Payroll Process in India: A Step-by-Step Guide for 2026

What changed in Indian payroll in 2025-26

Five changes reshaped payroll within a year, and a salary sheet built before them is probably out of date. The table lists them with their dates.

Labour is a subject on which states also make rules. For a private employer in Delhi, some details depend on Delhi’s own rules under the Codes. Check the latest Delhi Labour Department notification before relying on the central position.

What do you need before the first payroll run? A set-up checklist

Payroll only runs smoothly if the employee and employer records are complete before the first salary is due. Collect these once, then update them when something changes.

• Appointment letter: the Labour Codes make a written appointment letter mandatory for every new employee. It should state the salary and its components.
• Salary structure: basic pay, dearness allowance (DA), HRA, conveyance and any other allowances, fixed for each employee.
• Employer registrations: EPF applies to establishments with 20 or more employees and ESI to those with 10 or more (MoLE Compliance Handbook). A TAN is needed to deduct TDS.
• Employee details: PAN, Aadhaar, bank account, UAN for PF, the ESIC insurance number where ESI applies, and the tax regime the employee chooses.
• Tax declarations: investment and HRA proofs arrive on Form 124 (earlier Form 12BB). Under the new tax regime, which is the default under section 202, few deductions apply.

Step 1: Collect attendance, leave and other inputs

Every payroll starts with a fixed input cut-off date, usually a few days before month end. After the cut-off, late changes wait for next month’s arrears.

The inputs for each employee are days present, paid leave, loss of pay (LOP) days and overtime hours. Add new joiners and leavers with their dates, arrears, bonus or incentive amounts, and any loan or advance recovery. Unrecorded leave leads straight to a wrong salary, so confirm LOP days with each department head before processing.

Step 2: Calculate gross salary

Gross salary is the monthly salary adjusted for paid days, plus any variable pay for the month. Most employers use this formula:

Earned gross = monthly gross × paid days ÷ days in the month

Example: an employee on ₹30,000 a month takes 2 days of LOP in a 30-day month. Paid days are 28, so earned gross is ₹30,000 × 28 ÷ 30 = ₹28,000. Some employers divide by a fixed 26 or 30 days instead. Whatever the policy, apply it to every employee in the same way.

Check each gross figure against the minimum wage. In Delhi, the rates in force from 1 April 2025 are ₹18,456 a month for unskilled, ₹20,371 for semi-skilled and ₹22,411 for skilled workers (Delhi Labour Department). Figures from an “October 2025” order that circulated online came from a forged document, which the Delhi government declared fake, so don’t use them.

Step 3: Work out “wages” under the Labour Codes

Statutory “wages” is not the same as gross salary. PF and several other benefits are calculated on it, so this step decides how much is deducted.

Under the Codes, wages means basic pay, DA and retaining allowance. It excludes items such as HRA, conveyance allowance, overtime, commission, statutory bonus, gratuity and the employer’s PF contribution. The key rule: if the excluded items add up to more than 50% of total pay, the excess is added back to wages (MoLE Compliance Handbook). This stops employers from keeping basic pay artificially low.

Here the exclusions total ₹24,000, which is ₹4,000 more than 50% of total pay (₹20,000). That ₹4,000 is added back, so wages for PF are ₹16,000 + ₹4,000 = ₹20,000, not ₹16,000.

Step 4: Apply statutory deductions

Four deductions come out of salary by law, where they apply. The table shows the rates as of 24 September 2026. Our PF and ESI calculation guide works through each one with numbers and Excel formulas.

TDS on salary

The employer estimates the employee’s taxable salary for the whole year, calculates the tax and deducts it in equal monthly parts under section 392(1) of the Income-tax Act, 2025. Under the new regime, salaried employees get a standard deduction of ₹75,000, and the rebate under section 156(2) removes tax on total income up to ₹12 lakh. So an employee whose only income is a salary of up to ₹12.75 lakh a year usually has no TDS. The TDS meaning and return filing guide covers the wider TDS system.

Other deductions

Loan recoveries, advances, canteen charges and fines can also be deducted, within limits. Total deductions in a wage period must not exceed 50% of wages under the Code on Wages.

Step 5: Pay net salary on time

Net salary is earned gross minus all deductions, and the Code on Wages sets firm deadlines for paying it. Monthly wages must be paid by the 7th day of the following month. When an employee leaves, whether by resignation, dismissal or termination, all due wages must be paid within two working days (section 17). Gratuity, where due, must be paid within 30 days.

Most employers pay by bank transfer, which also leaves a record for the wage register.

Step 6: Issue payslips and keep registers

A payslip shows each employee how their net pay was reached. It should list paid days, each earning component, each deduction, net pay, and the employer’s PF and ESI contributions where the employer chooses to show cost to company.

Keep the salary register, attendance records and payslip copies together for each month. Inspectors under the Codes ask for these records, and they also settle most salary disputes quickly.

Step 7: Deposit challans and file returns

Deductions only become compliance once they reach the government. Three deposits fall due every month, and TDS also needs a quarterly return.

Late PF, ESI and TDS payments all attract interest or other charges, so treat the 7th and the 15th as fixed dates in the payroll calendar.

Year-end payroll: Form 130 and reconciliation

At the end of each tax year, the employer issues Form 130 (the new name for Form 16) to every employee whose tax was deducted. It is downloaded from TRACES and must be issued by 15 June. Where perquisites are given, Form 123 (earlier Form 12BA) goes with it. Employees use it to file their own return; our ITR filing guide for beginners walks through that step.

Before issuing certificates, match three figures: TDS deducted in the payroll, TDS deposited by challan, and TDS reported in the four Form 138 returns. Employees see the reported TDS in their tax statement, Form 168 (earlier the AIS), and any mismatch shows up there first.

Common payroll mistakes to avoid

• Calculating PF on basic pay alone and ignoring the 50% add-back rule.
• Still using the ₹15,000 PF ceiling after 17 September 2026.
• Paying a leaving employee’s final wages weeks later instead of within two working days.
• Deducting TDS under the old regime without a declaration from the employee, when the new regime is the default.
• Using unofficial minimum wage tables instead of the state labour department’s own order.

These are practical skills rather than theory. IPA’s payroll management course in Delhi runs for 3 months and covers salary processing, PF and ESI returns and TDS on Tally Prime and Zoho Payroll. Strong spreadsheet skills help at every step, which the Advanced Excel course covers. If you are weighing payroll as a job, the payroll executive salary and career guide sets out the roles and pay data. In small firms payroll often sits with the accountant, a role covered in our guide on how to become a computer accountant.

How we teach this at IPA

IPA’s payroll course splits this process into five modules: payroll processing, income tax and TDS, PF and ESI compliance, statutory compliance and payroll software. Salary slips and attendance come first, then the deductions and returns built on them, so you see the whole monthly cycle rather than one step of it.

Frequently asked questions