Payroll Basics — Salary, PF, ESIC

It is the last day of the month. Meera has been at Sharma Sir's office for almost three months now, and she has learned to handle vouchers, GST, and TDS. Today, Negi Bhaiya looks up from his screen and says, "Meera, guess what — salary day! Sharma Sir wants you to process this month's payroll." Meera blinks. "Payroll? I've never done that." Negi Bhaiya grins. "There's always a first time. And today it's personal — because your salary is in this batch too." Meera sits up straight. Suddenly, this lesson matters a lot.

What is Payroll?

Sharma Sir walks in with his usual 11 o'clock chai. Meera immediately asks, "Sir, what exactly is payroll?"

"Simple, Meera. Payroll is the process of calculating and paying salaries to employees. But it is not just writing a cheque. You have to calculate deductions — like PF, ESIC, professional tax, TDS — and then pay the employee what remains."

Payroll = Calculating each employee's gross salary, subtracting all deductions (PF, ESIC, Professional Tax, TDS), and paying the remaining amount (net salary) to the employee.

"Think of it like this," Sharma Sir says. "When you buy a bag of apples, you pay the shopkeeper. But the shopkeeper doesn't keep all the money. He has to pay the wholesaler, pay rent, pay electricity. What's left is his profit."

"Similarly, a salary has many parts. Some parts go to the employee, some go to the government (PF, ESIC, tax). The payroll process figures out who gets how much."

CTC, Gross Salary, and Net Salary

"Before we do any numbers, you need to understand three important terms," Sharma Sir says.

CTC — Cost to Company

"This is the total amount the company spends on an employee. It includes the salary, the employer's share of PF and ESIC, bonus, insurance — everything."

"When a job advertisement says 'CTC Rs 2,40,000 per year,' it does NOT mean the employee will receive Rs 2,40,000 in their bank account."

Gross Salary

"This is the salary before deductions. It includes Basic, HRA, Special Allowance, Conveyance, and other components. But it does NOT include the employer's contributions."

Net Salary (Take-Home)

"This is what actually lands in the employee's bank account. It is the gross salary minus all deductions."

CTC > Gross Salary > Net Salary (Take-Home)

Here is a simple flow:

"The difference between CTC and Gross is the employer's contributions — like the employer's share of PF and ESIC. The employee never sees this in their payslip."

Meera writes in her notebook: CTC minus employer contributions = Gross. Gross minus employee deductions = Net (take-home).

Salary Components — Breaking Down the Salary

"Every salary is made up of several parts," Sharma Sir explains. "Let me show you the common components."

1. Basic Salary

"This is the foundation. It is usually 40% to 50% of CTC. Many other components — like PF and HRA — are calculated based on Basic. So Basic is the most important number."

2. HRA — House Rent Allowance

"This is meant to help the employee pay rent. It is usually 40% to 50% of Basic (50% in metro cities, 40% in other cities). HRA has special income tax benefits — if the employee pays rent, part of HRA can be exempt from tax."

"Haldwani is not a metro city, so we use 40% of Basic."

3. Special Allowance

"This is a balancing figure. After calculating Basic, HRA, and other fixed components, whatever is left to reach the Gross Salary is put here."

4. Conveyance Allowance

"A small amount for travel expenses — usually Rs 1,600 per month. This is now often merged into Special Allowance under the new tax regime."

Example: Meera's Salary Breakdown

Sharma Sir pulls out a sheet. "Let's use your salary as an example, Meera. Your CTC is Rs 1,44,000 per year. That is Rs 12,000 per month."

"See? Your CTC is Rs 12,000 per month. But your Gross Salary is only Rs 10,400. The remaining Rs 1,600 is the employer's cost — PF, ESIC, and other benefits."

Meera stares at the numbers. "So I won't even get Rs 10,400?"

"No," Sharma Sir says gently. "There are employee deductions too. Let's calculate those."

PF — Provident Fund

"PF is a retirement savings scheme run by the government. Both the employee and the employer contribute."

PF = Provident Fund. A portion of the employee's salary is deducted and deposited into a PF account. The employer adds an equal amount. This money earns interest and can be withdrawn after retirement (or under certain conditions earlier).

How PF is Calculated

"So Rs 600 is deducted from Meera's salary every month. And the employer also contributes Rs 600. Total Rs 1,200 goes into Meera's PF account every month."

"Wait," Meera says. "So the employer is also putting money for me?"

"Yes! That is the beauty of PF. Your employer matches your contribution. It is free money — well, not exactly free, it is part of your CTC. But it is being saved for your future."

"The money earns interest too — currently around 8.25% per year. Over 20-30 years, it grows into a large amount."

