Payroll Explained: Components, Statutory Deductions, and Compliance for Indian SMBs

The end-to-end monthly process of computing and paying salaries — including TDS, EPF, ESI, Professional Tax, payslip generation, and compliance returns. Below: how Indian salary structures break down, what's mandatory, and when to stop running it in Excel.

Payrollis the end-to-end monthly process of calculating and paying employee salaries. It includes computing income tax (TDS), statutory contributions (EPF, ESI, PT, LWF), generating payslips, paying salaries on time, and filing all the resulting compliance returns. In India, most companies run payroll on the 25th–30th of each month for the previous month's work.

Get it right and it's an invisible part of running a company. Get it wrong and you're looking at interest, penalties, disqualified deductions in your IT return, and (in extreme cases) personal liability for the employer's directors. The mechanics aren't complicated — they're just unforgiving about deadlines.

Components of a typical Indian salary

Salary structures in India are remarkably standardised. Most firms break the CTC into components, each with its own tax treatment and statutory implications:

Component	% of CTC (typical)	Tax treatment
Basic Salary	40–50%	Fully taxable
Dearness Allowance (DA)	Mostly govt sector	Fully taxable
House Rent Allowance (HRA)	40–50% of basic	Partly exempt (Sec 10(13A))
Special / other allowances	Variable	Mostly taxable
Employer EPF (12%)	~12% of basic+DA	Exempt (Sec 10(11/12))
Employer ESI (3.25%)	If basic ≤ ₹21k	Exempt
Bonus / Variable	5–30%	Taxable on receipt
Gratuity provision	~4.81% of basic	Exempt up to ₹20L on retirement

CTC (Cost to Company) is everything; Net Salaryis what hits the employee's bank account. The gap between the two — typically 25–35% of CTC — is the combined load of EPF, ESI, gratuity provision, and statutory deductions.

Statutory deductions the employer must make

Five common ones, each with its own threshold and authority:

Deduction	Employee	Employer	Applies
EPF	12% of (basic + DA)	12% (3.67% EPF + 8.33% EPS)	Compulsory if >20 employees
ESI	0.75% of gross	3.25% of gross	Gross ≤ ₹21,000/month
TDS	Per IT slabs	—	Annual income above exemption
Professional Tax (PT)	₹150–200/month	—	State-specific (16 states)
Labour Welfare Fund (LWF)	₹6–12/month	₹12–24/month	State-specific (~10 states)

Compliance deadlines you can't miss

EPF: Paid by 15th of next month. ECR (return) by 25th.
ESI: Paid by 15th of next month. Return by 11th of month after.
TDS: Deducted at salary payment, deposited by 7th of next month. Quarterly return Form 24Q.
Professional Tax: State-specific. Most states by 10th–21st of next month.
Form 16: Issued to each employee by 15 June, certifying TDS deducted in the prior FY.

Late payment penalty: 1% per month interest. Late return: ₹200/day under Section 234E. Failure to deduct TDS: 1% per month from the date it should have been deducted to actual deposit, plus disallowance of the related expense in your IT return — effectively a 30% extra hit on the unpaid amount.

Useful calculators

If you're doing payroll manually, these computations come up monthly:

Income Tax Calculator (AY 2025-26) — old vs new regime comparison
HRA Calculator — Section 10(13A) exemption
Gratuity Calculator — Payment of Gratuity Act 1972
TDS Rate Chart 2025-26 — every section, every rate
Dearness Allowance Explained — DA rates and formula

When to switch from Excel to payroll software

Manual payroll in Excel is fine up to ~5 employees. Beyond that, the time spent on TDS calculations, EPF challans, payslip generation, and statutory return filing exceeds the cost of any payroll tool. Most Indian SMBs cross over to dedicated software at ~10 employees.

Standard pricing across the market: ₹40–200 per employee per month for tools like Keka, GreytHR, ZohoPeople, FactoHR, sumHR. Pyrelo charges flat ₹599/month for up to 30 employees — the per-seat math breaks down faster the bigger you get.

Common mistakes

Treating CTC as gross salary. Employer EPF, gratuity provision, and ESI are part of CTC but never reach the employee's account. Always communicate Net Salary or In-Hand to candidates, not CTC.
Forgetting state-specific PT. Karnataka, Maharashtra, West Bengal, Tamil Nadu, and 12 other states levy Professional Tax. Companies with employees in multiple states need separate PT registrations per state.
Missing PAN for high-earner declarations. Employees claiming HRA > ₹1L/year must furnish landlord's PAN. Without it, the employer can't allow the exemption — and the employee gets an unexpected TDS hit in March.
Not running new vs old regime comparison. Defaulting employees to the new regime without checking if they'd save more in the old (with HRA + 80C) is a quiet ~₹20–50k/year leak per employee.