Payroll processing in India includes the process of disbursement and taxation. Payroll is one of the most intricate components of human resource management. It has various static and dynamic parts structured in a certain way. These components run through multiple stages, which allows your organization to calculate appropriate compensation for your employees.     

Core Components of Payroll Processing

Even the slightest mistake in payroll processing can be extremely detrimental for you. Especially for large organizations that make batch payments to disburse their payroll. For smaller enterprises, it can be a cause for loss-of-face. Now, let us first understand which are the core components of payroll processing.

1. Allowances


The salary is core parts of payroll processing; it is made of two components – fixed and dynamic. The fixed component changes only upon annual revision, in which the vital element is performance-base. The fixed part consists of a basic salary and the various allowances. The basic wage is taxable, but specific benefits are not payable.

Allowances form a segment of compensation awarded to employees which are for specific expenditures. The money paid for these expenditures is non-taxable, given they meet certain conditions. Here are the various types of allowances which form part of the salary.

2. House Rent Allowance

Companies provide House Rent Allowance or HRA to allow employees to take care of their accommodation expenditures. The lowest amount from the following three options is exempt from tax

  • 50% of the salary in a metropolitan area or 40% in non-metropolitan.
  • Total rent paid above 10% of wages.
  • HRA received.

3. Transport Allowance

Transport expenses exempted of up to INR 800 from the tax per month. Between residence and the workplace, these expenses must have incurred in commuting. The amount increased up to INR 1600 per month For disabled employees.

4. Medical Allowance

Exemptions under medical allowance amount for the following options:
  • Reimbursement for treatment of individual and immediate family, up to INR 15000.
  • Reimbursement treatment expenses of particular and immediate family in approved network hospitals;
  • Any premium paid by the employer towards employee’s health insurance.
  • Reimbursement of premium paid by employee towards for his/her health insurance premium along with       family.
  • Expenses that the employee incurred on foreign soil for treatment;
  • Travel and housing abroad for the employee or his family (including one attendant accompanying the patient for medical treatment).
  • Facility for group or floater family insurance schemes for employee and family or reimbursement of premium paid by the employee towards group medical insurance scheme.

For medical treatment outside India covers actual costs for accommodation, travel, and treatment of the patient and one attendant. The ceiling for the total gross income, excluding the amount to be reimbursed, is INR200,000.

5. Leave Travel Allowance

Leave travel allowance is for covering traveling expenditures related to moving on leaves. While on holiday in India, the costs of the individual and family members (this includes only the spouse, two children, and dependent parents, brothers, and sisters) are cover. The amount excluded depends upon the mode of travel. Two journeys are available in a block of four calendar years. If the individual does not use LTA during the current block, then the same can be transferred to the next block.

Payroll Process

There are three stages of payroll processing – pre-payroll, actual payroll processing, and post-payroll activities.

1. Pre-Payroll Processes

There’s the first step of the pre-payroll process regarded as a one-time affair. This process is known as payroll policy creation. Original policy created at the beginning, which is then revised periodically. The recurring pre-payroll process includes the gathering of various aspects of employee data, which will affect the actual payroll processing. So, information like leaves used, unpaid leaves (if any), salary revision data, and attendance data. These processes are eliminated if in case companies use HRM or Payroll applications.

2. Actual Payroll Processing in India

In the actual payroll process, information gathered from the pre-payroll is fed into the payroll system, and the salary is processed. However, in the case of the HRMS or integrated payroll management systems, the information in the pre-payroll process is already available. The payroll process needs are activated. During this period, the paper trail for the process and the payroll stubs are generated. These can be reconciled and verified with the original calculation and the bank statements later.

3. Post-payroll Process

At the end of the payroll process, the taxation and compliance deductions like ESI, Provident Fund, Professional Tax, and TDS takes place. These charges need to be deposited with the respective party for the payroll process to be complete. Reports are generated for a high-level snapshot of the month’s payroll, once the entire process is whole.


Payroll processing is a massive part of any organization if we are honest. Therefore it is of paramount importance that you take care of the various things and functionalities that go into streamlining this process.

With over 17 years worth of experience in payroll, Paysquare can give you the very best in terms of both services and expertise when you decide upon outsourcing this essential facet of your organization.

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