll (inputs and policy)

Pre-payroll work is everything that happens before a single number is calculated. This includes defining your pay policy (pay date, cut-off date, overtime rules, leave encashment rules), maintaining accurate employee master data, and gathering monthly inputs such as attendance, approved leaves, new joiners, exits, increments, and one-time payments like incentives or arrears.

Most payroll errors are actually input errors. A wrong bank account number, a missed resignation date, or an unapproved leave record will corrupt the output no matter how good your calculation engine is.

Stage 2: Payroll calculation

This is the actual computation: gross earnings, statutory deductions, other deductions, and net pay for every employee. In a spreadsheet-driven setup this is where formula mistakes creep in; in a payroll software setup this stage is largely automated once the rules are configured.

Stage 3: Post-payroll (payment, compliance, reporting)

After calculation comes salary disbursement, payslip distribution, statutory deposits (PF, ESI, TDS, professional tax), return filings, and accounting entries. Post-payroll is where compliance deadlines live, so it deserves its own checklist and calendar.

Step-by-Step: How to Run Payroll in India

Here is the full monthly process, step by step.

Step 1: Define your payroll policy and calendar

Before your first payroll run, document the basics:

• **Pay period and pay date.** Most Indian companies pay monthly, with salary credited on the last working day or the 1st of the following month. Note that wage payment timelines are regulated for many categories of establishments, so confirm what applies to you.
• **Attendance cut-off.** For example, attendance from the 21st of the previous month to the 20th of the current month is considered for this month's payroll, with adjustments carried to the next cycle.
• **Components and rules.** Which allowances you pay, how overtime is computed, how loss of pay (LOP) is derived from attendance, and how leave encashment works.
• **Approval workflow.** Who prepares payroll, who reviews it, and who gives final sign-off before disbursement.

Write this down once and you will save hours of debate every month.

Step 2: Collect and freeze employee master data

Your employee master is the foundation of payroll. For each employee you need, at minimum:

• Full legal name, date of joining, and employee ID
• PAN (mandatory for TDS), and Aadhaar where required for PF/ESI registration
• UAN (Universal Account Number) for PF and ESI insurance number where applicable
• Bank account number and IFSC for salary credit
• Salary structure (CTC breakup) and applicable tax regime declaration
• Work location and applicable state for professional tax and labour welfare fund

Set a monthly cut-off after which master changes roll into the next cycle. Mid-run changes are the classic source of mismatched payslips and bank files.

Step 3: Gather monthly payroll inputs

Each month, collect:

• **Attendance and shift data** — present days, weekly offs, holidays, overtime hours
• **Leave data** — approved paid leaves, unpaid leaves (LOP days)
• **New joiners and exits** — pro-rated salaries, notice pay recovery, final settlements
• **Variable payments** — incentives, bonuses, arrears, reimbursements
• **Deduction inputs** — salary advances, loan EMIs, canteen or transport recoveries

If attendance lives in a separate system (or a biometric device), reconcile it before payroll, not after. A good HRMS pulls attendance and leave into payroll automatically, eliminating the single largest category of payroll disputes.

Step 4: Understand the salary structure (CTC vs gross vs net)

Indian salaries are usually communicated as CTC (Cost to Company), which includes everything the employer spends. A typical structure:

| Component | Typical treatment | |---|---| | Basic salary | Fully taxable; base for PF and gratuity | | House Rent Allowance (HRA) | Partially exempt under the old tax regime, subject to conditions | | Special allowance | Fully taxable balancing component | | Employer PF contribution | Part of CTC, not part of gross salary | | Gratuity provision | Part of CTC in many companies | | Statutory bonus | Payable where the Payment of Bonus Act applies |

Key definitions to keep straight:

• **CTC** = everything the employer pays, including employer PF, gratuity provision, and insurance premiums
• **Gross salary** = earnings before deductions (basic + HRA + allowances)
• **Net (take-home) salary** = gross minus employee-side deductions (PF, ESI, professional tax, TDS, other recoveries)

A common mistake is promising a "package" without explaining that CTC is not take-home. Clear salary structures reduce offer-stage disputes and payroll-stage confusion alike.

