How Payroll Works in India: A Beginner's Guide for HR Teams (2026)

Payroll can look deceptively simple from the outside. An employee has a monthly salary, HR checks attendance, finance transfers the money, and a payslip is generated. But once you are responsible for payroll, you quickly realise that the amount credited to an employee's bank account is the final outcome of several connected processes. Payroll is better understood as a monthly process than as a salary calculation.

This guide explains how payroll works in India from beginning to end: what information HR needs, how gross salary becomes net pay, where PF, ESI, professional tax and TDS fit in, and what has to happen after employees are paid. If you are new to HR, read it top to bottom. If you already run payroll, use the 19 steps as a checklist against your own process.

What Is Payroll?

Payroll is the process through which an organisation calculates, verifies, pays and records employee compensation. In practical terms, every pay cycle answers five questions:

1. How much has the employee earned?
2. Are there any adjustments to that amount?
3. What statutory or other deductions need to be made?
4. How much should finally reach the employee's bank account?
5. What does the employer need to report, deposit and retain after payment?

A typical cycle runs in this order: employee and salary data, attendance and leave, earnings and adjustments, statutory deductions, net salary, review and approval, bank payment, payslip, and finally compliance and reporting. Every stage depends on the information before it being correct. That is why payroll errors are often not calculation errors at all. They begin with an incorrect attendance record, a salary revision that was not updated, an unapproved reimbursement, or a new employee whose details were added too late.

The Basic Payroll Formula

At its simplest, payroll works like this:

Gross payable earnings − employee deductions = net pay

Each part of that equation contains several components.

Gross earnings

Gross earnings can include basic salary, dearness allowance where applicable, house rent allowance, other allowances, incentives, bonuses, overtime, arrears, and commissions or variable pay. The exact structure depends on the employer and the employee's compensation arrangement.

Deductions

Employee deductions can include the Employees' Provident Fund contribution, ESI where applicable, tax deducted at source, professional tax where applicable, loss of pay, loan or salary advance recoveries, and other authorised deductions. The Code on Wages requires deductions from wages to fall within authorised categories and generally caps total deductions during a wage period at 50% of wages.

Net pay

Net pay, sometimes called take-home salary, is the amount finally payable to the employee after applicable deductions. New HR professionals should distinguish it from two terms that are often used interchangeably in casual conversation.

CTC vs Gross Salary vs Net Salary

An offer of ₹6 lakh CTC therefore does not automatically mean ₹50,000 will reach the employee's bank account every month. The actual take-home amount depends on the salary structure, statutory contributions, tax liability, attendance and other adjustments. For a full worked example, see our guide to salary structure: CTC vs gross vs net.

How the Monthly Payroll Process Works

A good payroll process divides into three stages: pre-payroll, payroll calculation and verification, and post-payroll. Understanding these stages is more useful than memorising individual deductions, because it shows HR exactly where each piece of information belongs.

Stage 1: Pre-Payroll

Most payroll mistakes are created before the calculation begins. The purpose of pre-payroll is to make sure the information entering payroll is complete and correct.

Step 1: Maintain accurate employee master data

Payroll starts with the employee record. HR should have accurate information on each employee:

• Employee name and ID, date of joining, department and location
• Bank account details, PAN and other required statutory information
• Salary structure, PF and ESI applicability, and tax information
• Employment status and last working day, where applicable

If the employee master is incorrect, the payroll calculation built on top of it will also be incorrect. Even something as simple as a wrong date of joining can change the number of payable days in an employee's first month.

Step 2: Confirm the salary structure

Each employee should have an approved salary structure in the payroll system. This establishes which components are fixed and which can vary. An employee may have fixed components (basic salary, HRA and fixed allowances), variable components (incentive, overtime, bonus or performance-linked pay) and employer-side components (employer PF contribution or other benefits included in CTC).

The definition of wages has become especially important since India's four Labour Codes came into force on 21 November 2025. The Code on Wages applies a common definition of wages and includes a 50% rule under which specified excluded allowances above the permitted threshold can be added back to wages for statutory purposes. Salary components should not simply be created to make a payslip look convenient, because the structure can have statutory consequences. We cover this in detail in our guide to the Labour Codes for HR teams.

