How to Calculate Payroll in India: Step by Step 2026

Most guides on how to calculate payroll in India start with a formula. Gross minus deductions equals net. That is true, and it is not the part anybody gets wrong.

What goes wrong is upstream of the arithmetic. It is deciding which figure the provident fund sits on, which is no longer the figure most Indian payrolls use. It is knowing that a salary of twelve lakh and seventy-five thousand rupees now carries no income tax at all, so a payroll deducting from it every month is wrong in a way the employee will eventually notice. It is filing the quarterly salary return on a form that was renumbered on 1 April 2026.

This article walks one payroll month from end to end. It is the whole payroll process in India, seven steps in the order a run actually happens, with one employee carried through all of them so every number can be checked. Where a rule changed recently, and four of them changed between November 2025 and July 2026, the article says what it was and what it is now.

The intended reader is whoever presses the button. A founder doing payroll in a spreadsheet, an HR generalist who inherited it, or a payroll executive checking their own process against somebody else's. It assumes no prior knowledge and it does not skip the steps that are usually assumed.

Positions are current at September 2026. They reflect the four Labour Codes as brought into force on 21 November 2025, the Central Rules notified on 8 May 2026, the Employees' Provident Funds Scheme, 2026 and its companion schemes effective 29 June 2026, and the Income-tax Act, 2025 with the Income-tax Rules, 2026, which govern salary paid from 1 April 2026. State rules under the codes are still being notified and several positions below are state-specific. Worked examples state their assumptions and should be re-derived rather than adjusted if you change one. Nothing here is legal or tax advice.

The short version, before the detail.

How to calculate payroll in India, in one paragraph: it is seven steps. Lock the inputs. Establish the wage base under the Code on Wages, which since 21 November 2025 is not the same as the basic pay in your salary structure. Compute gross earnings for the days actually paid. Apply provident fund, ESI and professional tax. Compute income tax on the annual projection, not on the month. Arrive at net pay and produce the register and the bank file. Then remit and file, on four different dates to four different authorities. The two steps that most commonly produce a wrong number are the second and the fifth, and neither of them looks wrong on the payslip.

What Payroll Calculation Actually Involves

Payroll is not one calculation. The payroll process in India is a sequence of them, and the order matters because each step consumes the output of the one before it.

The sequence is: inputs, wage base, gross, statutory deductions, income tax, net, and then remittance. Run them out of order and you get answers that are individually defensible and collectively wrong. The most common ordering mistake is computing income tax before you know the year's total earnings, which produces a monthly deduction that has to be corrected in March, usually in one painful instalment.

Three figures do the work and they are constantly confused with each other.

Gross salary is what the employee earns in the month before any deduction. Wages, as a statutory term, is a narrower and legally defined figure that decides how much provident fund and gratuity are due. Cost to company is the employer's total outlay including its own contributions, and it appears nowhere in the calculation of what somebody gets paid. An employee on a twenty lakh CTC does not have twenty lakh of gross salary, and the gap is the subject of more payroll queries than any other single thing. The component-by-component version of that is in our CTC breakup guide.

Here is the employee carried through the rest of this article.

She works in Bengaluru, joined before the start of the financial year, and has full attendance in the month being run. Fifteen lakh a year in gross salary. Everything below is computed on those figures rather than estimated, and the workings are shown so you can substitute your own.

Step One: Lock the Inputs Before You Compute Anything

Nothing in payroll is fixed by better arithmetic if the inputs are wrong. This step takes the longest and it is the one most often compressed when the run is late.

The month is decided by six inputs.

• Attendance and leave, reconciled to the cut-off date, with unpaid leave separated from paid leave.
• Joiners, with a date of joining that matches the appointment letter rather than the date HR was told.
• Leavers, with a date of exit and a settlement flagged, because an unstopped leaver is paid a full salary the following month and nobody notices until the bank reconciliation.
• Changes to salary, including increments, promotions and any arrears with the period they relate to.
• Variable pay: overtime hours, incentives, commissions, reimbursement claims approved in the period.
• Master data changes: bank accounts, PAN, state of work location, and any new PF or ESI member.

The cut-off date is what makes this work, and it has to be a date rather than a convention. Attendance to the 25th, changes accepted until the 26th, run on the 28th, salaries out on the 30th, is a defensible calendar. Attendance until somebody says they are done is not, and it is why payroll runs late.