Step 5: Calculate gross earnings

For each employee:

1. Start with the monthly fixed salary per the structure. 2. Pro-rate for joiners and leavers based on payable days. 3. Deduct loss of pay: typically (monthly gross ÷ total days in month, or fixed 30, per your policy) × LOP days. 4. Add variable earnings: overtime, incentives, arrears, reimbursements.

Document your day-count convention (calendar days vs fixed 30 vs working days) and apply it consistently — auditors and employees will both ask.

Step 6: Calculate statutory deductions

This is the heart of Indian payroll compliance. The four big ones:

#### Provident Fund (PF)

• Applies to establishments covered under the EPF Act (generally those with 20 or more employees, though voluntary coverage is possible).
• Employee and employer each contribute a percentage of PF wages (historically 12% each, with a portion of the employer share going to the pension scheme). A statutory wage ceiling applies for mandatory coverage, with options to contribute on higher wages.
• Contributions are deposited against each employee's UAN, and monthly returns (ECR) are filed electronically.

Rates, ceilings, and administrative charges are revised from time to time — always verify the current figures on the EPFO portal before processing.

#### Employees' State Insurance (ESI)

• Applies to covered establishments for employees earning up to the prescribed wage ceiling.
• Both employer and employee contribute a small percentage of gross wages.
• Contribution periods and benefit periods follow a fixed half-yearly cycle, and an employee who crosses the wage ceiling mid-cycle generally continues to contribute until the cycle ends.

Again, verify current rates and the wage ceiling on the ESIC portal, as they change by notification.

#### Professional Tax (PT)

• A state-level tax on employment, applicable in many (not all) Indian states, with slab-based monthly deductions and a statutory annual cap.
• Slabs, due dates, and return formats differ state by state, so multi-state employers must configure PT per work location.

#### Tax Deducted at Source (TDS) on salary

• Employers must estimate each employee's annual taxable income, compute tax per the regime the employee has chosen (new regime is the default unless the employee opts otherwise), and deduct one-twelfth of the estimated annual tax each month, adjusting as declarations and actuals change.
• Collect investment declarations at the start of the year and verified proofs before the final quarter to true-up deductions.
• Deposit TDS by the prescribed due date of the following month and file quarterly returns (Form 24Q). Issue Form 16 annually.

Income tax slabs and rules change with the annual Finance Act, so confirm the current year's rates before configuring payroll.

#### Labour Welfare Fund (LWF)

Several states also levy small periodic labour welfare fund contributions from employees and employers. Frequencies (monthly, half-yearly, annual) and amounts vary by state.

Step 7: Apply other deductions and compute net pay

After statutory deductions, apply:

• Salary advance or loan recoveries
• Notice pay recovery for exits
• Any policy-based recoveries (asset damage, canteen, transport), subject to legal limits on permissible deductions

Then: **Net pay = Gross earnings − statutory deductions − other deductions.**

Sanity-check that total deductions never exceed legally permissible limits and that no employee's net pay is negative without a documented reason.

Step 8: Review, reconcile, and approve

Before any money moves, run a payroll review:

• **Variance report.** Compare this month's payroll to last month's, employee by employee. Investigate every variance you cannot explain (joiner, exit, LOP, increment, incentive).
• **Headcount reconciliation.** Payroll headcount must equal active employees plus paid leavers.
• **Statutory totals.** Verify PF, ESI, PT, and TDS totals against the calculation sheets.
• **Bank file check.** Validate account numbers and IFSC codes, especially for new joiners.

Get written (or system) approval from the designated authority. This audit trail matters.

Step 9: Disburse salaries and issue payslips

• Generate the bank transfer file and upload it to your corporate banking portal, or pay through your payroll software's integrated payout, in time for the committed pay date.
• Issue payslips showing earnings, deductions, and net pay. Digital payslips through an employee self-service portal cut down "please resend my payslip" emails dramatically.

Step 10: Deposit dues and file returns

Post-payroll compliance, with typical monthly rhythm:

1. Deposit PF contributions and file the monthly ECR by the due date. 2. Deposit ESI contributions by the due date. 3. Deposit professional tax and file state returns per the applicable state calendar. 4. Deposit TDS by the prescribed date of the following month; file Form 24Q quarterly. 5. Record payroll journal entries in your accounting system.