Step 3: Finalise attendance

Attendance is one of the most important payroll inputs. Before payroll runs, HR may need to know days present, weekly offs, holidays, approved leave, unpaid leave, loss-of-pay days, overtime, shift information and attendance corrections.

Suppose payroll is processed using 30 payable days but an employee actually had two unapproved unpaid absences. Unless that information reaches payroll before the cut-off, the employee may be overpaid. This is why attendance and payroll should not be treated as separate systems. When attendance lives in one spreadsheet, leave approvals in WhatsApp and payroll in another file, HR has to reconcile all three manually every month. Our guide to attendance and payroll management covers how to close that gap.

Step 4: Finalise leave and loss of pay

Not every absence results in a salary deduction. An employee may have taken approved paid leave, unpaid leave, comp-off, or leave that is still awaiting approval. Payroll therefore needs the final leave status before salary is calculated. Loss of Pay (LOP) is generally used when an absence is not covered by payable leave or where company policy requires salary to be reduced. The actual adjustment depends on the company's payroll rules and applicable requirements.

The principle for HR is simple: attendance records, leave balances and payroll must agree before payroll is approved.

Step 5: Add variable payroll inputs

Not every month's payroll is identical. HR may need to add incentives, bonuses, overtime, arrears, reimbursements, salary revisions, loan recoveries, salary advances, one-time deductions or leave encashment. These inputs should have clear approval and cut-off dates. If the payroll cut-off is the 25th, managers should know when variable-pay information has to reach HR. Otherwise, payroll processing becomes a last-minute exercise in collecting approvals.

Step 6: Handle new joiners and exits

New employees may need salary calculated only from their date of joining. Employees leaving the company require a different process, because HR may need to calculate salary up to the last working day and account for other final-settlement items.

This has become particularly important under the Code on Wages. For monthly employees, wages are generally required to be paid before the expiry of the seventh day of the succeeding month. Where an employee resigns, is dismissed, retrenched or otherwise falls within the specified exit provisions, wages due are generally required to be paid within two working days. That makes accurate attendance and exit data an operational compliance issue, not merely an administrative one.

Stage 2: Payroll Calculation

Once payroll inputs are finalised, HR can calculate what each employee should receive.

Step 7: Calculate payable earnings

Begin with the employee's applicable monthly earnings, then account for partial-month employment, loss of pay, overtime, variable pay, arrears, bonus and salary revisions. A simplified calculation looks like this:

Fixed monthly earnings + variable earnings + arrears − loss-of-pay adjustments = gross payable earnings

The exact methodology depends on the company's payroll rules and applicable law.

Step 8: Calculate provident fund

The Employees' Provident Fund is one of the most familiar payroll deductions in India. Under the prevailing EPFO contribution framework, the standard employee contribution is generally 12% of the applicable PF wages, with corresponding employer contributions subject to the scheme's rules. The statutory PF wage ceiling was raised from ₹15,000 to ₹25,000 effective 17 September 2026, which changes the contribution base for employees who contribute on the ceiling rather than on actual wages.

A beginner should be careful with one common misconception: PF is not simply "12% of gross salary" in every case. Its calculation depends on the employee's PF status, the applicable wage components, the contribution rules and the establishment's circumstances. Since the Labour Codes introduced a common wage definition, payroll teams also need to keep the current statutory definition of wages in mind when reviewing salary structures. For worked examples, see our PF calculation guide and the note on the ₹25,000 EPFO wage ceiling.

Step 9: Calculate ESI, where applicable

Employees' State Insurance provides social-security benefits including medical, sickness, maternity, disability and employment-injury benefits for eligible employees. ESIC currently states that covered employees within the applicable wage limit contribute 0.75% of wages, while employers contribute 3.25%. The generally stated wage limit for coverage is ₹21,000 per month, with specific rules governing continued coverage during a contribution period if wages subsequently rise above the threshold.

Again, HR should not determine ESI by looking at the employee's take-home salary. Coverage, wage definition and contribution-period rules need to be applied correctly.

Step 10: Calculate professional tax

Professional tax is not a single nationwide payroll deduction. It is imposed under state-level legislation, so whether it applies, how much is deducted and what thresholds are used depend on the employee's location and the relevant state rules. This is especially important for companies operating in multiple states. A payroll system should know where the employee is employed, not only how much they earn.