One thing here is worth more than the rest. Separate the person who enters a master data change from the person who approves the run. That single separation prevents the two errors on this list that can be deliberate rather than accidental, a duplicate bank account and a leaver who keeps getting paid, and it costs nothing to implement.

The other habit worth forming is to reconcile headcount before you compute anything. Count the employees in the payroll input against the HR master. Any difference at all is investigated rather than explained. A payroll that starts with the right number of people cannot make the single most expensive error available to it.

Where attendance is captured in one system and payroll runs in another, this step is where the two are reconciled, and it is worth being honest that most of the effort in a payroll month is spent here rather than on any of the calculations that follow. That reconciliation is the argument for keeping attendance and payroll on one record, which is what our attendance management software and payroll management system are built to do together.

Step Two: Establish the Wage Base

This is the step that changed, it affects most Indian salary structures, and it produces no visible symptom at all.

Before 21 November 2025, most payrolls computed provident fund and gratuity on basic pay plus dearness allowance, because that is what the Employees' Provident Funds Act, 1952 called basic wages. Structures were built accordingly: a low basic, and the rest of the salary distributed across allowances that did not attract contributions.

The Code on Wages, 2019 replaced that with a single definition of wages used across all four labour codes. Section 2(y) defines wages as basic pay, dearness allowance and retaining allowance, and then adds the rule that changes the arithmetic. Where the excluded components exceed one half of all remuneration, the excess is added back into wages.

In practice that means the statutory wage figure can never be less than half of total remuneration. Apply it to the employee above.

Her wage base is ₹62,500, not the ₹50,000 sitting in the basic salary field. For provident fund this happens not to matter, because the ₹15,000 wage ceiling is below both figures. For gratuity, leave encashment and the overtime rate it matters a great deal, because none of those is subject to a ceiling.

Where the change actually bites is lower down the salary range, and this is the part that gets missed. Take a second employee on a monthly gross of ₹22,000, with a basic of ₹8,800 and allowances of ₹13,200. Half of total remuneration is ₹11,000, the excluded components exceed that by ₹2,200, and the wage base moves from ₹8,800 to ₹11,000. Both figures are below the ceiling, so the full increase flows into the contribution.

Five hundred and fifty rupees a month between the two sides, ₹6,600 a year, for one employee. On a hundred employees in that salary band it is ₹6.6 lakh a year, and it has been accruing since November 2025 in any payroll still computing on the old basic.

How to check yours. Take one employee with a typical structure. Add up everything that is not basic, dearness allowance or retaining allowance, and compare it to half the gross. If the allowances are larger, your wage base needs the add-back. If your payroll system has a field called PF wages and it equals the basic salary field for every employee in your organisation, that is the answer. Which allowances sit on which side of the line is covered in our salary allowances guide.

The symptom is that there is no symptom. Payslips look normal, challans are accepted, nothing is rejected. It surfaces at an exit when a gratuity figure is challenged, or at an inspection, and by then the arrears are years deep.

Step Three: Compute Gross Earnings for the Month

For an employee present all month, gross earnings are the sum of the fixed components plus anything variable. For everybody else, and there are always some, the month has to be prorated, and the method you choose changes the answer by about six per cent.

Three methods are in common use in India and all three are defensible.

No method here is wrong. What is wrong is using more than one, and the pattern that recurs is calendar days for joiners and working days for leavers, usually because the two were configured at different times by different people. That is not a rounding difference. It is a policy that says arriving and leaving are worth different amounts.

The related failure costs more and hides better. If salary is prorated on a fixed 30-day divisor and the month has 31 days, an employee present for all 31 days is paid thirty-one thirtieths of their salary. Nobody investigates a payslip that is slightly too high, so this configuration tends to run for years. The test is one query: pick any 31-day month, filter for employees with full attendance, and confirm every one of them was paid exactly their monthly salary.

Loss of pay uses the same divisor and adds a second question, which is what the deduction sits on. If a component is a reimbursement against an actual bill it should not be prorated for absence, because the bill does not shrink when somebody takes leave. If it is an allowance that compensates for presence, it usually should be. Systems that deduct loss of pay from a flat gross figure quietly reduce reimbursements the employee has already spent, and that is a query you will receive. Decide it once, per component, in the salary structure and not in the payroll engine, so the answer is visible to whoever looks at the structure next.