Maintain statutory registers (wages, attendance, deductions) as required by applicable laws. Due dates can change by notification — keep a compliance calendar and verify dates each quarter against official sources.

Step 11: Handle full and final settlements

For every exit, run a final settlement that covers:

• Salary up to the last working day
• Leave encashment per policy
• Gratuity where eligible (generally after the qualifying years of continuous service under the Payment of Gratuity Act)
• Notice pay or recovery
• Pending reimbursements and recoveries
• TDS on the final payout

Wage settlement timelines for departing employees are regulated, and the labour codes envisage tighter timelines, so process exits promptly and document acknowledgement.

Payroll Compliance Calendar at a Glance

| Activity | Typical frequency | |---|---| | Salary disbursement | Monthly | | PF deposit + ECR | Monthly | | ESI deposit | Monthly | | Professional tax | Monthly/quarterly/annual (state-specific) | | TDS deposit | Monthly | | TDS return (Form 24Q) | Quarterly | | Form 16 issuance | Annually | | Bonus payment (where applicable) | Annually | | LWF | State-specific |

Treat this table as a template; confirm the exact current due dates for your establishment with official portals or your compliance advisor.

Payroll Methods: Spreadsheets vs Outsourcing vs Software

Manual spreadsheets

Spreadsheets are free and familiar, and they work tolerably up to roughly 15–25 employees. Beyond that, the risks compound: broken formulas, copy-paste errors, no audit trail, no access control over salary data, and a single point of failure in whoever owns the file. Every statutory rate change must be manually applied to every formula.

Outsourced payroll

Outsourcing to a payroll bureau or CA firm moves the workload out, but the inputs problem remains yours: you still have to send accurate attendance, leave, and change data every month, usually over email. Turnaround time on corrections can be slow, and employees still come to HR for payslips and tax questions.

Payroll software / HRMS

An integrated HRMS connects attendance, leave, and employee data directly to payroll, so inputs flow without re-entry. Statutory calculations are maintained in the product, payslips are self-service, and every run leaves an audit trail. For most growing companies, this is the point where payroll stops consuming a week of someone's month.

A reasonable rule of thumb: if payroll inputs take more than a day to assemble, or you have crossed 25 employees, or you operate in more than one state, dedicated payroll software pays for itself quickly.

Common Payroll Mistakes (and How to Avoid Them)

• **Misclassifying salary components.** Keeping basic salary artificially low to reduce PF can backfire; the "basic wages" question has significant legal history, and the labour codes' wage definition pushes toward a higher regulated wage base. Structure salaries conservatively and review with an expert.
• **Missing statutory deadlines.** Late PF/ESI/TDS deposits attract interest and damages. A shared compliance calendar with owner names fixes most of this.
• **Ignoring state-level differences.** PT, LWF, and shops-and-establishments rules vary by state. Configure per location.
• **Processing unapproved inputs.** Only approved leave and attendance should enter payroll. Workflow approvals beat email threads.
• **No payroll reconciliation.** A month-on-month variance check catches most errors before employees do.
• **Poor data security.** Salary data on open spreadsheets is a breach waiting to happen. Restrict access and log changes.
• **Forgetting mid-year tax true-ups.** Collect proofs in advance; January-to-March TDS shocks damage trust.

How the New Labour Codes Affect Payroll

India has consolidated central labour laws into four codes — on wages, social security, industrial relations, and occupational safety. For payroll teams, the most-watched change is the standardised definition of "wages", which is expected to influence the base for PF, gratuity, and leave encashment, potentially shifting pay structures that rely on a small basic and large allowances.

Implementation depends on central and state notifications and has been phased. The practical advice for 2026: design salary structures that would remain compliant under the codes' wage definition, and track official notifications rather than relying on second-hand summaries.

