How to Run Payroll in India: The Complete Monthly Process

How to run payroll in India each month comes down to seven steps: freeze inputs by a cut-off date, lock attendance and leave, calculate gross pay, apply statutory deductions (EPF, ESI, professional tax, TDS), get finance approval on the register, disburse via bank file, then file returns and deposit dues. Each step needs a named owner and a fixed date.

The payroll cycle in India, in order

A monthly payroll cycle in India runs across roughly three weeks: about ten days of input collection, two or three days of calculation and checking, one day of approval and disbursal, and then the filing window that closes in the middle of the following month.

1. Freeze inputs at a published cut-off date.
2. Lock attendance, leave and loss of pay.
3. Calculate gross earnings, including arrears and one-time payments.
4. Apply statutory and voluntary deductions.
5. Review the register and obtain approval.
6. Disburse salaries and release payslips.
7. Deposit dues, file returns and close the month.

The order matters more than the tooling. Almost every payroll error traces back to a step that was run before the previous one had finished.

Step 1: Freeze inputs at a cut-off date

Pick a fixed cut-off, commonly between the 20th and the 25th, and publish it to every function that feeds payroll. After that date, nothing enters the current month's run.

The inputs to collect:

• New joiners with date of joining, salary structure, PAN, UAN or previous PF details, bank account and Aadhaar.
• Exits with last working day, notice recovery and full and final settlement instructions.
• Salary revisions with the effective date, not just the approval date.
• One-time payments: incentives, statutory bonus under the Payment of Bonus Act, 1965, retention payouts, arrears.
• Reimbursement claims approved for the month.
• Loan and advance recovery schedules.
• Tax regime elections and investment proofs, which drive the TDS calculation.

What breaks here

Late arrivals. A revision approved on the 28th with effect from the 1st becomes next month's arrear, and if nobody tracks it, it becomes a complaint in the third month. A missing PAN forces TDS at a higher rate under Section 206AA of the Income-tax Act, 1961, and a missing or duplicate UAN blocks the EPF ECR upload. Keep a rejected-input log and process those items as arrears in the next cycle rather than reopening a frozen run.

Step 2: Lock attendance and leave

Loss of pay is the single input that changes net pay for the largest number of employees. Lock the attendance period, push pending regularisations and leave approvals to managers with a hard deadline, then convert the approved data into paid days, LOP days and overtime.

Reconcile three numbers before moving on: total employees on roll, total paid days across the register, and the count of employees with any LOP. If the LOP count looks unusually high or low against last month, investigate before calculating.

What breaks here

Managers who approve leave after the lock. Shift workers whose overtime sits in a separate spreadsheet. Employees who joined mid-month, whose attendance starts from the date of joining and not the 1st. Sandwich leave and holiday treatment applied inconsistently across locations. Write the LOP rule down once and apply it everywhere, because an undocumented rule gets re-decided every month.

Step 3: Calculate gross earnings

Gross pay is the fixed structure pro-rated for paid days, plus variable and one-time components. Run the calculation in a defined sequence: pro-rate fixed components, add arrears, add variable pay, add reimbursements paid through payroll, then total.

Two structural points worth confirming annually:

• Basic pay drives EPF, gratuity and often bonus. Structures that push most of the package into special allowance change the statutory cost, and the EPFO and the courts have taken views on which allowances count as basic wages for provident fund. Get the structure reviewed rather than assuming.
• The Code on Wages, 2019 changes the definition of "wages" and the treatment of allowances, but implementation timelines have moved. Check the current notification status with the Ministry of Labour and Employment before redesigning salary structures around it.

What breaks here

Pro-ration method. Dividing by calendar days, by a fixed 30 days, or by working days gives three different answers for a February joiner. Pick one, document it in the payroll policy, and do not switch mid-year. The other frequent failure is arrears calculated on the new structure without recomputing the statutory deductions for the arrear months.

Step 4: Apply statutory deductions

This is where the Indian payroll process differs most from a generic one. Four deductions apply to most employers, and the rules sit with four different authorities.

Provident fund

Governed by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and administered by the EPFO. Employee and employer contributions are a percentage of PF wages, subject to a statutory wage ceiling, with the employer share split between the provident fund and the pension scheme. Confirm the current percentages, ceiling and administrative charges on the EPFO site, and confirm whether your establishment applies the ceiling or contributes on full wages.

Employees' State Insurance

Governed by the ESI Act, 1948 and administered by the ESIC. It applies to employees whose gross wages fall below the prescribed threshold, in implemented areas. ESI runs on two fixed contribution periods, April to September and October to March, and an employee who crosses the wage threshold mid-period continues to contribute until that period ends. Verify the current rates and wage limit with ESIC.

Professional tax

Professional tax is levied by state governments, so slabs, deduction frequency and return due dates differ by state, and several states and union territories do not levy it at all. If you employ people in more than one state, maintain a state-wise matrix and review it each year after state budgets.

TDS on salary

Deducted under Section 192 of the Income-tax Act, 1961, on estimated annual income spread across the remaining months of the financial year. The regime under Section 115BAC is the default unless the employee opts out, so capture the election in writing at the start of the year and again when proofs are collected. Recompute TDS whenever salary changes, when an employee joins mid-year with previous employer income, or when proofs are rejected.

