How to Run Payroll in India: A Step-by-Step Guide for Small Teams
Payroll in India is really two jobs stitched together: paying people the right amount, and getting the statutory deductions — PF, ESI, professional tax and TDS — exactly right. For a small team without a dedicated payroll department, the second half is where the stress lives. Here's the whole cycle, step by step.
1. Define each employee's salary structure
Everything downstream depends on a clean salary structure. For each employee, break the CTC into components:
- Basic — the anchor for PF and gratuity, usually 40–50% of gross.
- HRA — house rent allowance, relevant for the employee's tax exemptions.
- Special allowance and any fixed allowances.
- Employer contributions (PF, ESI) that sit on top of the take-home.
Define these once per employee and reuse them every month, rather than rebuilding the math each pay run.
2. Collect the month's inputs
Before you calculate anything, gather what changed this month:
- Days present, and any loss-of-pay (LOP) days from unapproved or unpaid absences.
- New joiners (with pro-rated pay) and exits (with full-and-final settlement).
- One-offs: reimbursements, bonuses, incentives, salary revisions.
This is the step where attendance and leave data feed payroll — if those live in separate systems, this is the reconciliation that eats an afternoon.
3. Calculate gross-to-net
Now the core arithmetic, per employee:
- Start with gross earnings for the month (adjusted for LOP and pro-ration).
- Subtract employee statutory deductions — PF, ESI (if applicable), professional tax.
- Subtract TDS (income tax deducted at source) based on the employee's projected annual tax.
- Subtract any other deductions (advances, loan EMIs).
What's left is net pay — the amount that actually hits the bank account.
4. Get the statutory pieces right
This is the part that has real deadlines and penalties.
- Provident Fund (PF/EPF). Both employee and employer typically contribute 12% of basic wages. Deposited monthly with the EPFO, with a monthly ECR filing.
- ESI. Applies to employees below the wage threshold; employee and employer contribute their respective shares, deposited monthly.
- Professional Tax (PT). A state-level tax — the slabs and even whether it applies depend on the state your establishment is registered in.
- TDS. Deducted monthly against each employee's estimated annual liability, deposited to the income-tax department, and reported quarterly.
The recurring trap for small teams isn't the percentages — it's the calendar. PF, ESI and TDS each have their own monthly or quarterly deposit and filing dates, and missing them is what turns a rounding question into a penalty.
5. Generate and share payslips
Every employee should get a clear payslip showing earnings, deductions and net pay. A good payslip heads off half your payroll queries because people can see exactly how their number was reached — and it's a record both sides can rely on later.
6. Pay, then file
Finally: release the bank transfer (usually via a bank-format file or NEFT), then complete the month's statutory deposits and filings on time. Keep the run's records — you'll want them at year-end for Form 16 and for any audit.
A recurring monthly checklist
- Confirm attendance, leave and LOP for the month
- Add joiners, process exits and F&F
- Run gross-to-net for every employee
- Verify PF, ESI, PT and TDS figures
- Generate and share payslips
- Release salaries and complete statutory deposits/filings
How HRDesk24 helps
HRDesk24 is built for exactly this cycle. Define pay components once, and each run handles statutory PF, ESI and PT for you, applies loss-of-pay from the attendance your team already records, and produces clean, downloadable payslips — so a small team can close payroll in minutes instead of losing days to spreadsheets.
Curious how it fits your setup? Book a walkthrough and we'll tailor it to how you run payroll today.