Pre-Payroll: Policies, Master Data and the Cutoff Date
Payroll starts long before anyone opens the salary sheet. Three things must be settled and frozen: policy, master data and the attendance cutoff. Policy means the rules the run will apply: the wage divisor (26 or calendar days), the half-day and late-mark rules, the overtime multiplier and approval requirement, leave types and LOP treatment, and statutory settings for EPF, ESIC, PT and TDS. If any of these is decided during the run, the run is not repeatable.
Master data is the employee record: name, employee code, date of joining, department, branch and work location (which drives PT), bank account and IFSC, PAN, UAN and ESIC IP number, salary structure with each component, tax regime declaration, and contract type with start and end dates for fixed-term staff. Every month, the pre-payroll step is to capture changes: joiners with their full data, exits with last working day and full-and-final flag, transfers between branches, salary revisions with effective dates and any change to bank details (verified by a second person, because bank changes are the classic payroll fraud).
The attendance cutoff is the date after which no attendance change is accepted for the current payroll. Most Indian companies close attendance on the 25th or 26th and pay for the calendar month, treating the last few days as presumed present and adjusting in the next month. Whatever date you pick, publish it, and lock the attendance record on that date. The attendance-to-payroll preparation guide covers the cutoff discipline in detail.
- Freeze policy: divisor, late/half-day rules, OT multiplier, leave and LOP rules, statutory settings
- Capture joiners, exits, transfers, revisions and bank changes before the run, with verification
- Publish and enforce an attendance cutoff (commonly the 25th or 26th)
- Record fixed-term contract dates and tax regime declarations in the master
Payroll Inputs: Days, LOP, Overtime, Leave and One-Offs
The attendance input reduces to a small set of numbers per employee: total days in the period, days paid, LOP days, overtime hours by type (weekday, weekly-off, holiday), paid leave days consumed and half-days. Each of these should be derived from the attendance record, not typed from memory. A guard rostered on 26 duties who missed 2 and did 3 extra 12-hour posts has paid days 24, LOP 2 and overtime hours to be computed from the extra posts, all visible in the record.
Leave interacts with LOP through balances. An absence covered by approved paid leave is a paid day; an absence without balance or without approval is LOP. This is where paper systems fail: the leave register and the attendance register are kept by different people and reconciled late. When leave balances and attendance sit in the same system, LOP is a query, not a negotiation. The salary per day and LOP calculation guide shows the arithmetic once the days are known.
Then come the one-off inputs: incentives and commissions from sales or operations, reimbursements with bills, arrears from a backdated revision or a minimum-wage notification, advance recoveries, fines or damage deductions (with the required notice and limits), and any bonus or ex-gratia. Collect these in a single input template with an approver's name against each line, and close the template on the cutoff date alongside attendance.
- Derive paid days, LOP, overtime hours and leave consumed from the attendance record
- Resolve leave-versus-LOP through balances and approvals, not after-the-fact explanations
- Collect incentives, reimbursements, arrears, advances and deductions in one approved input sheet
- Close all inputs at the same cutoff as attendance
Gross-to-Net: The Order of Calculation
The order matters because later steps depend on earlier ones. Step one: compute each earning component for the days paid. Basic, DA, HRA and fixed allowances are prorated for LOP: monthly component ÷ divisor × days paid. Step two: add variable earnings that are not prorated: overtime wages, incentives, arrears, bonus. Step three: total these into gross earnings for the month. Reimbursements against bills are often paid alongside salary but kept outside gross because they are not income.
Step four: compute the statutory bases. Wages for EPF are basic plus DA (with the 50% add-back under the Codes), capped at the ₹25,000 ceiling unless you contribute on higher wages by agreement. Wages for ESIC are gross wages, tested against the ₹21,000 ceiling and the contribution-period rule. Professional tax is tested against the state's salary definition for the month. Step five: compute TDS for the month based on the projected annual income under the employee's chosen regime, less any tax already deducted. Step six: apply non-statutory deductions such as advance recovery, canteen or accommodation, and any fines within legal limits.
Step seven: net pay = gross earnings − statutory deductions − other deductions + non-taxable reimbursements. Employer contributions (EPF 12% with its EPS split, EDLI 0.5%, admin 0.5%, ESIC 3.25%) are computed at the same time but sit in the cost columns, not on the employee's deduction side. A worked example: gross ₹25,000 with basic ₹12,500, 2 LOP days on a 26-day divisor gives basic ₹11,538 and gross ₹23,077; PF employee ₹1,385 on basic; ESI employee 0.75% of ₹23,077 = ₹173; PT per state; TDS nil under the new regime at this income; net ≈ ₹21,519 before PT.
- Prorate fixed components for LOP, then add unprorated variable earnings to reach gross
- Compute EPF on basic + DA (Codes' 50% rule, ₹25,000 ceiling) and ESIC on gross up to ₹21,000
- Compute TDS on projected annual income for the chosen regime, adjusting for tax already deducted
- Keep employer contributions in cost columns, separate from employee deductions
Validations Before Anyone Approves
A payroll that computes correctly can still be wrong because of a bad input. Validation catches that before money moves. Compare each employee's net pay with last month and flag variances above a threshold, say 10% or ₹2,000, for a reason: LOP, overtime, revision, joiner or exit. Anyone whose variance has no reason is a data error. Check for negative net pay, which usually means an advance recovery or LOP larger than earnings and needs a manual decision. Reconcile headcount: employees in the run should equal last month plus joiners minus exits, exactly.