Overtime is not a proration question and it has its own statutory rate. Section 14 of the Code on Wages requires overtime at not less than twice the normal rate of wages, and normal rate of wages means the wage figure from step two, not the basic salary. An establishment paying overtime at twice the basic on a structure where the wage base is higher has been underpaying every overtime hour since November 2025. The full working is in our guide to overtime pay calculation in India.

Our employee has full attendance and no overtime, so her gross earnings for the month are ₹1,25,000.

Step Four: Provident Fund, ESI and Professional Tax

Three statutory deductions come off before income tax, each with its own base, its own threshold and its own authority.

Provident fund. The Employees' Provident Funds Scheme, 2026 replaced the 1952 Scheme with effect from 29 June 2026, notified under the Code on Social Security, 2020, alongside a new Employees' Pension Scheme, 2026 and Employees' Deposit Linked Insurance Scheme, 2026. The rates did not move. Employee and employer each contribute 12 per cent of wages. Of the employer's 12 per cent, 8.33 per cent goes to the pension scheme and the balance to provident fund. The employer additionally pays 0.5 per cent for deposit-linked insurance and 0.5 per cent in administrative charges, the latter subject to a minimum of ₹500 per month per establishment.

The wage ceiling is ₹15,000 a month, re-notified on 29 May 2026 under Chapter III of the Code on Social Security. It was not raised. It has been ₹15,000 since September 2014, and the repeated reports of a move to ₹21,000 or ₹25,000 remain proposals. An employer may restrict contributions to the ceiling or may contribute on full wages, but it must do the same thing for everybody and it should be written down.

For our employee, contributions restricted to the ceiling:

Two details that catch people. The pension contribution is a rupee figure of ₹1,250, and it is capped there however high the salary goes, which is why the employer's provident fund share rises and the pension share does not. And the base is now wages as defined in step two rather than basic wages, so an employee whose wages are below ₹15,000 will see a higher contribution than the old basic produced, which is exactly the ₹22,000 case above.

Employees' State Insurance. ESI applies where monthly wages do not exceed ₹21,000, or ₹25,000 for an employee with a disability. The employee contributes 0.75 per cent and the employer 3.25 per cent, four per cent in total. On a monthly wage of ₹18,000 that is ₹135 from the employee and ₹585 from the employer.

The rule that produces the most errors is the contribution period. ESI runs on two fixed contribution periods a year, April to September and October to March. An employee who crosses the wage threshold in the middle of a period stays covered until the end of that period, and contributions continue on the higher wages. Dropping somebody out of ESI in the month their salary crossed ₹21,000 is a common and entirely avoidable error, and it leaves the employee without cover they are entitled to. The mechanics are worked through in our ESI calculation guide and the rates sit on the ESI compliance page.

Our employee earns well above the threshold and is not covered.

Professional tax. This is a state levy and there is no national slab table. Article 276(2) of the Constitution caps it at ₹2,500 per person per year, and within that ceiling every state sets its own bands, its own due date and its own return. Delhi, Uttar Pradesh and Haryana do not levy it at all.

Our employee works in Bengaluru. Karnataka exempts monthly salaries up to ₹25,000 and charges ₹200 a month above that, except in February when it charges ₹300. Eleven months at ₹200 plus one at ₹300 is exactly ₹2,500, which is the constitutional ceiling, and that is the whole reason for the February figure. A payroll that deducts a flat ₹200 every month collects ₹2,400 and under-remits ₹100 per employee per year, which is one of the most common professional tax errors in Indian payroll. Maharashtra works the same way. Slabs for every levying state are on our professional tax pages, and the professional tax calculator applies the right one by work location.

The state that matters is the state of the work location, not the state on the employee's address. Remote employees are where this goes wrong: the registration in the new state has to exist before the employee's first payslip there, not after.

Her professional tax this month is ₹200.

Step Five: Income Tax on Salary

Income tax is the step where method matters more than rates, because tax is computed on the year and deducted across the months.

The correct sequence is to project the employee's total income for the financial year, compute the tax on that projection, subtract what has already been deducted, and divide the balance by the months remaining. Do it that way and an increment in September or a bonus in December is absorbed smoothly. Compute tax on each month's salary in isolation and you get a deduction that is wrong all year and a correction in March that the employee experiences as a penalty.

