Payroll processing is one of the most crucial yet complicated business processes. Since SMEs have a lesser employee count as compared to large enterprises, they tend to process payroll using spreadsheets or outsource it to a professional. But these methods are highly susceptible to errors. 

In this blog post, we’ll cover what payroll is, different terms & stages, and everything else about running a payroll.

What is payroll?

Payroll is defined as the process of paying salary to a company’s employees. It starts with preparing a list of employees to be paid and ends with recording those expenses. 

It’s a tangled process that needs different teams such as payroll, HR and finance to work together. But, businesses can manage all the complexities effortlessly by choosing modern technology. 

Simply put, the process involves arriving at what is due to the employees for a particular payroll cycle after adjusting the necessary deductions like TDS, employees’ PF contribution, meal coupons, etc. 

A payroll cycle is the time gap between two salary disbursements. Businesses can opt to pay salaries on a weekly, bi-weekly, or monthly basis. Generally, it is processed every month in India. 

Payroll terms

1. Gross Pay: Gross salary is the total of all the components of the salary package offered to an employee. It is the salary before any mandatory and voluntary deductions such as income tax, provident fund, medical insurance, etc.

2. Net Pay: After calculating gross pay, you have to make govt. mandated deductions such as income tax, provident fund, etc. from gross pay. The amount that an employee takes home after all such deductions is termed net pay or net salary.

3. Overtime: Overtime refers to the extra hours worked by an employee in a company than the usual defined as per govt. Law. The extra salary or remuneration depends that the employee will get depends on the company policies.

4. Pay Period: It is a time frame defined to calculate earned wages and determine when employees receive their payslips. Pay periods are fixed and recurring on a bi-weekly, or monthly basis.

5. Compensation: It involves managing, analysing, and determining the salary, benefits, and incentives paid to the employees for their work.

6. Contractual employees: These are not permanent employees and are usually employed on a temporary basis. Their terms of employment are mentioned in a contract.

Payroll stages

As a business owner, you should understand the complexities involved in payroll because it is one of your highest expenses every month and quite a time-consuming task. The teams need to monitor the entire process carefully. 

Here are the series of steps involved in executing payroll successfully from ground zero. 

Payroll Processing

Pre-payroll processing method

1. Onboard employees

As the first step of payroll processing, businesses should onboard employees and prepare a list of employees to be paid. 

2. Define your payroll policy

In this step, businesses should define their policies and get them approved by the management to ensure standard payroll execution. These policies include pay policy, leave and attendance policy, employee benefits policy, etc.

3. Gather employee inputs

Employee inputs like PAN, address, bank account details, etc. are important for payroll processing. Usually, these inputs are collected from employees at the time of joining by the concerned teams.

4. Validate employee inputs

Once the inputs are received, check for validity of the details with respect to company policy, approval model, etc. Also, ensure that all active employees are taken into consideration, and no former employees are included for salary and compliance payments. 

Actual payroll processing method

5. Calculate payroll

In this stage, the validated inputs are fed into the system for processing payroll. This results in net payment calculations after adjusting necessary deductions and taxes due. These calculations are done using spreadsheets. So, it becomes difficult to reconcile and verify the values to avoid any errors. However, automated payroll software could have eliminated the risk of clerical or mathematical errors. 

Post-Payroll Processing Method

6. Disburse employee salaries

Then, businesses need to ensure that their bank account has sufficient funds to make salary transfers. Then, a salary bank advice statement is sent to the concerned bank directing the bank to disburse salaries. All these time-consuming tasks can be avoided with one-click salary disbursement feature of automated payroll software. 

7. Pay statutory dues

At the time of payroll processing, all statutory deductions such as PF, TDS, ESI and PT are deducted. Then, these payments are made to the appropriate government departments with the due dates.

8. Distribute payslips and tax computation sheets

This step involves payslip distribution employees, along with their tax computation sheets. With an automated payroll system, businesses don’t have to distribute payslips individually. Employees can log-in to their account and access their payslips easily.

Challenges in handling the payroll process

Keeping up with compliance 

Businesses in India have to follow a legal framework while disbursing salaries to their employees. This framework is made up of four components. 


The process of being compliant is complex and expensive if not done the right way. Compliance is complicated because each of these is computed differently than the other. The calculations are derived from the payroll data of each employee. Furthermore, the businesses must periodically file returns on four different portals to submit such computations to the government. 

[Suggested Read: Payroll Compliance Sourcebook for Businesses]

Most businesses use spreadsheets and other manual methods to work on compliance, which is not the most efficient way to be compliant. The computations are lengthy, time-consuming and inaccurate. 

And, laws change frequently!

For example, the introduction of the Dual Tax Regime in Budget 2020 changed the process of TDS on employees’ salaries. This new amendment introduced lower income tax slabs with certains exemptions and deductions.  

Businesses had to struggle while incorporating these changes in spreadsheets and decoding the new law. Moreover, explaining the implications of such changes to their employees became a tough challenge. 