What breaks here

Multi-state professional tax is the most common miss for distributed teams. ESI mid-period exits and threshold crossings are the second. Labour Welfare Fund, which several states levy half-yearly or annually, gets forgotten because it does not appear every month. Keeping deduction rules configured centrally in one system, which is how HRZyra handles them, avoids the version drift that creeps into spreadsheet-based rules. For the rule-by-rule detail, see our guide to Indian statutory compliance for PF, ESI, professional tax and TDS.

Step 5: Review the register and get approval

Do not disburse off an unreviewed register. Run these checks before sending it for sign-off:

• Headcount reconciliation: opening headcount, plus joiners, minus exits, equals closing headcount on the register.
• Month-on-month variance per employee, with an explanation required above a set threshold.
• Zero or negative net pay cases.
• Employees with no PF or ESI deduction who should have one, and the reverse.
• Duplicate bank accounts across employee IDs.
• Total gross, total deductions and total net tied back to the previous month plus explained movement.

What breaks here

Approval treated as a formality. If the approver only sees a single net figure, the approval adds nothing. Give the approver the variance report, not the register.

Step 6: Disburse and release payslips

Generate the bank file in your bank's format, upload it, and confirm the debit and the success count against the register count. The Payment of Wages Act, 1936 sets outer limits for wage payment dates based on establishment size, so build the calendar backwards from payday rather than from whenever the calculation happens to finish.

Release payslips only after the credit is confirmed. Publishing payslips before disbursal turns every bank rejection into a support ticket. An employee self-service portal handles payslip access, tax statements and proof submission without the payroll team emailing PDFs, which is one reason teams move to payroll software built for Indian pay rules.

What breaks here

Bank rejections from stale or incorrect account details, usually for recent joiners. Build in a buffer: a defined same-day re-run for rejected credits, with corrected details written back to the employee master so the same record does not fail next month.

Step 7: Deposit, file and close

Disbursal is not the end of the payroll cycle. The compliance tail runs into the following month and, for TDS, into the following quarter.

• TDS deposit: monthly challan payment against tax deducted under Section 192, with a different due date for the March deduction. Confirm current dates on the Income Tax Department portal.
• EPF: generate and upload the ECR, then pay the challan within the EPFO deadline for the following month.
• ESI: file the monthly contribution and pay within the ESIC deadline.
• Professional tax and Labour Welfare Fund: as per each state's frequency and due date.
• Quarterly TDS return: Form 24Q, followed by Form 16 issuance after the financial year ends.

Then close the month: pass the payroll journal to finance, reconcile the salary payable and statutory payable accounts, archive the register and challans, and apply the master data corrections logged during the run.

What breaks here

Late deposits attract interest and damages, and delayed PF credit shows up in employee passbooks, which generates queries the payroll team then has to answer. The second common failure is the register and the general ledger drifting apart because reimbursements or arrears were booked differently in each. Reconcile monthly, not at year end.

A monthly payroll calendar worth copying

Set these as recurring dates with named owners:

• Day 20 to 22: inputs due from HR, finance and reporting managers.
• Day 23: attendance and leave lock.
• Day 24 to 25: calculation and internal checks.
• Day 26: variance review and approval.
• Day 27 to 28: bank upload, credit confirmation, payslip release.
• Following month, first half: statutory deposits and filings.
• Following month, by day 20: general ledger reconciliation and month close sign-off.

Shift the dates to suit your payday. Keep the sequence.

Frequently asked questions

What are the steps to run payroll in India each month?

Seven steps, in order: freeze inputs at a published cut-off date, lock attendance and leave to fix loss of pay, calculate gross earnings including arrears, apply EPF, ESI, professional tax and TDS, review the register and obtain approval, disburse through a bank file and release payslips, then deposit dues, file returns and reconcile the month.

What is a typical payroll cut-off date in India?

Most Indian employers set the input cut-off between the 20th and the 25th, leaving three to five working days for calculation, review, approval and bank upload before payday. Publish the date to HR, finance and reporting managers, and process anything received after it as an arrear in the following cycle rather than reopening the run.

Which statutory deductions apply to Indian payroll?

Provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, ESI under the ESI Act, 1948 for employees below the prescribed wage threshold, professional tax levied by individual state governments, and TDS on salary under Section 192 of the Income-tax Act, 1961. Several states also levy Labour Welfare Fund contributions.

Why does professional tax differ between employees in the same company?

Professional tax is a state levy, not a central one. Slabs, deduction frequency and return due dates are set by each state government, and several states and union territories do not levy professional tax at all. An employer with staff across multiple states must maintain a state-wise deduction matrix and review it after each state budget.

What is the most common payroll error in Indian companies?

Inputs arriving after the cut-off, particularly salary revisions with a retrospective effective date and mid-month joiner details. These get missed or force a reopened run. The fix is a rejected-input log that carries each item into the next cycle as an arrear, with statutory deductions recomputed for the arrear months.

Should payslips be released before or after salary credit?

After. Confirm the bank debit and the success count against the payroll register first, then publish payslips. Releasing payslips before disbursal means every failed credit, usually caused by stale account details for recent joiners, turns into an employee query that the payroll team has to handle one at a time.