Building Your Monthly Payroll Checklist

A condensed checklist you can adopt:

1. Freeze attendance and leave data after cut-off 2. Process joiners, exits, and increments 3. Enter variable pay and deductions 4. Run payroll calculation 5. Review variance report and statutory totals 6. Obtain approval 7. Disburse salaries and publish payslips 8. Deposit PF, ESI, PT, TDS 9. File returns due that month 10. Post accounting entries and archive registers

Run this list on the same dates every month and payroll becomes boring — which is exactly what you want.

A Worked Example: One Employee, One Month

Numbers make the process concrete. Consider an illustrative employee, Priya, with a monthly gross of ₹60,000 structured as basic ₹30,000, HRA ₹15,000, and special allowance ₹15,000. The figures below are simplified for illustration — actual rates and ceilings must be verified for the current year.

**Inputs for the month.** The month has 30 days. Priya took two days of unpaid leave (LOP) and earned a ₹5,000 performance incentive.

**Gross earnings.** Per-day gross on a calendar-day basis is ₹60,000 ÷ 30 = ₹2,000. LOP deduction is 2 × ₹2,000 = ₹4,000. Earned gross becomes ₹60,000 − ₹4,000 + ₹5,000 incentive = ₹61,000. Each component is reduced proportionately for LOP in most systems, which matters because PF is computed on the earned basic, not the structured basic.

**Statutory deductions.** Employee PF is computed on earned PF wages (here, earned basic of ₹28,000) at the prevailing rate. ESI does not apply if her wages exceed the current ESI ceiling. Professional tax follows her state's slab — many states deduct around ₹200 at this salary level. TDS depends on her annual projection, chosen regime, and declarations; suppose the payroll system projects her annual tax and deducts ₹3,100 this month.

**Net pay.** Gross ₹61,000 minus PF, PT, and TDS produces her take-home, shown line by line on her payslip alongside the employer-side contributions that never touch her bank account but appear in CTC.

Multiply this by every employee, every month, with joiners, exits, arrears, and mid-year tax changes, and the case for automation makes itself.

Year-End Payroll Activities

Payroll has an annual rhythm on top of the monthly one. In the January–March quarter, collect and verify investment proofs against declarations, recompute TDS, and spread any shortfall over the remaining months rather than dumping it into March. After year-end, reconcile the four quarters of Form 24Q against your payroll registers, generate and issue Form 16 to every employee within the prescribed timeline, and process any statutory bonus where the Payment of Bonus Act applies.

April brings the new financial year: refresh tax regime elections, reset declaration windows, apply revised slabs or rates announced in the Finance Act, roll increments if your cycle starts in April, and re-verify PF/ESI/PT parameters against official notifications. Companies that treat April payroll as "just another month" tend to discover configuration drift in May.

Multi-State and Multi-Entity Payroll

The moment you hire in a second state, payroll complexity steps up. Professional tax slabs, registration requirements, and return calendars are state-specific; labour welfare fund applicability and amounts differ; shops-and-establishments registrations are per location; and minimum wages vary by state, zone, and skill category.

Practical guidance for multi-state employers:

• Maintain work location as a first-class field in your employee master, and drive PT, LWF, and minimum wage validation from it.
• Register for PT in each applicable state before the first salary is paid there, not after a notice arrives.
• Track each state's return calendar separately — a single "PT due date" reminder is not enough.
• For multiple legal entities, keep statutory registrations, bank accounts, and filings cleanly separated per entity even if HR operations are shared.

This is one of the strongest arguments for payroll software: location-based statutory configuration is tedious to maintain by hand and trivial for a system to apply automatically.

How to Choose Payroll Software

If you decide to move off spreadsheets, evaluate tools against the problems you actually have:

• **Integrated inputs.** Does attendance, shift, and leave data flow into payroll without exports and re-imports? This is where most payroll time is spent or saved.
• **Statutory coverage.** PF (with ECR output), ESI, professional tax for the states you operate in, TDS with both tax regimes, and Form 16 generation.
• **Salary structure flexibility.** Can it model your components, pro-ration rules, and LOP conventions without workarounds?
• **Employee self-service.** Payslips, tax declarations, proof submission, and reimbursement claims handled by employees directly.
• **Audit trail and access control.** Who changed what, when — and salary visibility restricted by role.
• **Full and final settlement support.** Exits are where ad-hoc tools break down.
• **Reports.** Variance reports, statutory registers, bank transfer files, and journal entries for your accounting system.

