Understanding Company Payroll

Introduction to Payroll

What is Payroll?

The process of paying employees of a corporation is known as payroll. It entails gathering the list of workers who need to be paid, keeping track of hours worked, figuring out each worker's compensation, delivering salaries on schedule, and documenting payroll costs.

Payroll Terms

  • Gross Salary: It is the monthly or yearly salary paid to an employee before any mandatory or voluntary deductions are calculated. For example, if the gross salary of a Ravi is Rs. 60,000 and the basic salary is Rs. 24,000, they would get Rs. 24,000 as a fixed salary along with other allowances, like DA, HRA, conveyance, and any other allowance.
  • Net Salary: It is the amount of salary which the employee receives after the deductions. For example, if the gross salary of a Ravi is INR 60,000 and the basic salary is Rs, 24,000, Rs. 9600 HRA, Rs 1600 conveyance, Rs 24800 other allowance. Deduction PF Rs. 1800, PT Rs.200, Tax Rs.2000 than Net pay Rs.56000. Calculation Gross Salary – Deduction = Net Salary.
  • Overtime: Whenever an employee works more hours than the usual hours of work, the employer must pay an extra amount of money to compensate for these hours. The overtime payment is more than the average salary or gross pay of the employee.
  • Fixed Pay: Fixed pay is the guaranteed salary that employees get on a monthly basis irrespective of their individual performance, team’s performance, or company’s performance. Fixed pay is pre-defined and is clearly communicated to employees at the beginning of their job. Example Basic Salary, DA, HRA, etc.
  • Variable Pay: A variable pay that an individual draws on the basis of hours spent in completing the certain amount of work allowance: Allowance is the fixed amount paid to employees, in addition to basic salary, for covering expenses of activities such as traveling to the workplace, renting a house, or eating food, internet etc.
  • Basic Salary: It is the employee’s basic income and is around 40% of the total salary. The basic salary is a fixed component of the CTC (Cost to Company) package.
  • House Rent Allowance: It is a salary component that covers the housing expenses of employees.
  • Dearness Allowance: Dearness Allowance (DA) is paid to government employees.
  • Conveyance Allowance: conveyance allowance to its employees for traveling from home to workplace & and vice-versa. The conveyance allowance exemption limit is Rs. 1600 per month (Rs. 19200 per year).
  • Bonus: The bonus is dependent on the profitability of the organization and can be given to employees based on individual performance or the company’s overall performance. It can be given to all employees on a festival such as Diwali or can be given to an individual employee on joining the company, or for staying with the company for a long period of time.
  • Cost of Company: The salary offered to employees in India is in form of CTC and the detailed breakup of various salary components (basic, HRA, PF, allowance, etc.) that are included in CTC is given to employees in their offer letters.

Abbreviation of terms of Payroll

  • DA: Dearness Allowance
  • HRA: House rent Allowance
  • CTC: Cost of Company
  • OT: Overtime
  • LTA: Leave Travel Allowance
  • PF: Provident Fund
  • PT: Professional Tax
  • LWF: Labour Welfare Fund
  • TDS: Tax deducted at Source


  1. Tax Deductible at Source (TDS)

It refers to the amount of tax deducted by your employer on behalf of the Income Tax department. You can reduce TDS by investing in tax-saving schemes and submitting the appropriate investment proofs to your employer.

  1. Professional Tax

This pay slip component is levied on all individuals, including the salaried, professionals and traders who have an income. It amounts to Rs.2,500 per year.

  1. Employees Provident Fund (EPF)

This comprises a compulsory deduction in your salary slip. This component of your salary slip is at least 12% of your basic salary and is diverted to an EPF account. Contribution towards the EPF is exempted from tax as per Section 80C of the Income Tax Act.

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Manisha Gupta
Role : Finance Executive
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