Payroll Concepts

Organizational Structure Managing Director

Vice President

General Manager

Dept. Head

Dept. Head

Dept. Head

Dept. Head

Various functions of individual Dept. Payroll Processing What is salary and why salary It is a matter of fact that one of the main intentions of working is motivation. In today’s world there are many factors that an employee will be looking into for the work they do. Out of which three are identified as basic requirement that today’s employee would be looking into. • • • Knowledge Status Monitory benefits

A monitory benefit, Salary is one of the ways of motivating the employee. This is generally paid once in a month depending on the organizational structure. There are also cases where in salary is paid weekly/bimonthly and also on daily wages. 1

Whereas a few class of employees are paid either weekly or daily wages. Give and take. the Minimum Wages act etc. There are some rules affecting the payment of salary as told.g. Business policy says. DA. Generally now a day’s people follow payments once a month to reduce statutory compliance. Any employer for the work taken from the employee has to pay some money in return to the employee. A company may be giving a component called Washing allowance where as few companies doesn’t give washing allowance at all. E. Deriving at the salary is a big process. Structures: Salary calculation varies from company to company. Give to take. Factors influencing Payroll Salary calculation methods and structures Calculation methods: Calculation methods can be monthly/Fortnightly/weekly and daily. Basic DA HRA Special allowance Entertainment allowance Washing Allowance Magazine allowance 2 . Payment of Salaries and Wages act.g. Few companies may opt to give a component that another company doesn’t wish to give. An example is given below Take a case of a company that gives the following components to its employees. Minimum wages to be paid in a metro city is something more than that of a rural area. There are some rules affecting the same and to certain class of people the above components may vary. and HRA which comes under the minimum wages act. If we look into few of them.There are various laws affecting salary payment to the employees. the labour welfare act. Employee is to be given few components of salary that are Basic. E. Classes are basically divided under the minimum wages act as skilled workers/Unskilled Workers and Semi Skilled Workers Minimum wages rate may vary from location to location.

And so on. 3 .. From traditional hand written ledgers to punch card system to drop card system to swipe card systems and biometrics readers. Different attendance monitoring systems of different companies gives different outputs.KIT allowance. A company’s leave structure is dependent on the management decision. Salary components can also be based on the physical presence of the employee e. Attendance and Leave Attendance: It is the availability of an employee for accomplishment of assignment or work given by the employer.g. DA can be 20% of Basic and HRA can be 40% of Basic and DA and there can also be a case where in an allowance like Entertainment allowance is given based on the total salary on a Slab basis.g. A component like Ex Head quarters allowance/Petrol allowance is given to the employee only when he is present Above all these there can be deductions like quarters rent. Leave: It is an extension given by the employer to the employee for being available for employee for the accomplishment of assignment. There are many companies giving these systems. E. For e. People in the administration may be getting an allowance that is not given to the production dept. There are various methods of deriving at the figures. the Attendance details are maintained in various forms. employees and so on. canteen deduction etc. etc. But in general there are three to four types of leave eligibility that a company will give to its employees.g. All the above components can be based on a gross earning or individual can be derived based on another component. They are CL – Casual Leave SL – Sick Leave EL/PL – Earned Leave/Paid Leave ML – Maternity leave etc. The components can be different for a class of people.

on accumulation of leave to certain extent then salary for the accumulated no. When we speak of Leave we should not forget Holiday that can be based on branch. i. XX or a branch located in the Hill Top area may get Hill Top Allowance etc. It varies from company to company as per the management decision. This in turn can be accumulated every year and once it reaches 60 accumulated leaves any thing above 60 is encashed to the employee at Basic + DA. Like people in Tamil Nadu enjoys three days Sankranthi where as people in Karnataka enjoys only one day for Sankranthi. This may affect the salary calculation to a large extent.. which was not a part of his salary when he was working in a non-metro city or a non Hill Station place. This can be based on a fixed rate to each employee or can also be based on a rate derived from salary. a person working in a Metro city like Mumbai may be getting a Metro Allowance of Rs. 2. i. of days festival holiday to be declared but are particular of 5 minimum National holidays to be declared every year and 10 National + General holiday a year OT OT or overtime-extra payment is given to the employee when he works above 8 hours (depending on the companies working hours).e. Minimum eligibility for Earned Leave is that he/she should have worked for 240 days. of leaves is encashed to the employee. every 20 day worked one earned leave is granted to the employee. But Factory act speaks only about the minimum no. to another or from a branch to another for smooth flow of work. Transfers/Increment There are many chances of an employee being transferred from a dept.e. be it a weekly holiday or a national holiday or a general holiday... Companies that come under Factory’s Act has to follow the following method of granting leave. 4 . 1.There are also some companies that give only one type of leave or a combination of the above said leaves. Generally the system of encashment goes as follows: 15 days EL is allotted to the employee every year. Holiday can be based on the location of the branch also. Maternity leave is not to be considered for the eligibility criteria. EL or the earned leave is generally encashable i. But when he is transferred to a metro or a hill station he is to be paid for the allowance applicable to the location.e.

