Ask ten HR teams to describe their payroll process and nine will start at the calculation. Gross to net, PF, TDS, bank file. That part is the easiest to describe and the least likely to go wrong, because software does it the same way every month.
Errors come in through the door before that. A resignation nobody told payroll about, an attendance sheet with a cut-off everyone interpreted differently, an increment letter dated the 3rd that arrived on the 27th. By the time the calculation runs, the mistake is already in the file, and the calculation propagates it neatly into someone's bank account.
The three phases, and which one actually needs your attention
Payroll splits into pre-payroll, payroll and post-payroll. Most teams spend their effort in the middle and their weekends on the two ends.
- Pre-payroll is policy, inputs and validation, and it is where errors originate
- Payroll is calculation, reconciliation and disbursement, and it is mostly mechanical if the inputs are clean
- Post-payroll is statutory payments, returns, accounting entries and record keeping, and it is where missed deadlines cost money
Payroll accuracy is an input problem wearing a calculation costume. Fix the cut-off discipline and most of the recurring errors disappear on their own.
Step 1: Write the policy down before you calculate anything
Payroll executes rules. If the rules only exist in someone's head, the output changes when that person is on leave.
What needs to be written and approved once: the salary structure and which components are fixed, variable or reimbursed. Attendance and leave rules, including how loss of pay is computed and whether the divisor is calendar days or working days, which changes what an absent employee is paid in February against March. The input cut-off date, the pay date, who approves the run, and who is allowed to make an off-cycle payment.
The loss of pay divisor is worth settling explicitly. A company using calendar days pays a different amount for the same day of absence in a 28-day month than a company using a fixed 30, and employees compare notes.
Step 2: Collect the inputs and freeze the cut-off
Inputs come from more places than payroll controls, which is why a written list beats a monthly hunt.
- Attendance, overtime and loss of pay days from the attendance system or manager confirmation
- New joiners with their salary structure, PF and ESI details, bank account and PAN
- Exits with their last working day, notice recovery, leave encashment and full and final workings
- Salary revisions and arrears, including revisions effective from an earlier month
- Variable pay, incentives and any one-time payments approved for the month
- Reimbursement claims approved within the cut-off
- Recoveries: loans, advances, asset dues, insurance premiums and excess leave
- Investment declarations and proofs, which drive the TDS projection
The cut-off is the part that needs defending. Pick a date, usually somewhere between the 20th and the 25th, and hold it. Anything that arrives late goes into the next month as an arrear instead of reopening a run that has already been reconciled. Reopening is how a clean run becomes three versions of the same register and a bank file that nobody is sure about.
Step 3: Validate the inputs before you calculate
This step takes twenty minutes and prevents most of what goes wrong. Run it as a checklist rather than a feeling.
- Headcount reconciliation: opening headcount plus joiners minus exits equals closing headcount, with names for every difference
- Anyone with zero pay or negative net pay, which usually means recoveries exceed earnings
- Duplicate or missing bank accounts, and account numbers that changed this month
- New joiners without PF, ESI or PAN details, and anyone whose statutory eligibility flags look wrong for their salary
- Exits still marked active, and active employees with no attendance record
- Salary revisions with an effective date in a closed month, which need arrear treatment rather than a fresh rate
Negative net pay deserves special attention because the Payment of Wages Act caps total deductions at 50 per cent of wages, and 75 per cent where cooperative society deductions apply. A recovery that pushes someone past that limit has to be staged across months, not forced through because the system allowed it.
Step 4: Run the calculation, gross to net
Earnings first, for the days actually paid, including arrears and one-time payments. Then the deductions, in the order that matters for each.
Provident fund at 12 per cent from the employee with a matching employer contribution, on basic plus dearness allowance, with the ₹15,000 wage ceiling deciding mandatory coverage at joining. ESI at 0.75 per cent from the employee and 3.25 per cent from the employer where gross wages are ₹21,000 or less. Professional tax on the slab of the state the employee works in, capped at ₹2,500 a year. Labour welfare fund where the state levies it, usually a small amount collected half-yearly or annually rather than monthly.
Then income tax under Section 192. Tax deducted at source on salary is computed on the projected annual income for the whole year, spread across the remaining months, which is why a single bonus in December changes the deduction for January onwards and generates a queue at the HR desk. The projection has to be refreshed when investment proofs come in, and again for a mid-year revision.
Employer costs that are not deductions still belong in the run for costing purposes: the employer PF and ESI share, gratuity provisioning at about 4.81 per cent of basic, and bonus provisioning under the Payment of Bonus Act where employees are eligible. Leaving them out understates payroll cost, which is the number the finance team is actually asking for.
Step 5: Reconcile against last month before you release
This is the step most teams skip, and the only one that finds errors while they are still free to fix. It is also fast once it is set up, because you are looking for differences rather than reviewing everything.
Take the current register against last month's, employee by employee, and require a reason for every variance above a threshold you set, whether that is ₹500 or ₹5,000. Every difference should map to something you already know: a joiner, an exit, an increment, loss of pay, an arrear, a bonus, or a change in TDS. A variance nobody can explain is an error you have not identified yet.
Then the totals. The bank file total must equal the net pay total on the register to the rupee. Statutory totals must equal what you are about to pay in each challan. Payroll cost in the register must equal what you are about to post to the ledger. If those three do not tie before disbursement, they will not tie afterwards either, and you will be reconciling with money already gone.
Step 6: Get approval, then disburse
One named approver, one version of the register, one approval on record. Circulating a spreadsheet for comments is not approval, and it makes the question of who signed off unanswerable three months later during an audit.
