Payroll processing consist of calculation of payments to employees for their work in the company – whether it is based on time or productivity, calculation of benefits, and statutory deductions. Payroll needs to be processed by each company periodically. It may be processed weekly, bimonthly, monthly or daily (for daily wage workers).
Payroll calculation is a complicated process that varies from company to company. Each company may have its own payroll structure consisting of various payroll components that may be unique to that company only. In addition, many location specific laws such as labor welfare act, Payment of salary and wages act, and the Minimum wages act affect the payroll calculations. Under minimum wages act, the employees need to be given some mandatory salary components such as Basic, DA, and HRA.
Payroll processing involves accurate payroll calculations, disbursal, payslip generation, and managing payroll taxes and record keeping compliance. All these activities cannot be rushed into and must be performed using a payroll software to ensure that employees do not get erroneous paychecks and all statutory compliances are met.
Let us understand how benefits and deductions affect payroll calculations.
Considering TDS Deductions For Payroll Calculations
Every employer who is paying salary to employees has to make certain payroll deductions from the salary as TDS (Tax Deducted at Source) to meet statutory compliance.
Employers need to deduct TDS under section 192 of the Income tax Act, 1961, if the salary is more than maximum amount exempt from tax. The employers also need to generate Form 24Q and Form 16 in a timely manner and submit these to the authorities. Some of the salary components that impact TDS deduction are:
- HRA – House Rent Allowance Exemption is possible based on the defined criterion, if expenditure on rent is actually incurred. HRA is taxable if residing in self-occupied house property. This allowance is applicable for exemption based on the location where the employee stays.
- TRAVEL ALLOWANCE – Tax free upto 1600/-pm as per current rules.
- LEAVE TRAVEL ALLOWANCE: Exemption available only in respect of two journeys performed in a block of 4 calendar years.
- CHILDREN EDUCATION ALLOWANCE – Exempt up to Rs. 100 per month per child for a maximum of 2 children
- MEDICAL ALLOWANCE – Taxable (medical reimbursement is tax-free upto 15,000).
- INVESTMENTS: Investments in approved fixed deposit schemes, Equity oriented MF, PPF (Public Provident Funds), life insurance premiums, Company Provident Fund etc. under general payroll deductions u/s 80 C section can be made by salaried employees to avail the total tax benefit of Rs. 1,50,000/-.
- 12B: Declaration of income from previous employer, other income, and commissions can be made on form 12B for proper TDS calculation for salaried employees.
- In addition there are other deductions too for taking care of parents, care of handicapped children, interest paid for housing loans that allow decrease in net salary payable to employees.
Considering Employee Benefits For Payroll Calculations
The employees of the company get many payroll benefits in addition to their regular salary. Most of the benefits that employees get impact tax calculations. Some such benefits are:
- FLEXI ALLOWANCE BASKET: The salary packages these days include a basket of flexible allowances to minimize the tax outgo. For example the employees can choose medical reimbursements and leave travel concession components that are exempt under limits prescribed by the Act.
- PERQUISITES: Perquisites are also the privileges given to employees by the employer over and above the regular income of the employees. It includes car conveyance, free food and beverages, interest free or concessional loan, sweeper/gardener/cook allowance, and leave travel concession etc. The perquisites are taxable but the tax on perquisites is generally borne by the employer and is tax exempt for the employee.
Considering Statutory Requirements And Visa Rules For Expats In India For Payroll Calculations
Foreign nationals (except citizens of the countries of Nepal and Bhutan) require a valid passport or travel document and a valid visa to enter India. Expatriates are paid salaries several times than those of their Indian counterparts. Under India’s double-taxation agreements, salaries that a foreign company (and not its permanent establishment in India) pays for services rendered in India are taxable in India if the employee works for more than 182 days during the tax year.