Run one parallel month — old process and new system side by side — and reconcile to the rupee before cutting over. A clean parallel run is the single best predictor of a smooth migration.

Payroll Data Security and Confidentiality

Salary data is among the most sensitive information a company holds. Minimum hygiene: restrict payroll access to named individuals, use role-based permissions rather than shared logins, avoid emailing unprotected salary sheets, and keep an immutable log of changes to pay data. With India's data protection regime maturing, treating employee personal and financial data with documented care is no longer optional. An HRMS with role-based access and audit logs gives you most of this by default; a spreadsheet on a shared drive gives you none of it.

Quick Glossary of Indian Payroll Terms

• **CTC** — Cost to Company; total annual employer spend on an employee.
• **Gross salary** — earnings before any deductions.
• **Net salary** — take-home after employee-side deductions.
• **LOP** — Loss of Pay; salary reduction for unpaid absence.
• **UAN** — Universal Account Number; an employee's portable PF identity.
• **ECR** — Electronic Challan-cum-Return; the monthly PF filing.
• **Form 24Q** — quarterly TDS return for salaries.
• **Form 16** — annual TDS certificate issued to employees.
• **PT** — Professional tax, a state-level employment tax.
• **LWF** — Labour Welfare Fund, a state-level periodic contribution.
• **F&F** — Full and final settlement on exit.

FAQ: Running Payroll in India

What is the difference between CTC and take-home salary?

CTC is the total annual cost the employer incurs, including employer PF contributions, gratuity provision, and benefits. Take-home is what lands in the bank after employee-side deductions like PF, ESI, professional tax, and TDS. Two offers with the same CTC can have noticeably different take-home amounts depending on structure.

Is PF mandatory for all companies?

PF generally becomes mandatory once an establishment crosses the prescribed employee threshold (commonly 20), though voluntary registration is possible earlier. Within a covered establishment, mandatory coverage also depends on the statutory wage ceiling. Check the current rules on the EPFO portal for your situation.

How is TDS on salary calculated?

The employer estimates the employee's taxable income for the financial year under the applicable tax regime, computes annual tax, and deducts roughly one-twelfth each month, adjusting through the year as declarations, proofs, and actual pay change. The new tax regime is the default unless the employee opts for the old one.

What happens if salary payment is delayed?

Delayed wages can violate wage payment laws and attract penalties, in addition to the obvious damage to employee trust. If a delay is unavoidable, communicate proactively and document the reasons.

Can payroll be processed without software?

Yes, smaller teams run payroll on spreadsheets. But as headcount, locations, and components grow, manual processing becomes error-prone and slow, and the compliance risk of a missed update grows with it. Most companies find software worthwhile somewhere between 20 and 50 employees.

What records must be maintained for payroll?

Typically: wage registers, attendance registers, deduction registers, payslip copies, statutory challans, and return acknowledgements, retained for the periods specified under applicable laws. Digital records through an HRMS simplify audits considerably.

How long does a payroll run take?

With clean inputs and software, calculation and review can be done in hours. With spreadsheets and email-based inputs, teams routinely spend three to five days per month. The difference is almost entirely in input collection and reconciliation.

Conclusion: Make Payroll a Process, Not a Project

Running payroll in India is genuinely complex — but it is complexity of the predictable kind. A documented policy, a frozen input cut-off, a statutory checklist, and a month-on-month variance review will carry you through the vast majority of cycles without incident. Verify statutory rates against official portals each quarter, watch the labour code notifications, and never let unapproved data into a payroll run.

If you would rather spend that energy on people instead of spreadsheets, CozyHR brings attendance, leave, employee records, and payroll into one system — inputs flow automatically, statutory calculations stay current, and payslips reach employees through self-service. Explore CozyHR and see how much shorter your payroll week can get.

*This article is general information, not legal or tax advice. Statutory rates, ceilings, and due dates change by government notification — always verify current figures with official sources or a qualified professional.*