How Should I Structure Payroll with Benefits and Deductions? Seeking Guidance and Examples

Hi,

I need to process payroll. The company provides basic HRA, conveyance, and medical benefits. Can anyone guide me on how the salary should be structured? Additionally, what percentage of PF, PT, and gratuity should be deducted? If anyone has a sample of the payroll system, it would be great.

Thanks,
Aditi

Dear Aditi,

There are a few fundamentals that you have to keep in mind:

- Basic should not be less than 35%
- HRA: generally half of Basic
- Conveyance: Any amount but up to 800 pm is tax-free
- Medical: Is it an Allowance or reimbursement? Allowance is taxable, and reimbursement up to 1250 pm is tax-free

Deductions:

- PF: PF is 12% of Basic (employee contribution). There is also an employer's contribution of the same amount: 12%. Some companies include this in the CTC, and some just include the employee's contribution. So, you need to check what amount is offered to the employee at the time of joining. PF is deducted only if Basic is less than or equal to 6500 pm.
- ESI: If the total gross salary of an employee is less than or equal to 1000 pm, then ESI is deducted at 1.75% of gross salary (employee share) and 4.75% (employer share). Again, you need to check whether it is included in the CTC or not.
- Taxes: As per the law

Please review and ensure compliance accordingly.

Thank you.

Hi Aditi,

The contents of the salary breakup are as follows. You can prepare it according to your convenience. HRA would be 50% or 60% of the basic salary.

Basic
HRA
TA
Other Allowance
Mobile Reimbursement per Month
Gross Per Month = Sum of all the above.
Gross Per Annum = 12 * Gross/Month
PF Contribution = 12% of Basic/Annum
ESI Contribution = 4.75% of Gross/Annum
Medical = The mediclaim facility provided to employees who are not covered under ESI, as the maximum ceiling for ESI is 10,000 per month. Anything beyond this will be covered under Mediclaim or as per company policy.
Ex-Gratia/Bonus = A fixed amount as a bonus
Annual Fixed Gross Cost = Gross/Annum + Ex-gratia
Annual Total Cost = AFGC + PF + ESIC
Annual total cost is also referred to as CTC.

I hope this clarifies everything for you. If you have any queries, feel free to ask.

Regards,
Amit Seth

Hi Anupama,

Please brief about PF. Is it not deducted if the basic is more than 6500/m? And if not, what are the other deductions made?

Regards,
Pallavi

Hi,

PF is being deducted even after the basic salary crosses the ceiling of Rs. 6500/-, but it is being done based on the ceiling amount only. Moreover, it depends on the company policy as well. However, one can remain a member of the PF Fund even after their basic salary exceeds Rs. 6500/- per month.

Regards,
Amit Seth.

Hi,

Please let me know why basic should not be less than 35%. Is there any obligation mentioned anywhere?

Regards,
Rachna

Hi Madhumita,

Payroll is the salary processing system.

Payroll can be seen from two aspects. One is from the HR side, and the other from the commercial people side. The HR personnel process the payroll by sending attendance details or, better to say, Leave Without Pay (LWP) details and other complete information that an employee is going to receive in a particular month.

After receiving these details, the commercial team begins entering them into the payroll software, initiating the salary processing.

While processing the salary for a particular month, we, the HR personnel, provide complete LWP (Leave Without Pay) details to the commercial department.

When calculating LWP, we prepare the attendance sheet with the weekly offs. Besides the weekly offs, we also check how many days an employee is absent, and out of those days, how many days the employee was on leave, cross-referencing with leave applications. If an employee has submitted an approved leave application form and the leave is available in their account, we mark them as on leave.

However, if an employee has not submitted the leave application form or has no leave balance, then for that specific day, the employee will be considered absent, and we will deduct their salary for that day.

Similarly, if there is a provision to provide one day's extra salary for a specific day if the employee does come, we calculate one day's extra salary for those employees who were present on that day.

I hope this clarifies the process for you.

Regards,

Amit Seth.