How to run payroll in India: a step-by-step guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll in India means calculating gross pay, applying statutory deductions (EPF, ESI, TDS), depositing those deductions with the relevant authorities, and filing the required returns — all within fixed deadlines. Get any one step wrong and you face penalties, employee disputes, or both.
Gather the inputs before you calculate anything
Payroll accuracy starts with clean data. Before you run a single calculation, confirm you have:
- A signed offer letter or contract with the agreed CTC or gross salary
- PAN and Aadhaar details for every employee
- Bank account details verified against the employee's identity
- Investment declarations (Form 12BB) submitted by each employee at the start of the financial year
- Attendance, leave, and loss-of-pay data for the month
If an employee has not submitted their investment declaration, deduct TDS under the new default regime — the one with slabs rising to 30% and a 4% health and education cess. Do not assume; default to the regime in force.
Structure the salary and calculate gross pay
Break each employee's salary into its components: basic pay, house rent allowance, special allowance, and any variable or performance-linked pay. The split matters because EPF contributions are calculated on specific wage heads, and certain allowances have tax treatment implications.
Once you have the components, add them up for the month. Factor in any additions (arrears, bonus, incentive payouts) and any deductions for loss of pay based on the number of working days the employee was actually present.
Apply statutory deductions
This is where compliance lives. Four main deductions apply to most employers.
EPF. If your establishment is covered under the Employees' Provident Fund and Miscellaneous Provisions Act, both the employee and the employer contribute 12% of the applicable wage. The employee's 12% is deducted from their salary. The employer's 12% is an additional cost on top. Deposit both contributions to the EPFO by the 15th of the following month. File the ECR (Electronic Challan cum Return) at the same time.
ESI. For employees whose gross wages fall below the statutory threshold, ESI contributions are mandatory. The employee's share and the employer's share are both calculated as a percentage of gross wages. Deposit ESI contributions by the 15th of the month following the wage month and file the monthly return.
TDS. Project each employee's annual taxable income, apply the applicable slab rates under whichever tax regime they have chosen (or defaulted to), subtract the section 87A rebate where eligible, add the 4% cess, and arrive at the annual tax liability. Divide that by the remaining months in the financial year to get the monthly TDS amount. Deposit TDS with the government by the 7th of the following month (30th April for March). File Form 24Q every quarter.
Professional Tax. This is a state-level levy. Rates and slabs differ by state. Check the rules for every state in which you have employees, deduct the correct amount, and deposit it with the respective state authority.
Pay employees and issue payslips
Once deductions are calculated, transfer the net salary (gross minus all deductions) to each employee's bank account. Most employers run this on a fixed date — typically between the last day of the month and the 7th of the following month.
Issue a payslip for every pay period. A proper payslip shows gross earnings broken down by component, each statutory deduction with the applicable rate, and the net amount paid. Payslips serve as the primary record if an employee disputes their salary or queries their tax deductions.
File returns and issue annual documents
Quarterly compliance does not end with depositing money. You must file Form 24Q — the quarterly TDS return for salary — within the deadline for each quarter. After the financial year closes, issue Form 16 to every employee by the 15th of June. Form 16 is their official certificate of tax deducted at source and is what they use to file their personal income tax returns.
Keep payroll registers, EPF and ESI challans, TDS payment receipts, and Form 24Q acknowledgements for at least the minimum retention period required under applicable law. Under India's four consolidated Labour Codes, which are in force from 2025, record-keeping and compliance obligations have been rationalised — review your processes against the new Code on Wages and the Code on Social Security to make sure your documentation meets current standards.
Account for gratuity as a long-term liability
Gratuity is not a monthly deduction in the same way as EPF or TDS, but it is a statutory obligation you must plan for. An employee becomes eligible after completing five years of continuous service. The payout is calculated on last drawn salary and years of service. Many employers provision for gratuity monthly as an accrual, either by funding a group gratuity scheme or by maintaining an internal provision. Ignoring it until someone resigns or retires creates a cash-flow problem — and a legal one.
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