Payroll processing is expected to be top-notch in the ever-changing business atmosphere of India, not only for keeping your employees happy but also for ensuring compliance and laying the foundation for organizational expansion. This has been further strengthened, making the structure more compact (owing to the Labour Codes of 2025), by substituting income and central social security with a composite model.
A complete guide to payroll processing in India for businesses large and small. Whether you are a startup or a multinational, recognising these nuances can save time and resources. Multi Recruit simplifies payroll via its end-to-end payroll services at Bangalore, it is a top Hr and Recruitment Company in Bangalore, servicing over 300 clients globally.
What is Payroll Processing?
It includes the calculation of wages and benefits, deduction of taxes, garnishments, and other contributions, as well as the disbursement of payments to employees following all laws and regulations. While in India, the working hours are regulated by laws like the Payment of Wages Act, Minimum Wages Act, and four new Labour Codes (Code on Wages, Industrial Relations Code, Social Security Code, and Occupational Safety Code), which will be effective from 2025. The process ensures wages are paid correctly, taxes and other deductions remitted to the relevant statutory bodies, and writing up of records — ideally, each month. Important components are basic pay or gross income, HRA, D.A., bonuses, and deductions like PF, taxes will be mentioned in the salary slip. Added to the total cost are employer contributions, & 13% in EPF (including 0.5% administrative charges). Although digital resources and automation limit the number of mistakes, oversight of some manual entries is required for compliance through regulatory reporting in most cases.Key Components of Salary in India
Indian Salary contains many heads, so that you can have Tax benefits with them, and we can fulfil employee requirements by splitting them into several parts.- Other Components:– Basic Salary – 40-50% of CTC, basis for PF and gratuity calculations.
- House Rent Allowances (HRA): up to 50 % of the basic salary at non-metros. Dearness Allowances: linked to inflation. Conveyance Medical Leave Travel Allowance (LTA)
- Income Tax Act- TDS (Tax deductions at Source)Slab: 0% to 30%FY: 2025-26
- Employees Provident Fund (EPF): 12% of employee+12% employer contribution.
- Employees’ State Insurance (ESI): 0.75% employee + 3.25% employer for salaries ≤ ₹21,000
- Professional Tax (PT) — State-specific, e.g., Rs 200 per month in Maharashtra
- Labour Welfare Fund = Different in each state.
- Reimbursements and Benefits: Vouchers for meals, phone bills are mostly excluded from tax.
Steps in Payroll Processing
A structured approach ensures accuracy:- Pre-Payroll Activities: Employee Onboarding, Policy Definitions, Input Gathering – Attendance, Leaves, and Reimbursement
- e) Salary Calculation – Gross pay, Deductions (like TDS, PF, ESI, PT), Overtime, and Incentives are calculated using formulas like Net Pay = Gross – (TDS + PF + ESI + PT).
- Automated Payment Disbursal: Transfer through Bank, Generate payslips, and tax Form 16
- File returns (TDS quarterly via Form 24Q, EPF monthly), record keeping for 7 yrs., compliance audit
Compliance and Regulations in 2025
Mandatory, or else one would have to bear a fine of as much as ₹50,000 for delays. Key aspects:- Taxes: TDS filing deadlines of next month; annual returns by May 31.
- Social Security: EPF/ECR filing 15th ESI 15th
- New Codes: A unified wage definition, wider coverage of ESI, & Staggered employment after EPFO (e-Shram) portal
- Employee Data Security: Follow the DPDP Act