Another example is the changes announced in Atmanirbhar Bharat Abhiyaan. As a part of the relief package, the government introduced changes like reduction in EPF contribution, decrease in TDS rates and extension of ITR filing deadline. 

The statutory compliance requires businesses to follow all regulations, and failure to do so results in unprecedented legal trouble and unavoidable penalties.  

Spreadsheet complications

According to a survey, over 57% of businesses in India still rely on paper or spreadsheet-based payroll management and processing.

  • Although manual setup requires no initial investments, the calculations using spreadsheets or any manual method are lengthy and time-consuming
  • Spreadsheets can work for some businesses. But, as the employee count increases, the number of spreadsheets increases too
  • Multiple teams work on this process and have access to these spreadsheets. Any mishandled information can affect businesses collaborations 
  • Spreadsheets do not have the necessary capabilities to be compliant with the tax laws month-on-month 

Data security 

For processing payroll, employees are required to provide a substantial amount of sensitive data in the form of official documents to the concerned team. These include employee’s bank account details, rental agreements, PAN and Aadhaar details. 

  • Employee data can be compromised, and failure to protect it can seriously damage the reputation of the business
  • Paper-based documents can be misplaced easily. Even if the documents are saved on spreadsheets, they are just a password away from being misused

Lack of flexibility

Employees regularly approach the payroll team to have their particulars updated. Rental agreements, bank account details and other relevant documentation are routinely brought up to date by the team to ensure that the process runs smoothly. 

  • Multiple updation requests demand a lot of time and efforts from the concerned teams. Failure to update these records might result in salaries being wrongly credited. 
  • Employees might fail to submit records on time. This halts the entire process substantially

If you, as a business owner, are managing your payroll manually, then Your Payroll Process Might be Flawed!

Various payroll processing methods 


Many businesses at their initial stage of operations find spreadsheet-based payroll management convenient because they only have a handful of employees to manage. 

This method involves calculations using standard templates, that have set mathematical formulas for the salary and compliance payment computations. 

While this is a cost-effective method, it’s not suitable for businesses when their employee count increases. Also, the opportunity cost of using a traditional system over automated methods is very high. 


Payroll outsourcing means entrusting your payroll execution to an agency. A lot of businesses that don’t have dedicated personnel opt for outsourcing. 

Based on their payroll cycle, they provide the agency with salary information and other data such as attendance, leaves, reimbursement details, etc. every month. The agency then calculates dues and is also responsible for complying with statutory compliances. 


Automated payroll software will do away with all the challenges of using spreadsheets or outsourcing it. There are many payroll automation tools and software available in the market which can reduce manual efforts and increase efficiency. 

Apart from carrying out payroll computations, the software needs to be updated with the latest compliance laws. 

[Suggested Read – How to switch to an automated software]

The best payroll software for your business

There are many automated payroll software available to choose from. From simple salary calculation tools to Human Resource Management Systems (HRMS), there is no shortage of options to choose from.

Here are the features that you should consider while choosing a software.

  • Easy to operate – The software should be intuitive and easy to use without any need for a user manual or training module 
  • Automation – The software should help businesses automate their payroll processes and ensure their employees get paid on time
  • Employee self-serve – The software should empower employees to access their payslips & Form 16, declare investments, and update their documents in a matter of a few clicks
  • Time, attendance, and leave management – The software should provide leave & attendance management through a web portal, biometric devices or APIs

[Suggested Read – A 7-step checklist to help you wrap up FY 2020-21 error-free]

The ideal payroll software for you


RazorpayX Payroll is built to focus on delivering a one-click, seamless, and end-to-end payroll processing experience to businesses. Combining the functionality of payroll software with that of outsourcing services, RazorpayX Payroll not only does calculations but also executes the whole process.

Payroll execution is what sets RazorpayX Payroll apart from other solutions. Payroll agencies and most HRMS simply compute salary dues along with statutory liabilities. However, they do not execute payroll. 

Executing payroll refers to the disbursal of salaries to the employees and the payment of statutory dues like PF, PT, ESI, and TDS. Most service providers hand over the salary figures to the finance department, which then uploads them onto a bank portal for disbursal.

RazorpayX Payroll eliminates the involvement of the HR team, the finance team and Chartered Accountants, who would otherwise be handling calculations, processing, disbursal, and compliance.

Compliance is a major pain point in this entire process, demanding the involvement of CAs and other personnel with compliance expertise. Given the complexity of labour laws, ensuring that the payroll process is compliant with the prevailing laws has become increasingly difficult.

RazorpayX Payroll also facilitates employee self-service and processes dues based on the tax regime chosen by the employees. Further, it enhances transparency by ensuring that payslips and other relevant information are instantly accessible to the employees, being just a login away.

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    Author Komal Chawla

    A Writer by Chance. Finance Wizard. If not working, you can find me binge-watching F.R.I.E.N.D.S!

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