Payroll Concepts

Organizational Structure

Managing Director

Vice President General Manager

Dept. Head Dept. Head Dept. Head Dept. Head

Various functions of individual Dept.

Payroll Processing

What is salary and why salary

It is a matter of fact that one of the main intentions of working is

motivation.

In today’s world there are many factors that an employee will be

looking into for the work they do. Out of which three are identified as
basic requirement that today’s employee would be looking into.

• Knowledge
• Status
• Monitory benefits

A monitory benefit, Salary is one of the ways of motivating the

employee. This is generally paid once in a month depending on the
organizational structure. There are also cases where in salary is paid
weekly/bimonthly and also on daily wages.

1
There are various laws affecting salary payment to the employees, the
labour welfare act, Payment of Salaries and Wages act, the Minimum
Wages act etc. Business policy says, Give and take, Give to take.

Any employer for the work taken from the employee has to pay some
money in return to the employee. There are some rules affecting the
payment of salary as told. If we look into few of them, Employee is to
be given few components of salary that are Basic, DA, and HRA which
comes under the minimum wages act.

There are some rules affecting the same and to certain class of people
the above components may vary. Classes are basically divided under
the minimum wages act as skilled workers/Unskilled Workers and Semi
Skilled Workers

Minimum wages rate may vary from location to location. E.g. Minimum
wages to be paid in a metro city is something more than that of a rural
area.

Factors influencing Payroll

Salary calculation methods and structures

Calculation methods:
Calculation methods can be monthly/Fortnightly/weekly and
daily. Generally now a day’s people follow payments once a month to
reduce statutory compliance. Whereas a few class of employees are
paid either weekly or daily wages.

Structures:
Salary calculation varies from company to company. Few
companies may opt to give a component that another company
doesn’t wish to give. E.g. A company may be giving a component
called Washing allowance where as few companies doesn’t give
washing allowance at all. Deriving at the salary is a big process. An
example is given below

Take a case of a company that gives the following components to its

employees.

Basic
DA
HRA
Special allowance
Entertainment allowance
Washing Allowance
Magazine allowance

2
KIT allowance, etc.,

All the above components can be based on a gross earning or

individual can be derived based on another component.
E.g. DA can be 20% of Basic and HRA can be 40% of Basic and DA and
there can also be a case where in an allowance like Entertainment
allowance is given based on the total salary on a Slab basis. And so on.
There are various methods of deriving at the figures.

The components can be different for a class of people. For e.g. People
in the administration may be getting an allowance that is not given to
the production dept. employees and so on.

Salary components can also be based on the physical presence of the

employee e.g. A component like Ex Head quarters allowance/Petrol
allowance is given to the employee only when he is present

Above all these there can be deductions like quarters rent, canteen
deduction etc.

Attendance and Leave

Attendance: It is the availability of an employee for the

accomplishment of assignment or work given by the employer.

Attendance details are maintained in various forms. From traditional

hand written ledgers to punch card system to drop card system to
swipe card systems and biometrics readers.

Different attendance monitoring systems of different companies gives

different outputs. There are many companies giving these systems.

Leave: It is an extension given by the employer to the employee for

being available for employee for the accomplishment of assignment.

A company’s leave structure is dependent on the management

decision. But in general there are three to four types of leave eligibility
that a company will give to its employees.

They are
CL – Casual Leave
SL – Sick Leave
EL/PL – Earned Leave/Paid Leave
ML – Maternity leave etc.

3
There are also some companies that give only one type of leave or a
combination of the above said leaves. It varies from company to
company as per the management decision.

EL or the earned leave is generally encashable i.e., on accumulation of

leave to certain extent then salary for the accumulated no. of leaves is
encashed to the employee.
Generally the system of encashment goes as follows:
15 days EL is allotted to the employee every year. i.e., every 20
day worked one earned leave is granted to the employee. This in
turn can be accumulated every year and once it reaches 60
accumulated leaves any thing above 60 is encashed to the
employee at Basic + DA.