Step 11: Calculate income tax and TDS

Employers estimate the employee's taxable salary for the relevant tax year, account for applicable declarations and deductions, calculate the expected tax liability, and deduct tax from salary through TDS. There is an important 2026 change here.

For salary paid from 1 April 2026, salary TDS is governed by Section 392(1) of the Income Tax Act, 2025, replacing the old Section 192 framework for those payments. The Income Tax Department has instructed employers to reset salary-TDS calculations from 1 April 2026 based on projected income, applicable deductions and the employee's tax regime for Tax Year 2026-27. Payroll software and processes should not simply continue using older section references without review.

Employee tax declarations also feed into payroll. TDS is therefore not something HR calculates once in April and forgets. Changes during the year, including bonuses, salary revisions or employee declarations, can change the projected annual tax liability and therefore the deduction required in later payrolls. Our guide to TDS on salary explains how that recalculation works.

Step 12: Apply other authorised deductions

Other deductions can include salary advance recovery, employee loan recovery, approved benefit deductions, absence-related deductions and other authorised recoveries. The key word is authorised. The Code on Wages restricts employers from making arbitrary deductions from employee wages and identifies permitted categories of deductions. Payroll should not become a convenient place to subtract any amount the company believes the employee owes. There should be a documented basis for the deduction.

Step 13: Calculate net pay

Once earnings and deductions are complete, net pay works out as follows:

But payroll should not be paid immediately after the calculation. It needs to be checked.

Step 14: Review the payroll before approval

Payroll review is one of the most important steps in the process. HR should not only ask "Did the software calculate payroll?" It should ask "Does this payroll make sense?" A useful review compares the current month against the previous month. Look for:

• Unexpected changes in net salary, and negative net pay
• Employees missing from payroll, new employees missing, or former employees still appearing
• Unusual LOP deductions and unexpected PF or ESI changes
• Large TDS movements
• Duplicate reimbursements and missing incentives
• Salary revisions that are not reflected
• Incorrect bank details

Payroll variance reports make these checks much easier. If total company payroll increased by 18% in one month but the company only added one employee, HR should understand why before approving payment.

Step 15: Obtain payroll approval

The final payroll should have an approval process. Depending on company size, that may run from HR prepares, to HR manager reviews, to finance verifies, to an authorised manager approves. In a smaller company fewer people may be involved, but the principle still matters: the person making payroll adjustments should not have to rely on memory to explain later who approved them. A clear approval trail becomes increasingly important as the business grows.

Stage 3: Post-Payroll

Paying salaries is not the end of payroll. Several important activities happen after the payroll is approved.

Step 16: Pay employees

Once payroll is approved, a bank advice file or payment instruction can be created for salary disbursement. The amount transferred should match the approved net-pay amount in payroll. This sounds obvious, but problems arise when HR changes payroll after the bank file has already been generated. The approved payroll, payment file and final payslip should all reflect the same numbers.

Step 17: Generate payslips

Employees should receive a wage slip or payslip showing how their pay has been calculated. The Code on Wages requires employers to issue wage slips in the prescribed manner, and the Ministry of Labour's employer compliance guidance states that wage slips must be issued on or before payment of wages. A useful payslip makes it easy for an employee to understand earnings, deductions, gross pay, net pay, relevant statutory information and the pay period. An employee should not need to email HR every month simply to understand why their take-home salary changed.

Step 18: Deposit and report statutory deductions

Amounts deducted from employees are not simply company money. Employers need processes for depositing and reporting applicable statutory contributions and taxes within the relevant timelines. Depending on the organisation, payroll compliance may include PF contribution and reporting, ESI contribution and reporting, salary TDS, professional tax, state-specific requirements and other applicable statutory obligations.

For salary TDS from the 2026-27 tax year, the Income Tax Department now uses Form 138, which replaced Form 24Q under the Income Tax Act, 2025, as the quarterly statement for reporting salary TDS. This is a good example of why payroll is not a process that can be configured once and then ignored. Tax and labour requirements change, and payroll systems and HR teams have to change with them.

Step 19: Maintain payroll records

Payroll records should allow the company to answer questions months or years later. Why was this employee's salary lower in August? When did their salary revision become effective? Was the leave unpaid? What PF amount was deducted? Who approved the arrear payment?

The Ministry of Labour's current employer handbook requires relevant wage, attendance, overtime, fine and deduction records to be maintained, allows them to be kept electronically, and provides for a five-year preservation period for the relevant wage records. Good payroll record keeping is therefore not simply keeping copies of payslips. It means preserving the information that explains how payroll was arrived at.