From 1 April 2026 salary is governed by the Income-tax Act, 2025, which replaced the Income-tax Act, 1961. The slab-based default regime sits in section 202 and the rates did not change.

Salaried employees get a standard deduction of ₹75,000 under this regime. The rebate is the part payroll teams most often get wrong: where total income does not exceed ₹12,00,000, a rebate of up to ₹60,000 reduces the tax to nil. With the standard deduction on top, a salary up to ₹12,75,000 carries no income tax at all. If your payroll is deducting anything from an employee at ₹11 lakh who has not opted for the old regime, it is wrong, and it will be repaid at filing with the employee wondering why you held it.

The new regime is the default. An employee has to opt out of it to be taxed under the old regime with its deductions and exemptions, and that choice has to be collected in writing at the start of the year rather than assumed. The comparison is in our guide to TDS on salary under the old and new regimes.

For our employee, on annual gross earnings of ₹15,00,000:

Two adjustments belong in this step and are commonly left out. Professional tax paid is deductible from salary income, so the ₹2,500 a year reduces the projection slightly under the old regime. And a mid-year joiner who does not declare their previous employment leaves both employers applying the exemption limit and the rebate to their own slice of the year, which under-deducts across the year and produces a bill at filing. Ask for that declaration at onboarding, while the employee is still in front of you, instead of in February. Our TDS calculator runs the projection under both regimes.

Step Six: Net Pay, the Register and the Bank File

Net pay is gross earnings less every deduction. For our employee, in a normal month:

Her employer's cost for the same month is ₹1,25,000 in salary plus ₹1,800 in provident fund, ₹75 in deposit linked insurance and ₹75 in administrative charges, which is ₹1,26,950 before any gratuity provision.

One statutory limit governs this line. Section 18(3) of the Code on Wages caps total deductions in any wage period at fifty per cent of wages. It bites in full and final settlements, where a notice pay recovery can easily exceed half the final payment. A recovery larger than that has to be handled as a receivable outside payroll, not as a deduction inside it, and processing a negative net pay as a zero quietly writes off money with no record of the write-off.

Three outputs come out of the run and they are not interchangeable.

The payroll register is the internal record: every employee, every earning, every deduction, the totals. It is what an auditor asks for and it is what you reconcile against. The payslip is the employee's record and it has mandatory content, covered in our guide to the payslip format in India; if you need to produce one now, the payslip generator will do it. The bank file is the payment instruction, in whatever format your bank prescribes, and it contains only account numbers and net amounts.

Before the bank file goes out, six checks take about ten minutes on a payroll of a few hundred and catch most of what this article describes.

• Headcount paid against the HR master. Any difference is investigated, not explained.
• Net pay per employee against last month. Anything moving more than fifteen per cent gets a reason recorded next to it.
• Employer provident fund as a percentage of provident fund wages. Anything other than 12.00 per cent means a member is configured wrongly.
• Any negative net pay, and any deduction above half of wages. Both are structural problems, not arithmetic ones.
• Full-attendance employees paid exactly their monthly salary. This is the divisor test from step three.
• Bank file total against the register's net pay total, and the payee count against the headcount. Exact match on both.

Notice what is not on that list. Checking individual salaries for correctness is not a control, because a wrong salary looks exactly like a right one. Every item above compares two records that were produced separately, which is the only kind of check that finds a plausible error. The reports worth building for this are in our piece on the payroll reports HR teams need.

Step Seven: Remittances and Returns After the Run

Paying salaries is the middle of the month's work, not the end of it. Four obligations follow on four different dates.

That last row is new and it is the one most payroll teams have not caught up with. Under Rule 219 of the Income-tax Rules, 2026, the quarterly salary TDS statement for periods from 1 April 2026 is Form 138, not Form 24Q. Form 26Q became Form 140, Form 27Q became Form 144, the tax collection statement 27EQ became Form 143, and the salary TDS certificate previously issued as Form 16 is now Form 130. The fourth quarter of 2025-26 was still filed on the old forms, so the change lands with the quarter ended 30 June 2026. If your vendor documentation, your internal checklist or your payroll software still refers to Form 24Q or Form 16 by those numbers for the current year, it has not been updated.