Companies that come under Factory’s Act has to follow the following
method of granting leave.

1. Minimum eligibility for Earned Leave is that he/she should have

worked for 240 days.
2. Maternity leave is not to be considered for the eligibility criteria.

When we speak of Leave we should not forget Holiday that can be

based on branch, be it a weekly holiday or a national holiday or a
general holiday. Holiday can be based on the location of the branch
also. Like people in Tamil Nadu enjoys three days Sankranthi where as
people in Karnataka enjoys only one day for Sankranthi. But Factory
act speaks only about the minimum no. of days festival holiday to be
declared but are particular of 5 minimum National holidays to be
declared every year and 10 National + General holiday a year

OT
OT or overtime-extra payment is given to the employee when he works
above 8 hours (depending on the companies working hours). This can
be based on a fixed rate to each employee or can also be based on a
rate derived from salary.

Transfers/Increment
There are many chances of an employee being transferred from a
dept. to another or from a branch to another for smooth flow of work.
This may affect the salary calculation to a large extent. i.e., a person
working in a Metro city like Mumbai may be getting a Metro Allowance
of Rs. XX or a branch located in the Hill Top area may get Hill Top
Allowance etc. which was not a part of his salary when he was working
in a non-metro city or a non Hill Station place. But when he is
transferred to a metro or a hill station he is to be paid for the
allowance applicable to the location.

4
As we were speaking in the earlier session about motivation, one of the
major things one has to look into is the increment given to the
employee either at regular intervals or irregular intervals. Generally
companies give increment once a year unlike software/BPO companies
that hikes the salary every now and then.

Standing instructions
There can be various standing instructions given by the employee to
the employer. It can be for a bank loan taken or an insurance payment
or a salary saving to be done by the employee. Or even company
management would have given advance to the employee.

Variable payments/deductions
There can be variable payment at any point of time, most of the
software / BPO segments are working on Variable pay very much now a
day to reduce the liability it has on the employee.

Further more there can be many other components like a production

incentive or a performance incentive that is paid once in a quarter or
once in a year based on the production or performance of the
employee. There can also be some variable deductions like the
Tsunami / Gujarat Relief fund etc.

Statutory compliance
Earnings Deductions
• Bonus PF/ESI
• Gratuity PT
There are also some statutory compliance to be taken care of in salary
processing of which few are Bonus and Gratuity

Bonus:
Bonus is a component to be given to the employee by the
employer within 8 months of closing of book of accounts. A minimum
of 8.33% of Basic + DA is to be paid to the employee as per the Bonus
Act.
Bonus has its own rules that can be better explained with an example.
Assuming Bonus Gross = Basic + DA
• When Bonus Gross < 2500 then Bonus = Bonus Gross * 8.33/100
• When Bonus Gross is between 2500 and 10000 then Bonus =
2500 * 8.33/100
• When Bonus gross crosses 10000 then Bonus = 0

In many cases the above is not considered but a flat amount is given.
Though a flat amount is given to be on the safer side of non-liability

5
companies preferred to pay 8.33 % as per the bonus act and rest of
the amount as Ex-gratia or an incentive.

Again if an employee has not worked for more than 30days in the
company, the organization need not pay any bonus for the employee
and if his Bonus Gross is < Rs. 100 then also Company need not pay
Bonus for the employee.

Signature of the Employee is to be taken in C-Form and filed for

inspection by factory inspector immediately after the payment of
bonus to the employees.

Gratuity:
Gratuity is a lump sum amount given to the employee that is generally
15days salary for every year he has worked in the company with
respect to the current salary of the employee at the time of his
retirement or exit from the company if he has completed a minimum of
5 years of service in the company.

Deductions:

PF – Stands for Provident Fund (Subject to Company’s Registration

under PF Dept.)

Provident fund is a saving by the employee aided by the employer

There are two components in Provident Fund

1. Employee Contribution
2. Employer Contribution

12% of PF Gross i.e., Basic + DA of the employee is deducted by the

employer and is remitted along with a challan to the dept. every month
with an equal contribution to every employee by the employer.

