Calculating payroll is a tedious job for HR and determining the right payroll deductions while undergoing the calculation process is important from a statutory standpoint. But what are the payroll deductions in India, and how do you calculate the right payroll deductions?

This comprehensive payroll deduction guide will answer all your doubts related to payroll deductions in India.

What is payroll deduction?

Payroll deductions are the amounts that are deducted or withheld from the paycheck of the employees in the form of taxes or voluntary deductions. These payroll deductions hence determine the net pay or the take-home pay of the employees after deducting the relevant amount from the gross pay.
Now the next question is,

What are the applicable payroll deductions in India?

1. Provident Fund (PF)

Provident Fund (PF) is a benefit scheme for employees, whereby the employer and the employees contribute to the EPF account monthly. Here, the employer is responsible to deposit the given amount in the EPF account and the employee’s EPF share is deducted from their payroll every month.

To avail of EPF benefits, the employee is required to have a Universal Account Number (UAN) provided by EPFO, which acts as an umbrella for multiple member Ids allotted to individuals by different employers.

Applicability

Provident Fund Scheme is a mandatory payroll deduction for organizations with a strength of over 20 employees. Moreover, organizations with an employee strength of fewer than 20 employees can enroll for voluntary registration to avail of the EPF Scheme.

Contribution Rate

The EPF contribution rate for employees is 12% of the basic salary, excluding HRA, that is, an amount of 12% will be taken out from the employee’s payroll in accounts of EPF payroll deduction. An equal amount is required to be contributed by the employer to the EPF account of the employee.

1. A contribution rate of 10% will be applicable for,
2. Companies with less than 20 employees.
3. Companies that underwent a loss of an amount greater than their net worth.
4. Companies involved in the manufacturing or trading of beedi, brick, jute, or guar gum.
5. A company that has been declared a sick industrial company by the Board for Industrial and Financial Reconstruction (BIFR).

Due Date

The due date for EPF payment deduction is the 15th of every month, and the payment and return filing for EPF is required to be done on the same date. The due date to file the annual EPF return is 25th April.

Penalty

In case of non-compliance with the statutory requirements of the EPF scheme,

1. An interest rate of 12% will be applied on a delay for every day.
2. For a delay of over 2 months in the EPF payment, 5% p.a. interest will be applicable.
3. 10% p.a. interest rate will be applicable for a delay of over 2 months but less than 4 months.
4. For a delay of 4-6 months, the applicable interest rate will be 10% p.a.
5. For over 6 months of delay, a 25% p.a. interest rate will be applicable.

Employees' State Insurance (ESI)

The employee States’ Insurance is the amount paid for the full coverage of medical leaves. ESI is a self-governed and self-financed social security scheme under the Employees State Insurance Act 1948 that came into being to protect the interest of employees.

Under the ESI scheme, the employees of an organization with more than ten employees are protected against financial distress due to sickness, disablement, or death from employment injuries.

Applicability

ESI is applicable to every individual earning less than Rs. 21,000, working in an organization with more than ten employees who have been employed in non-seasonal factories. However, the strength of employees varies from 10-20 depending on the state in which the organization or establishment is based.

Contribution Rate

The ESI contribution rate at present is 3.25% of the wage for the employer and 0.75% of the wage for the employee. This rate is required to be paid on a monthly basis and is deducted from the wage of the employee. Any employee earning an average amount of up to Rs. 176 daily is exempt from the contribution to ESI.

Due Date

The due date to undergo ESI contribution for every month is the 15th of the following month. A half-yearly return is also required to be filed by the employer on 11th May and 11th November of every year.

Penalty

In case of non-compliance with the ESI scheme guidelines, an interest rate of 12% per annum will be applicable to the employee every month. It may also lead to imprisonment of two years or a fine of up to Rs. 5,000.

Professional Tax

Professional tax is levied on professionals, traders, and employees, based on the income of such individuals. Professional tax is a direct tax that applies to those individuals who earn income from employment, trading activities, or professions.

Applicability

Professional tax is applicable in the following cases,

1. An Individual
2. A Hindu Undivided Family (HUF)
3. A Company/Firm/Co-operative Society/Association of persons or a body of individuals, whether incorporated or not

Contribution Rate

The income tax contribution rate varies from state to state. The contribution rate applicable to some key states has been mentioned below,

Penalty

A penalty may be applicable to an individual for not registering for professional tax as per the state’s legislation. Furthermore, in case of late payment of taxes, penalties are levied on the basis of the guidelines of the state.

Labour Welfare Fund

Labour welfare fund is statutory compliance managed by the respective state authorities to provide monetary aid to those in need. Under the labour welfare fund, facilities are provided to labourers to improve their work conditions and provide social security, hence, removing their living standards.

Applicability

The Labour Welfare Fund Act was introduced by the government to provide social security to workers in 16 out of 37 states including union territories. Provided here is the list of states where labour welfare fund is applicable,

• Andhra Pradesh
• Chandigarh
• Chhattisgarh
• Delhi
• Goa
• Gujarat
• Haryana
• Karnataka
• Kerala
• Madhya Pradesh
• Maharashtra
• Odisha
• Punjab
• Tamil Nadu
• Telangana
• West Bengal

Contribution Rate

Employee contribution to the Labour Welfare Fund might be annual, half-yearly, or monthly, depending on the governing laws of the state. The employer is required to make the required deductions from the salary of the employee and submit the amount to the Labour Welfare Fund Board as per the prescribed guidelines.

National Pension Scheme (NPS)

National Pension Scheme is a voluntary deduction by employees as a means of retirement savings, enabling the subscriber to attain the benefit of systematic savings during their work cycle. The savings deducted from the bank accounts of the employees are pooled and invested by PFRDA-regulated fund managers as per the investment guidelines.

Applicability

NPS is mandatory for Central Government employees, except for Armed Forces who have been recruited from January 2004, and all states except for West Bengal are applicable to adopt NPS for their employees.

Contribution Rate

Government employees are required to make a monthly contribution at the rate of 10% p.a. from their salary and an equal contribution is made by the government. For the employees appointed under the central government, the contribution rate is 14% p.a.

To know about the common payroll mistakes and how to solve them, visit: How to get rid of wrong payroll deductions?

How can you ensure accuracy in Payroll Deductions?

The job of payroll calculation is subject to mistakes and inaccuracies. As discussed previously in this blog, payroll calculation mistakes can lead to penalties and statutory litigations. But you don’t have to worry about payroll miscalculations resulting from manual calculations by automating your payroll management with Webtel.
Webtel’s Payroll Management System offers the fastest and most secure payroll management and calculation assistance. With its smart and user-friendly features, Webtel’s PMS can solve all your payroll calculation worries.
The Payroll Management Solution offered by Webtel provides the following features in an easy and hassle-free manner.

1. Salary Calculation
2. Reimbursement Management
3. Loan & Advance Management
4. Over Time Management
5. Bonus Calculation
6. Full & Final Settlement
7. Tax Declarations or investment proofs
8. Gratuity Calculation
9. Pay slips & Reimbursement Slips
10. Bank Transfer Sheet
11. Salary Register & Various reports
12. Increment Module