Payroll system helps in the computation of payments a firm has to pay to all its employees. It is a periodic process which needs to be done after regular period of time and firm has to make payments to its employees for their work. Payroll is the entire compensation which is incurred as a cost to company for paying its employees periodically.
Payroll Processing-How it is done?
Payroll processing comprises of the computations of the payments to be made by the firm to the employees. It is time or productivity based and apart from calculations of the wages /salaries, there are calculations of benefits and income tax and other deductions that are done. Payroll calculations take into considerations the employment laws, wages act which are governing the employment legislation in our country. The firm has to abide by the minimum standards of employment in accordance to the salary and wages act to calculate the payroll of all the employees.
TDS-Tax Deducted at a Source
TDS is a method of tax collection from the employees where tax is collected from the source i.e employee’s income .So an employer in order to meet the statuary requirements of the law in accordance to the Income tax act, section 192, has to deduct a calculated amount from the employee’s salary as income tax. There is a maximum limit of income after which TDS in deducted and below the maximum limit specified, an employee is exempted from the income tax. The average rate of income tax varies and decided at the very start of the financial year as per the government norms. TDS is deducted every month from the employee’s salary.
Components that constitutes payroll in India
In India, an employee’s salary for the whole year is broken into number of components in order to provide him maximum benefits of exemptions while paying different types of taxes.
Basic Salary: Basic salary varies generally between 30-50 % of the total compensation, an employee draws from the company.
HRA (House Rent Allowance): It is not a compulsory allowance and falls in the bracket of 4—50 % of the basic income of the employee.
Medical Facility: Amount for the medical benefits given to the employee and his family members are exempted from the taxation .Up to the limit of INR 15000 per year it is not taxable.
Leave Travel Allowance (LTA):It covers the travel allowances to be paid by the employer for travelling .LTA is exempted from the tax under certain conditions specified in the Income Tax Act, section 10 (5).
Investments: Investments like provident funds, life insurance premiums are exempted from tax deductions. Employees get total tax benefit of up to an investment of INR 1,50,000/-
Calculation of Payrolls
Accurate and timely calculations of payrolls is the sole responsibility of the employer as the employees have to be paid on time and taxes have to be deducted periodically in accordance to the Wages and Salary Act and various employment legislations governing the country’s employment rules and regulations.
Basic steps in the calculation of an employee’s salary:
- Computation of Gross Salary
Gross Salary=CTC (Cost to Company) +PF (Provident Fund)-Gratuity
- Computation of taxable income:
Taxable Income=Gross salary-PF-HRA-Travel allowances-Medical facility cost-Leave Travel Allowance and other deductions
- Calculations of income tax on the Taxable income
Income tax is calculated on the taxable income as per the current year income tax rates.
- Salary in Hand
Salary in hand is calculated by the deduction of income, provident fund and other taxes from the gross salary.
Salary in Hand=Gross Salary-Income tax-PF-other taxes