Salary processing in India — the monthly mechanics

The Indian payroll month runs on a strict cycle. Late inputs to one step push everything downstream — TDS deposit deadlines, PF filing dates, bank cut-offs. Foreign-owned subsidiaries that run clean payroll month after month do so because the sequence is well-defined and the people running it stay disciplined about cut-offs.

The full sequence

1. Data freeze — by the last working day of the month, all attendance, leave, overtime, bonus, joining, exit and salary-change events for the month are locked in payroll.
2. Compute — apply each employee's salary structure to their paid-days fraction; layer on bonus, overtime, reimbursements.
3. Deduct — statutory (PF, ESI, PT, TDS) and non-statutory (advances, EMIs, recoveries).
4. Net pay — gross minus deductions per employee.
5. Bank file — generate the disbursement file in the format your AD bank expects (HDFC NetBanking, ICICI Connect, Citi Direct, etc.).
6. Disburse — upload the file to the bank portal, approve and release.
7. Payslips — issue to employees via the portal on disbursement day.
8. Statutory deposits — TDS by the 7th, PF by the 15th, ESI by the 15th, PT by the 20th (state-dependent).
9. Reconcile — match payroll register to bank debit, to ECR uploads, to TDS challans. Close the month.

Data inputs that drive the computation

Salary doesn't compute in a vacuum. Each month's payroll needs:

• Attendance / paid-days — from the time-tracking system or the company calendar.
• Leave taken — from the leave-management module.
• Overtime hours approved by the reporting manager.
• Bonus grants approved for payment that month.
• Payroll adjustments — advances recoveries, EMIs, ad-hoc additions or deductions.
• Joiners / exiters in the month — pro-rated salary computation.
• Tax declarations — investment-proof submissions that affect TDS computation.
• Reimbursements approved against bills.

Computation order — why it matters

Indian payroll computation has a strict order because each step's output is the next step's input.

1. Start with monthly CTC ÷ 12 = monthly gross at full-month attendance.
2. Apply salary structure to derive Basic, HRA, allowances at full month.
3. Apply paid-days fraction to pro-rate.
4. Add bonus, overtime, reimbursements.
5. Compute employer PF (12% of Basic, capped at the prevailing wage ceiling or full Basic per policy).
6. Compute employer ESI (3.25% of gross, only if employee's gross is at or below the ESI ceiling).
7. Compute employee PF deduction (12% of Basic).
8. Compute employee ESI deduction (0.75% of gross, only if eligible).
9. Compute Professional Tax based on the employee's state and gross slab.
10. Compute TDS — apply the year-to-date tax liability projection to find this month's TDS.
11. Apply non-statutory deductions (advances, EMIs, etc.).
12. Net pay = gross + bonus + OT + reimbursements − all deductions.

The bank disbursement file

Each Indian bank expects salary credit files in its own format — typically CSV or fixed-width text. The file lists account number, IFSC, beneficiary name and amount for every employee. Once uploaded and approved, the bank debits your subsidiary account and credits each employee account in a single batch.

• HDFC NetBanking accepts CSV with predefined column order.
• ICICI Connect accepts both CSV and Excel.
• Axis Bank's CMS portal accepts the H2H file format.
• Citi Direct uses their proprietary format.
• Most payroll platforms generate the file automatically for the 4-5 most common banks; uncommon banks need a custom export profile.

Month-end close — what 'done' looks like

1. Bank debit reconciled to gross payroll output.
2. PF ECR uploaded and challan paid.
3. ESI return submitted (if applicable).
4. PT remitted in every state with employees.
5. TDS deposited via Challan 281.
6. Payslips visible to every employee on the portal.
7. Variance versus prior month explained in the management report.
8. Audit trail captured — every step has a timestamp and the operator's identity.