How to Run Payroll in India: A Step-by-Step Guide
CTC, gross, in-hand, salary structure, the 50% wage rule, proration, arrears, overtime, LOP and the bank advice file for Indian payroll.
Running payroll in India means converting an employee's cost-to-company (CTC) into a net salary payment while staying compliant with provident fund, ESI, professional tax, TDS and labour law. This guide walks through the full process from salary structure to bank credit.
What is the difference between CTC, gross and in-hand?
| Term | Meaning | Includes | Excludes | |---|---|---|---| | CTC | Cost to company | Gross + employer PF/ESI + other benefits | Employee deductions | | Gross | Pre-deduction salary | Basic + HRA + allowances | Employee PF, ESI, PT, TDS | | In-hand | Net take-home | Gross minus employee deductions | Employer contributions |
How do you design a salary structure?
A typical structure has three parts: basic, HRA and special allowance. Some employers add fixed allowances for transport, medical, telephone or retention.
| Component | Typical share | Tax note | |---|---|---| | Basic | 40–50% of gross | Fully taxable, used for PF/ESI | | HRA | 20–30% of gross | Exempt under Section 10(13A) if rent is paid | | Special allowance | Balance | Taxable |
The Labour Codes require that basic and dearness allowance together make up at least 50% of wages. This is often called the 50% wage rule.
What is the Labour Codes 50% wage rule?
The Code on Wages, 2019 says basic pay and dearness allowance together must be at least 50% of an employee's wages. The rest can be allowances. This affects how employers design salary structures because statutory contributions like PF depend on the basic component.
How is payroll prorated?
Proration is used when an employee joins, resigns or takes unpaid leave in the middle of a month. The formula is:
Prorated gross = (Monthly gross / Calendar days in month) × Days present
Most companies use calendar days. Some use fixed 30-day months, but this must be clearly stated in the appointment letter.
How are arrears handled?
Arrears are past salary dues. They are paid in the month they are settled and taxed in that month. Arrears are added to the employee's gross for the month and statutory deductions are recalculated. Employers should issue an arrears payslip and keep a record for audit.
How is overtime calculated?
Overtime rules vary by industry and state. The Factories Act and Shops and Establishments Acts generally require overtime to be paid at twice the normal hourly rate. The hourly rate is usually derived from basic plus dearness allowance.
What are bonus and ex-gratia payments?
| Payment | When | Taxability | |---|---|---| | Statutory bonus | As per Payment of Bonus Act (₹21,000 basic limit) | Exempt up to ₹8,333 per month for some structures | | Ex-gratia | Employer discretion, often festival or year-end | Taxable |
Statutory bonus must be paid to employees whose basic plus DA is ₹21,000 or less per month. The bonus amount is between 8.33% and 20% of wages.
What is leave without pay (LOP)?
Leave without pay is absence not covered by paid leave. It reduces the monthly salary on a prorated basis. LOP days also create NCP days for provident fund, which affects pensionable service.
What is a payroll register?
A payroll register is a monthly summary that shows for each employee: gross salary, allowances, deductions, employer contributions, net pay and payment status. It is a legal record and must be maintained for inspection.
What is a bank advice file?
A bank advice file is the instruction file sent to the bank to credit salaries. It usually contains employee name, bank account number, IFSC and net amount. It can be a CSV, Excel or bank-specific format. The file should be generated after payroll is finalized and net pay is confirmed.
Worked example
An employee joins on 11 July with a monthly gross of ₹60,000. July has 31 days.
- Days present: 21 (11 July to 31 July)
- Prorated gross: (₹60,000 / 31) × 21 = ₹40,645
- Basic: 50% of ₹40,645 = ₹20,323
- HRA: 20% of ₹40,645 = ₹8,129
- Special: remaining ₹12,193
- Employee PF: 12% of basic = ₹2,439
- Professional tax: ₹208 (Karnataka slab)
- TDS: calculated separately
- Net pay: gross minus employee deductions
Frequently asked questions
- What is the difference between CTC, gross and in-hand salary?
- CTC is the employer's total cost including statutory contributions. Gross is the amount before employee deductions. In-hand is what the employee receives after PF, ESI, PT and TDS.
- What is the Labour Codes 50% wage rule?
- The Code on Wages, 2019 requires that at least 50% of an employee's wages consist of basic pay and dearness allowance. The remaining 50% can be allowances.
- How is payroll prorated for mid-month joiners?
- Gross pay is divided by calendar days in the month and multiplied by the number of days the employee actually worked or was present.
- What is a bank advice file?
- A bank advice file is the list of net salaries and account numbers sent to the bank to process bulk salary credits.