Payroll processing is one of the most crucial yet complicated business processes. In this blog post, we’ll cover what payroll is, different terms & stages, and everything else about it. In case, you’re new to the payroll universe, check out some basic terms we’ve listed at the end of the post.

What is Payroll?

Payroll is the process of paying compensation to a company’s employees for work done in a certain period of time. It is a critical business function that involves multiple departments like finance and HR.

Previously, businesses relied on spreadsheets or manual methods to calculate and disburse salaries. Today, automated payroll software helps businesses manage these complexities effortlessly.

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 in India, it is processed every month.

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Stages of Processing Payroll

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

Payroll Processing stages

Pre-Payroll Onboard employees Onboard employees and prepare a list of employees to be paid
Define payroll policy Define policies like pay policy, leave and attendance policy, employee benefits policy and get management approval
Gather employee information PAN number, bank account details, address and other relevant information to be collected from the employee
Validate employee information Check company policy, approval model, etc. Also, ensure that all active employees are taken into consideration, and no former employees are included in salary and compliance payments. 
Payroll Calculate payroll Validated inputs and information are entered into the system and final salaries are calculated after deducting taxes and other compliances.
Post-Payroll Disburse salaries After ensuring that sufficient funds are available, the company can then initiate the payouts.
Pay statutory dues  Statutory payouts to be made to the respective government bodies.
Payslips and tax computation sheets Distribute payslips and tax computation sheets to the employees.

Methods of Processing Payroll


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. 


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

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

Read more: How to switch to automated software

Advantages of Payroll

Payroll is a business’s most important financial process. Every business needs to ensure that their systems are as robust and smooth as can be. While there are benefits to a manual payroll process, automated payroll is the way to go today. Here’s why:

  1. Improved accuracy: Automated payroll systems reduce the risk of errors in payroll calculations, as they are programmed to follow specific rules and regulations. This can lead to fewer discrepancies in employee paychecks, which can save businesses time and money in the long run.
  2. Reduced costs: Automated payroll systems reduce payroll costs in the long run. For example, automated systems reduce the risk of payroll errors, which can lead to fewer penalties and fines. Additionally, automated systems save time and resources, which can lead to lower labour costs.
  3. Enhanced compliance: Automation can help with complex tax and payroll laws. For example, automated systems can automatically calculate and withhold taxes, and they can generate reports that can be used to verify compliance.
  4. Improved employee satisfaction: Employees appreciate being paid accurately and on time. Automated payroll systems ensure that employees are paid correctly and on time, which can lead to improved employee satisfaction.

Disadvantages of Payroll

Here are a few things to keep in mind when streamlining your processes:

  1. Cost: Automated payroll systems can be expensive to purchase and implement, especially for small businesses. Additionally, there may be ongoing costs for maintenance and support.
  2. Complexity: Automated systems can be complex to learn and use. This can be especially challenging for small businesses that do not have dedicated payroll staff.
  3. Limited customization: These systems may not be able to be customized to meet the specific needs of all businesses. This can be a challenge for businesses with complex payroll requirements.

Challenges in Handling 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. 

payroll compliance

Compliance is complicated because each tax is computed differently. Businesses must also periodically file returns on four different portals or risk expensive penalties.

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. 

In India, employee laws also change frequently, making it even tougher to stay updated.

Read more: Income Tax Slabs 2023 

Spreadsheet complications

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

Manual payroll is easy and cheap, but also time-consuming and prone to mistakes. Information can also be mishandled and tampered with.

Spreadsheets also cannot be compliant with tax laws as they change.

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. 

This data can be compromised; failure to protect it can seriously damage the reputation of the business and the personal security of employees. 

Paper-based documents can be misplaced easily. Even if the documents are saved on spreadsheets, they are just a password away from being misused.

How to Manually Calculate Payroll Taxes

To calculate payroll taxes in India, follow these steps:

  1. Calculate your gross salary. This includes your basic salary, allowances, and any other taxable components.
  2. Subtract any exempt components from your gross salary. This includes the following:
    • House Rent Allowance (HRA)
    • Leave Travel Allowance (LTA)
    • Standard Deduction
  3. Calculate your taxable income. This is the amount of your salary that is subject to income tax.
  4. Calculate your income tax. This is done by applying the income tax slabs to your taxable income. The income tax slabs for the financial year 2023-24 are as follows:
Income slab Tax rate
Up to ₹2.5 lakh 0%
₹2.5 lakh to ₹5 lakh 5%
₹5 lakh to ₹7.5 lakh 20%
Above ₹7.5 lakh 30%
  1. Add any other payroll taxes, such as professional tax and provident fund contribution, to your income tax.
  2. The total amount of payroll taxes payable is the sum of your income tax and other payroll taxes.

Calculating these taxes manually for each and every employee is a tedious task. Learn more about automating your payroll with RazorpayX Payroll.

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Payroll Glossary – Important 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 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 the contract.

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What is payroll in HR?

Payroll in HR refers to the process of managing and administering employee compensation, including wages, salaries, bonuses, and deductions, within the context of human resources. It involves ensuring accurate and timely payment to employees while adhering to legal requirements and company policies.

What is payroll formula?

The payroll formula is used to calculate the net pay of an employee, which is the total amount of money they receive after deductions. The basic payroll formula is: Net pay = Gross pay - Deductions.

Gross pay is the total amount of money an employee earns before deductions, including base salary, bonuses, overtime pay, and commissions. Deductions can include taxes, social security, Medicare, health insurance, and retirement contributions.

What is payroll process?

The payroll process refers to the set of activities and steps involved in calculating and administering employee compensation within an organization. It encompasses various tasks and responsibilities related to ensuring accurate and timely payment to employees.

What is a payroll example?

A payroll example refers to a demonstration or illustration of how employee compensation is calculated and administered within an organisation. While payroll examples can vary based on specific circumstances, here is a general example of a payroll process- data collection, time-keeping and attendance, gross pay calculation, deductions and withholdings, net pay calculation, payroll disbursement and reporting.

What is a payroll checklist?

A payroll checklist involves employee information, time-keeping and attendance, payroll calculations, compliance and legal regulations, payroll documentation and reporting, record keeping and archiving.

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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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