On timing, the Payment of Wages Act sets the outer limit rather than a preference. Wages are payable before the 7th of the following month for establishments with fewer than 1,000 employees, and before the 10th for larger ones. Most companies pay well inside that, on the last working day or the first, and the reason to pick a fixed date and hold it is that employees plan around it and a moved pay date generates more queries than any calculation error.
Payslips go out with the payment, not a week later, and they should show enough detail that an employee can reconstruct the net figure themselves. A payslip that shows only gross and net converts every deduction question into an email.
Step 7: Pay the challans and file the returns
Four different authorities, four different dates, and no single reminder that covers them.
| What | Payment due | Return or filing |
|---|---|---|
| TDS on salary | 7th of the following month, and 30 April for March | Form 24Q quarterly, Form 16 to employees by 15 June |
| Provident fund | 15th of the following month | Monthly ECR filed with the payment |
| ESI | 15th of the following month | Monthly contribution filed with the payment |
| Professional tax | Varies by state, commonly monthly or annually | State return, monthly or annual depending on liability |
| Labour welfare fund | Varies by state, commonly half-yearly or annual | State return where prescribed |
The quarterly Form 24Q dates are 31 July, 31 October and 31 January for the first three quarters, and 31 May for the fourth. Form 16 follows by 15 June. Late PF and ESI payments carry interest and damages, and a late TDS deposit carries interest at 1.5 per cent a month plus the risk of the deduction being disallowed, which is a much larger number than the interest.
Set these up as separate calendar entries with separate owners. A single reminder called statutory payments is how one of five gets missed for a quarter before anyone notices.
Step 8: Post the entries and close the month
Payroll is not finished when salaries land. The accounting entry has to go in the same month: salary and wages as cost, employer PF and ESI as cost, and every deduction as a liability until the challan clears it.
Provisions carry across months: gratuity, leave encashment and bonus. Then reconcile each statutory liability account to what you actually paid, so a balance sitting in the PF payable account gets noticed in the month it arises rather than at year end. Registers under the Payment of Wages Act and the state Shops Act need to be maintained and retained, and payroll records generally want a retention period of several years because both tax and labour authorities can look back.
Full and final settlements sit here too. Most companies target 30 to 45 days from the last working day, and gratuity where payable has a 30-day clock of its own. A delayed settlement is the single most common reason a departing employee escalates, and the delay is usually waiting for one manager to confirm one asset return.
A calendar dated backwards from the pay date
The practical version of all of this is a calendar built in reverse from the day you pay, rather than forward from the day the month starts.
- By the 20th: attendance closed for the cycle, exits and joiners confirmed, revisions loaded
- By the 25th: input cut-off, nothing new accepted into this run
- 26th to 27th: calculation, validation checks, variance reconciliation
- 28th: approval on record, bank file generated and tied to the register
- Last working day or 1st: salary credited, payslips released
- 7th: TDS deposited
- 15th: PF and ESI paid and filed
- Within the month: accounting entries, provisions and statutory ledger reconciliation
A first payroll in a new company adds a setup phase before any of this: PAN and TAN, PF and ESI registration where thresholds are met, professional tax registration in each state where you have staff, shops and establishment registration for each premises, and a salary structure agreed with finance. None of that is monthly work, but a payroll run before it is in place creates liabilities you then have to fix retrospectively.
Where payroll goes wrong most often
The failure patterns repeat across companies of very different sizes.
Exits communicated late, so a full salary goes out to someone who left on the 12th. Attendance approved by nobody in particular, so loss of pay is applied inconsistently between teams. Investment proofs collected in March, which compresses a year of TDS correction into one month and produces the largest deduction of the year in the month people least expect it. Off-cycle payments made outside the run and never brought into the register, which breaks both the TDS projection and the accounting. And multi-state professional tax quietly wrong, because the deduction follows where the employee works and somebody set it from the head office address.
None of those are calculation failures. Each of them is a process step missing an owner.
Frequently asked questions
What are the three stages of the payroll process?
Pre-payroll covers policy, input collection and validation. Payroll covers calculation, reconciliation and disbursement. Post-payroll covers statutory payments and returns, accounting entries and record keeping.
What is the payroll cut-off date and why does it matter?
It is the date after which no new input enters the current run, usually between the 20th and the 25th. Holding it is what prevents a reconciled run from being reopened, and anything late is paid as an arrear in the next month instead.
By when must salaries be paid in India?
Before the 7th of the following month for establishments with fewer than 1,000 employees, and before the 10th for larger ones, under the Payment of Wages Act. Most companies pay on the last working day or the 1st.
What are the statutory deductions in Indian payroll?
Provident fund at 12 per cent, ESI at 0.75 per cent where gross wages are ₹21,000 or less, professional tax on the state slab capped at ₹2,500 a year, TDS under Section 192, and labour welfare fund where the state levies it.
When are PF, ESI and TDS due each month?
TDS by the 7th of the following month, and PF and ESI by the 15th. Professional tax and labour welfare fund dates are set by each state separately.
How much of an employee's wages can be deducted?
Total deductions cannot exceed 50 per cent of wages under the Payment of Wages Act, or 75 per cent where cooperative society deductions apply. A larger recovery has to be spread across months.
What is payroll reconciliation?
Comparing the current run against the previous month employee by employee, explaining every variance above a set threshold, and tying the bank file, statutory challans and accounting entry to the salary register before release.
How long should a full and final settlement take?
Most companies settle within 30 to 45 days of the last working day. Gratuity, where payable, has its own 30-day timeline from the date it becomes payable.
If you are documenting your payroll process for the first time, write the calendar before the checklist. Dates create the accountability that a list of tasks does not. If you already run payroll every month and want to reduce errors, add the variance reconciliation at step 5 and defend the cut-off at step 2. Those two changes catch more than any amount of double-checking the calculation.