Interest runs on late deposits and it is not a fee. Tax deducted and not deposited attracts one and a half per cent a month from the date of deduction to the date of deposit. Provident fund has no grace period; interest begins on the sixteenth. None of these is large in isolation and all of them turn up in the statutory audit, which is usually where the cost actually lands.

The wider calendar, including annual returns and the state-level obligations that do not fit in a monthly table, is in our payroll compliance checklist, and the errors that recur across all of it are in common payroll compliance mistakes.

Questions People Ask

How do you calculate payroll in India step by step?

Seven steps, taken in order. Lock the inputs, meaning attendance, joiners, leavers, salary changes and variable pay, all reconciled to a cut-off date. Establish the wage base under section 2(y) of the Code on Wages, which since 21 November 2025 adds back any excluded allowances exceeding half of total remuneration. Compute gross earnings for the days actually paid, using one proration method applied consistently. Deduct provident fund at 12 per cent of wages capped at ₹15,000, ESI at 0.75 per cent where wages are ₹21,000 or less, and professional tax at the rate for the state of the work location. Compute income tax on the projected annual income, not on the month, and divide the balance across the remaining months. Arrive at net pay and produce the register, the payslips and the bank file. Then remit and file: tax by the 7th, provident fund and ESI by the 15th, professional tax on the state's own date, and the quarterly statement on Form 138.

What is the formula for salary calculation in India?

Net pay equals gross earnings less employee provident fund, less ESI where applicable, less professional tax, less tax deducted at source, less any recovery. Gross earnings are the fixed components for the days paid plus variable pay for the period. The formula is the easy part. The three inputs that decide whether it produces the right answer are the wage base used for provident fund, the divisor used for proration, and whether income tax was computed on the year or on the month.

What is the difference between gross salary, wages and CTC?

Gross salary is everything the employee earns in a month before deductions. Wages is a statutory term defined in section 2(y) of the Code on Wages, being basic pay, dearness allowance and retaining allowance, plus any excluded allowance in excess of half of total remuneration, and it is the base for provident fund, gratuity, leave encashment and the overtime rate. Cost to company adds the employer's own contributions, gratuity provisioning and any benefits, so it is always higher than gross and it never appears in the calculation of what somebody is paid. On a monthly gross of ₹1,25,000 with a basic of ₹50,000, the statutory wage figure is ₹62,500 rather than ₹50,000, because the allowances exceed half of the total.

How much PF is deducted from salary?

Twelve per cent of wages from the employee, matched by twelve per cent from the employer, of which 8.33 per cent goes to the pension scheme. The wage ceiling is ₹15,000 a month, so where contributions are restricted to the ceiling the employee's deduction is ₹1,800 and the pension share is capped at ₹1,250. The employer additionally pays 0.5 per cent for deposit linked insurance and 0.5 per cent in administrative charges, the latter with a minimum of ₹500 a month for the establishment. Since the Employees' Provident Funds Scheme, 2026 took effect on 29 June 2026 the base is wages as defined in the Code on Wages rather than basic wages, which raises the contribution for anybody whose allowances exceed half their gross and whose wages sit below the ceiling.

Is the PF wage ceiling still ₹15,000?

Yes. It was re-notified at ₹15,000 on 29 May 2026 under Chapter III of the Code on Social Security, 2020, which gave the existing figure fresh legal backing under the new code without raising it. It has been ₹15,000 since September 2014. Proposals to move it to ₹21,000 or ₹25,000 have been reported repeatedly and none has been notified, so configure payroll to the ceiling actually in force and treat a change as something to implement when it is notified rather than when it is announced.

At what salary is income tax deducted from salary in India?

Under the default regime for the financial year 2026-27, no tax is payable where total income does not exceed ₹12,00,000, because the rebate cancels it. Adding the ₹75,000 standard deduction for salaried employees, a gross salary up to ₹12,75,000 carries no income tax. Above that the rebate falls away entirely rather than tapering, so the tax at ₹15,00,000 of gross salary is ₹97,500 including cess, or ₹8,125 a month. An employee who has opted for the old regime is computed differently and has to have opted in writing.

Has Form 24Q been replaced?