As we were speaking in the earlier session about motivation. A minimum of 8. There can also be some variable deductions like the Tsunami / Gujarat Relief fund etc. Variable payments/deductions There can be variable payment at any point of time. Statutory compliance Earnings Deductions • Bonus PF/ESI • Gratuity PT There are also some statutory compliance to be taken care of in salary processing of which few are Bonus and Gratuity Bonus: Bonus is a component to be given to the employee by the employer within 8 months of closing of book of accounts. Generally companies give increment once a year unlike software/BPO companies that hikes the salary every now and then. Though a flat amount is given to be on the safer side of non-liability 5 . Standing instructions There can be various standing instructions given by the employee to the employer.33/100 • When Bonus Gross is between 2500 and 10000 then Bonus = 2500 * 8. Assuming Bonus Gross = Basic + DA • When Bonus Gross < 2500 then Bonus = Bonus Gross * 8. one of the major things one has to look into is the increment given to the employee either at regular intervals or irregular intervals. Further more there can be many other components like a production incentive or a performance incentive that is paid once in a quarter or once in a year based on the production or performance of the employee.33/100 • When Bonus gross crosses 10000 then Bonus = 0 In many cases the above is not considered but a flat amount is given. Or even company management would have given advance to the employee. most of the software / BPO segments are working on Variable pay very much now a day to reduce the liability it has on the employee.33% of Basic + DA is to be paid to the employee as per the Bonus Act. Bonus has its own rules that can be better explained with an example. It can be for a bank loan taken or an insurance payment or a salary saving to be done by the employee.

the organization need not pay any bonus for the employee and if his Bonus Gross is < Rs.33 % as per the bonus act and rest of the amount as Ex-gratia or an incentive.companies preferred to pay 8. 100 then also Company need not pay Bonus for the employee. 6500/. Employer contribution goes to two different accounts i.PF Gross goes to Employee Pension scheme account and rest of the amount gets debited to Provident fund account. Deductions: PF – Stands for Provident Fund (Subject to Company’s Registration under PF Dept.e. Gratuity: Gratuity is a lump sum amount given to the employee that is generally 15days salary for every year he has worked in the company with respect to the current salary of the employee at the time of his retirement or exit from the company if he has completed a minimum of 5 years of service in the company. Again if an employee has not worked for more than 30days in the company. Employer Contribution 12% of PF Gross i.33% of PF Gross subject to a maximum of Rs. Basic + DA of the employee is deducted by the employer and is remitted along with a challan to the dept. Employer contribution that gets in to two different accounts is divided into 8.) Provident fund is a saving by the employee aided by the employer There are two components in Provident Fund 1. Further this amount can be restricted to a PF Gross of 6500/as per the wish of the employer and employee. Signature of the Employee is to be taken in C-Form and filed for inspection by factory inspector immediately after the payment of bonus to the employees. Employee pension scheme and employee provident fund account. While whole contribution of the employee will go to employee provident fund account.e. 6 .. Employee Contribution 2.. every month with an equal contribution to every employee by the employer.

Above all there are nominal administration charges to all the above accounts that are Account 02. is to be kept informed about any new employee joined to the organization in the form of Form 5 every month Similarly PF dept.) Employees whose salary doesn’t cross 15000/. Employees also enjoy ESI benefits for his dependents in the family. every year.75% of the employees’ gross salary every month for the same.per month are to be covered under ESI that is similar to any other health insurance. which are Form 3A Form 6A Form 3A is the details of submission against individual employee and his PF contributions along with Employer contributions for the financial year (March – February) where as Form 6A is the summary of Form 3A. All employees who are drawing less than 15000/. There is also a form called Form 12A that details the amount of total contribution against the above said accounts. 7 . Account 21 and Account 22 is borne by the employer. There are two major Forms to be submitted by the employer every half year that are Form 6 and Form 7 which are details of the employees and the insurance payments for the whole half year. is to be kept informed about any employee who has left the organization in the form of Form 10 every month. Employer contributes 4. An amount of 1. There are two major forms to be submitted to the Dept.PF dept. Unlike the Financial year of PF ESI has two periods in a financial year the first one starting from April ends in September and the second half of the financial year starts in Oct of every year and ends in March of the next calendar year. Form 3A is expected by the department in DBF format as per the specification by the department.75% of the gross salary of the employee is to be paid to the ESI department every month as premium is paid to any other health insurance. ESI – Employee State Insurance (Subject to Company’s Registration under PF Dept.will be covered under health insurance and ESI benefits can be availed during the period.

This tax is based on a slab on your gross salary.00 10000.00 15000.99 Max Value PT 0 150 200 Every year a Form is submitted by the employer to the PT Department in the form of Form 5 and every month details of the deductions are shown to the department in the form of Form 5A. PT – Profession Tax Unlike other statutory bodies PT comes under the State Government as we pay tax for our income we also pay tax for our profession. Arrears Increase in salary is increment and any salary amount in lieu of increment or otherwise is arrears. ESI Dept. This is used for tax estimation (TDS). In Karnataka the slabs are as follows Amount From 0. Ex-gratia Similar to bonus but paid to employees who are not eligible for bonus. Approximation is done usually for a financial year. Reports related to salary processing: Attendance register (Muster roll) – record of attendance for a period for a set of employees.Women workers also can enjoy maternity benefits during the period of pregnancy and delivery. This being state government body different states have different slabs and calculation methodology is different. Salary extrapolation Approximation of future salary based on current salary. pays 90% of employee’s salary up to a max of 10000/.99 14999.00 Range Amount Range To 9999. 8 .for about 3 months. Leave encashment Exchange of unused leaves to money is leave encashment.

increments. Service register . Leave register .register containing all necessary details of an employee registered under PF/ESI. perks and more details. usage and balance of every employee.Pay slip – record of salary for a month for a particular employee. bonuses. 9 . PF/ESI register . Advance register .Records/details of any accidents occurred within the company premises during working hours. recovery and balance of advance of all employees.record of service proceedings of an employee including all details. promotions. Salary sheet – record of salary for a month for a set of employees.register of payment. receipt. date of joining.register of leave allotment. ESI accident report (Form 16) . benefits.

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