Then the statutory checks. Every employee with EPF deducted should have a UAN; every ESI deduction should be on an employee with an IP number and gross under the ceiling (or inside a running contribution period). PT deductions should exist only for employees in PT states and at the right slab. TDS should be present for anyone whose projected income crosses the threshold. Finally, confirm total days in the run match the month, that LOP totals agree with the attendance report and that overtime hours agree with the approved overtime list.
- Month-on-month net variance check with a documented reason for every flagged employee
- Zero negative nets without a manual decision; exact headcount reconciliation
- UAN, ESIC IP and PAN presence checks against the deductions made
- LOP and overtime totals tied back to the locked attendance record
Approvals, Disbursement and Payslips
Separate the person who prepares from the person who approves. The preparer runs payroll and produces the register and the variance report; the approver (usually HR head or finance) reviews the exceptions and signs off. For larger companies, add a second approval for the total payout amount against the bank balance. Keep the approval as a record, not a verbal yes.
Disbursement in India is almost always a bank transfer file: a NEFT or bulk-upload file in the bank's format listing account number, IFSC, amount and a narration, uploaded to corporate net banking and authorised by the signatory. Generate the file from the approved register so amounts cannot be edited between approval and payment. After the bank processes it, download the acknowledgement and match it to the register; returns for wrong account numbers need to be re-paid and the master corrected.
Payslips follow payment. The Code on Wages requires a wage slip for every employee, and electronic slips are accepted. Each slip should show days paid, LOP, every earning, every deduction, net pay and employer contributions if you choose to display them. Publish slips through an employee self-service app rather than email attachments; it removes the monthly 'I did not get my slip' queue. The salary slip format explained article lists the fields row by row.
- Preparer and approver must be different people; keep the sign-off as a record
- Generate the NEFT file from the approved register; do not edit amounts manually
- Match the bank acknowledgement to the register and correct failed transfers immediately
- Issue payslips to every employee, preferably through self-service, with LOP and deductions visible
Post-Payroll: Filings and Accounting Entries
Once salaries are paid, the statutory clock starts. TDS is deposited by the 7th of the following month (30 April for March). EPF ECR is filed and paid by the 15th, along with the ESIC contribution. Professional tax is paid per each state's schedule. Quarterly, Form 24Q is filed; annually, Form 16 goes out by 15 June. The payroll compliance checklist for India lays these out by frequency.
Accounting entries are the other output. Salary expense, employer PF and ESI expense, gratuity provision and bonus provision are debited; salary payable, PF payable, ESI payable, PT payable and TDS payable are credited, and then cleared as each payment goes out. Post the journal from the payroll register totals, not from the bank statement, so the books show the liability in the month it arose. Reconcile the payable accounts to the challans monthly; an unreconciled PT payable balance usually means a state was missed.
- TDS by the 7th; PF ECR and ESI by the 15th; PT per state; 24Q quarterly; Form 16 by 15 June
- Post salary and employer-contribution expense with matching payable liabilities from the register
- Clear each payable against its challan and reconcile monthly
- File the register, bank acknowledgement and challans together as the month's evidence pack
A Realistic Monthly Timeline, Roles and Controls
For a company paying for the calendar month: 25th or 26th, attendance cutoff and input sheet close; 26th–27th, attendance corrections approved and locked, payroll inputs reviewed; 28th, payroll run, validations and variance report; 29th–30th, approval; 1st–5th, bank file upload and payment; salaries credited by the 7th of the following month at the latest, which is the Code on Wages timeline for monthly wages. Payslips go out the same day as credit. 7th, TDS deposit; by the 15th, PF ECR and ESI payment; PT on the state's date.
Assign roles explicitly. HR owns master data, attendance lock and leave; payroll owns computation, validations and statutory workings; finance owns approval, bank upload and accounting; a compliance owner tracks filings. Controls worth having from day one: maker-checker on bank detail changes, a locked attendance snapshot per month, an approval record for the run, and a monthly reconciliation of payables to challans. None of these needs expensive software; all of them need discipline.
Attend Mitra covers the front half of this cycle: attendance, regularization approvals, leave balances and overtime are locked on the cutoff; the payroll run derives paid days and LOP from that record, applies EPF, ESIC, PT and TDS settings, runs the run-to-run comparison, and produces payslip PDFs, the salary register and the NEFT file. Filings and Form 16 remain on the EPFO, ESIC and TRACES portals or your tax software. Read the payroll processing glossary entry for a compact definition of the cycle, and the payroll solution overview for how attendance-linked runs are set up.
- Cutoff 25th–26th, lock 27th, run 28th, approve by the 30th, pay by the 7th
- TDS on the 7th, PF and ESI by the 15th, PT on the state date, 24Q quarterly
- Roles: HR (data and attendance), payroll (computation), finance (approval and bank), compliance (filings)
- Controls: maker-checker on bank changes, locked attendance snapshot, recorded approval, payable reconciliation