Yes, for periods from 1 April 2026. The quarterly salary TDS statement is now Form 138, filed under Rule 219 of the Income-tax Rules, 2026 for the purposes of sections 392 and 393(1) of the Income-tax Act, 2025. Form 26Q became Form 140, Form 27Q became Form 144, Form 27EQ became Form 143, and the salary TDS certificate previously known as Form 16 is now Form 130. Due dates did not change: 31 July, 31 October, 31 January, and 31 May for the fourth quarter. The fourth quarter of 2025-26 was still filed on Form 24Q, so the first return on the new form was the quarter ended 30 June 2026.

How do you calculate salary for an employee who joins mid-month?

Prorate the month, using one method applied to joiners, leavers, mid-month structure changes and unpaid leave alike. Calendar days, days available over days in the month, is the most common in India and the easiest to explain. A fixed 26-day divisor and an actual-working-days divisor are equally defensible and produce answers around six per cent apart on the same employee. What is not defensible is using one method for joiners and another for leavers, which is what a surprising number of payrolls do without intending to, because the two were configured separately.

Can payroll be calculated in Excel?

Yes, for a very small headcount, and most Indian businesses start there. It stops working at three specific points rather than at a headcount. When the wage base has to be recomputed under the Code on Wages for every structure. When income tax has to be projected across the year and re-projected after every increment. And when a return has to be filed in a prescribed format from the same data. Each of those is a formula somebody maintains by hand, and the failure mode is that the spreadsheet keeps producing a plausible number after the rule it encoded has changed. We go through the transition in replacing Excel with payroll software.

Where This Leaves You

Start with the wage base. If that one is wrong, the other three matter less than fixing it does.

Check the wage base. Take one employee with a typical structure, add up everything that is not basic, dearness allowance or retaining allowance, and compare it to half the gross. If the allowances are larger and your PF wages field still equals basic, you have been under-contributing since November 2025 and the arrears are compounding quietly.

Run the divisor test. Pick a 31-day month, filter for full attendance, confirm everybody was paid exactly their monthly salary. It takes five minutes and it either clears the largest arithmetic error available to a payroll or finds it.

Check what your March deduction looked like. If it was much larger than the other eleven, income tax is being computed on the month instead of on the year, and the employees who noticed have already asked.

Update the form numbers. Anything in your process that says Form 24Q or Form 16 for the current year is referring to forms that were renumbered on 1 April 2026.

None of these four is hard, and together they cover the parts of the payroll process most likely to be silently wrong. They persist because payroll produces a plausible number every month and nothing objects, so the only thing that finds an error is a deliberate comparison against a second record. That is easier when attendance, the register and the filing sit on one system rather than three, which is what our payroll management system and the wider HR management software are built to do. Book a demo and bring a month with a lot of joiners in it, because that is the month that shows the most.

If you would rather start with the arithmetic than with the software, our salary calculator, TDS calculator and professional tax calculator run the three steps above that are easiest to get wrong.

Sources

• Code on Wages, 2019, enacted text on India Code. Section 2(y) on the definition of wages and the one-half proportion rule, section 14 on overtime at not less than twice the normal rate, and section 18(3) capping total deductions at fifty per cent of wages in a wage period.
• Employees' Provident Fund Organisation, epfo.gov.in. Account-wise contribution rates, the 0.5 per cent administrative charge with its ₹500 monthly minimum, and the electronic challan cum return due on the 15th.
• Ministry of Labour and Employment, labour.gov.in. Commencement of the four Labour Codes on 21 November 2025, the Central Rules notified on 8 May 2026, the Employees' Provident Funds Scheme, 2026 and its companion schemes effective 29 June 2026, and the ₹15,000 wage ceiling notified on 29 May 2026 under Chapter III of the Code on Social Security, 2020.
• ESIC contribution rates, esic.gov.in. Employee and employer rates, the ₹21,000 wage threshold, and the contribution-period rule governing an employee who crosses it mid-period.
• Income Tax Department, incometax.gov.in. The Income-tax Act, 2025 in force for salary paid from 1 April 2026, the section 202 slab rates, the ₹75,000 standard deduction and the rebate, and the Income-tax Rules, 2026 renumbering the TDS statements and certificates.

Worked examples state their assumptions and were computed rather than estimated. State rules under the Labour Codes are still being notified and professional tax is state-specific throughout. Verify the current position on the relevant portal before configuring a payroll run.