What Is the Role of HR in Payroll?

Payroll often sits between HR and finance. HR usually owns or provides much of the employee information that drives payroll: attendance, leave, joining dates, exits, salary revisions, bonuses, deductions and employee records. Finance may manage bank transfers, accounting entries, statutory payments and reconciliation. The exact division differs from company to company. What matters is that responsibilities are clear.

If HR assumes finance will update a salary revision while finance assumes HR has already done it, the employee still gets paid incorrectly. A good payroll process defines who provides each input, who verifies it, who approves payroll, who transfers salaries, and who handles statutory filing.

Why Payroll Errors Happen

Payroll mistakes are rarely caused by difficult mathematics. They usually happen because information is fragmented. Consider a typical small-company process: attendance comes from a biometric machine, leave arrives through WhatsApp, reimbursements come over email, salary revisions sit in an Excel file, a manager sends an incentive amount after payroll has already been calculated, and finance keeps a separate spreadsheet for bank transfers. HR then manually tries to combine everything before salary day.

The problem is not that payroll is impossible. The problem is that every manual handoff creates another opportunity for something to be missed. That is why integration matters.

What Can Be Automated in Payroll?

Automation does not mean HR stops reviewing payroll. It means the system handles repetitive calculations while HR focuses on exceptions and approvals. A payroll system can automate or simplify:

• Pulling attendance into payroll and applying approved leave and LOP
• Maintaining salary structures and applying salary revisions and arrears
• Calculating recurring salary components and applicable PF, ESI, TDS and professional tax
• Generating payslips and bank advice
• Maintaining employee payroll history and producing statutory and management reports
• Giving employees access to their own payslips and tax documents

The goal is not "one-click payroll" for the sake of it. The goal is to reduce the manual movement of the same data between multiple systems. For a broader look at what to evaluate, see our payroll management software guide.

A Simple Monthly Payroll Checklist

For someone processing payroll for the first time, a useful monthly sequence is:

• Before calculation: Confirm new joiners, exits, salary revisions, attendance, leave, LOP, incentives, overtime, arrears, reimbursements and deductions.
• During calculation: Calculate payable earnings, applicable statutory deductions, tax and other authorised adjustments.
• Before approval: Compare payroll with the previous month, investigate unusual changes, validate bank information and obtain approval.
• After approval: Generate the bank payment instruction, disburse salaries, issue payslips, complete statutory deposits and reporting, post payroll into accounts and retain the relevant records.

Following the same sequence every month is one of the simplest ways to make payroll more reliable.

How MedleyHR Helps Simplify Payroll

For a small company, spreadsheets may work when there are five employees. The difficulty usually appears as the team grows. Attendance starts changing payroll, people join and leave, different employees have different salary structures, managers send variable-pay information, employees request payslips and tax documents, and PF, ESI, TDS and professional tax calculations have to remain consistent. MedleyHR connects payroll with employee records, attendance, leave and other HR information so HR does not have to rebuild the payroll input every month.

MedleyHR supports automated payroll runs with approval workflows, PF, ESI, TDS and professional tax calculations, attendance and leave integration, salary structures and revisions, loans and reimbursements, bank advice, employee payslips, Form 130 (formerly Form 16), employee self-service, multi-branch payroll, and payroll and compliance reports. Employees can open payslips and other documents through self-service instead of requesting them from HR every month. The benefit is not simply faster calculation. It is having the employee information that affects payroll connected to the payroll itself.

Payroll Is Ultimately About Trust

Payroll is one of the few HR processes every employee experiences personally every month. An onboarding process can be slightly inconvenient and employees may forget about it. A payslip can arrive a day late and everyone notices. A ₹2,000 unexplained deduction can immediately turn into an HR issue.

That is why good payroll is not only about compliance or calculation accuracy. Employees should be able to trust that their attendance has been captured correctly, approved leave has been considered, deductions can be explained and the salary promised to them will arrive correctly and on time. The best way to build that reliability is to stop treating payroll as a last-day-of-the-month calculation. It is a connected process that begins with accurate employee data, runs through attendance and leave, continues through salary calculations and statutory deductions, and ends only when salaries, payslips, records and compliance are complete.