Employer contribution goes to two different accounts i.e., Employee

pension scheme and employee provident fund account. While whole
contribution of the employee will go to employee provident fund
account. Further this amount can be restricted to a PF Gross of 6500/-
as per the wish of the employer and employee.

Employer contribution that gets in to two different accounts is divided

into 8.33% of PF Gross subject to a maximum of Rs. 6500/- PF Gross
goes to Employee Pension scheme account and rest of the amount
gets debited to Provident fund account.

6
PF dept. is to be kept informed about any new employee joined to the
organization in the form of Form 5 every month

Similarly PF dept. is to be kept informed about any employee who has

left the organization in the form of Form 10 every month.

There is also a form called Form 12A that details the amount of total
contribution against the above said accounts.

There are two major forms to be submitted to the Dept. every year,
which are
Form 3A
Form 6A

Form 3A is the details of submission against individual employee and

his PF contributions along with Employer contributions for the financial
year (March – February) where as Form 6A is the summary of Form 3A.
Form 3A is expected by the department in DBF format as per the
specification by the department.

Above all there are nominal administration charges to all the above
accounts that are Account 02, Account 21 and Account 22 is borne by
the employer.

ESI – Employee State Insurance (Subject to Company’s Registration

under PF Dept.)

Employees whose salary doesn’t cross 15000/- per month are to be

covered under ESI that is similar to any other health insurance. An
amount of 1.75% of the gross salary of the employee is to be paid to
the ESI department every month as premium is paid to any other
health insurance. Employer contributes 4.75% of the employees’ gross
salary every month for the same. All employees who are drawing less
than 15000/- will be covered under health insurance and ESI benefits
can be availed during the period. Unlike the Financial year of PF ESI
has two periods in a financial year the first one starting from April ends
in September and the second half of the financial year starts in Oct of
every year and ends in March of the next calendar year. Employees
also enjoy ESI benefits for his dependents in the family.

There are two major Forms to be submitted by the employer every half
year that are Form 6 and Form 7 which are details of the employees
and the insurance payments for the whole half year.

7
Women workers also can enjoy maternity benefits during the period of
pregnancy and delivery. ESI Dept. pays 90% of employee’s salary up to
a max of 10000/- for about 3 months.

PT – Profession Tax

Unlike other statutory bodies PT comes under the State Government as

we pay tax for our income we also pay tax for our profession. This tax
is based on a slab on your gross salary. This being state government
body different states have different slabs and calculation methodology
is different.

In Karnataka the slabs are as follows

Amount Range Amount PT

From Range To
0.00 9999.99 0
10000.00 14999.99 150
15000.00 Max Value 200

Every year a Form is submitted by the employer to the PT Department

in the form of Form 5 and every month details of the deductions are
shown to the department in the form of Form 5A.

Ex-gratia
Similar to bonus but paid to employees who are not eligible for bonus.

Arrears
Increase in salary is increment and any salary amount in lieu of
increment or otherwise is arrears.

Leave encashment
Exchange of unused leaves to money is leave encashment.

Salary extrapolation
Approximation of future salary based on current salary. This is used for
tax estimation (TDS). Approximation is done usually for a financial
year.

Reports related to salary processing:

Attendance register (Muster roll) – record of attendance for a

period for a set of employees.

8
Pay slip – record of salary for a month for a particular employee.

Salary sheet – record of salary for a month for a set of employees.

Service register - record of service proceedings of an employee

including all details, date of joining, promotions, increments, bonuses,
benefits, perks and more details.

PF/ESI register - register containing all necessary details of an

employee registered under PF/ESI.

ESI accident report (Form 16) - Records/details of any accidents

occurred within the company premises during working hours.

Leave register - register of leave allotment, usage and balance of

every employee.

Advance register - register of payment, receipt, recovery and

balance of advance of all employees.