Important rule: PF is mandatory for all establishments with 20 or more employees. Even smaller establishments can voluntarily register. The employee's contribution is deducted from their salary. The employer's contribution is an additional cost above the gross salary.

A Note About PF Split

"Technically, the employer's 12% is split into two parts," Negi Bhaiya adds:

• 3.67% goes to the Employee's Provident Fund (EPF)
• 8.33% goes to the Employee's Pension Scheme (EPS)

"But for our payroll calculation, we just use 12% as one number. The PF department handles the split internally."

ESIC — Employees' State Insurance Corporation

"ESIC is like a health insurance scheme run by the government for employees," Sharma Sir explains.

ESIC = Employees' State Insurance Corporation. It provides medical benefits, sickness benefits, maternity benefits, and disability benefits to employees. Both employee and employer contribute.

Who is Covered?

"ESIC is applicable to employees whose gross salary is Rs 21,000 per month or less."

Meera's gross salary is Rs 10,400 — well below Rs 21,000. So ESIC applies to her.

How ESIC is Calculated

"So Rs 78 is deducted from Meera's salary. The employer pays Rs 338 separately."

"With ESIC, Meera gets access to ESI hospitals and dispensaries. If she falls sick, she gets paid sick leave. If she has an accident, she gets disability benefit."

"In Uttarakhand, there are ESI dispensaries in Haldwani, Rudrapur, and Dehradun," Negi Bhaiya adds. "It is a very useful benefit."

Professional Tax

"This is a state-level tax on employment. Different states have different rates."

Professional Tax = A tax levied by the state government on salaried individuals and professionals. The employer deducts it from the employee's salary and deposits it with the state government.

"Uttarakhand charges Professional Tax. The rates depend on the salary slab."

(Note: Professional Tax slabs vary and may be updated by the state government. Always check the current rates.)

Meera's gross salary is Rs 10,400 — she falls in the Rs 8,334 to Rs 16,667 slab. So her Professional Tax is Rs 100 per month.

Meera's Complete Salary Slip

"Now let's put it all together," Sharma Sir says.

Earnings (What Meera Gets)

Deductions (What is Taken Out)

Net Salary (Take-Home)

Meera looks at the number. "Rs 9,622. That's what I will get in my bank account?"

"Yes," Sharma Sir says. "Does it make sense now? Your CTC is Rs 12,000, but after all the deductions and employer contributions, you receive Rs 9,622."

"But don't feel bad about the deductions," Negi Bhaiya adds. "The PF money is being saved for your future. The ESIC gives you health coverage. The Professional Tax funds state services. It all comes back to you in different ways."

The Other Two Employees

Sharma Sir's office has three employees (including Meera). Let's calculate payroll for all three.

Negi Bhaiya — Junior Accountant

Deductions:

Net Salary: Rs 18,500

Pant Ji — Office Assistant

Deductions:

Net Salary: Rs 11,090

Summary — All Three Employees

"The total net salary payout is Rs 39,212. The total employee PF is Rs 2,520. The employer also pays Rs 2,520 as PF. The total employer ESIC is much more — let me calculate."

Employer ESIC:

• Meera: 3.25% of 10,400 = Rs 338
• Negi Bhaiya: 3.25% of 20,000 = Rs 650
• Pant Ji: 3.25% of 12,000 = Rs 390
• Total Employer ESIC: Rs 1,378

Processing Payroll in ERPLite

Negi Bhaiya takes over. "Let me show you how to do all of this in ERPLite."

Step 1: Set Up Employees

1. Go to HR > Employees > + New Employee
2. Fill in Meera's details:

3. Click Save

Repeat for Negi Bhaiya and Pant Ji.

Step 2: Set Up Salary Structure

"Now we tell ERPLite what each employee's salary looks like."

1. Go to HR > Salary Structure > + New
2. Name it: "Standard Structure — Trainee"
3. Add components:

4. Set Gross Salary target: Rs 10,400
5. Click Save
6. Assign this structure to Meera

Create similar structures for Negi Bhaiya (Gross Rs 20,000) and Pant Ji (Gross Rs 12,000).

Step 3: Generate Monthly Payroll

"This is the exciting part — generating the actual salary slips."

1. Go to HR > Payroll > Process Payroll
2. Select Month: October 2025
3. Select Employees: All (or select specific employees)
4. Click Calculate

ERPLite calculates all earnings and deductions for each employee and shows a summary:

5. Review each salary slip by clicking the employee name
6. Click Approve Payroll

Step 4: View Salary Slip

Meera clicks on her own name to see her salary slip:

╔══════════════════════════════════════════════════════════════╗
║           V.K. SHARMA & ASSOCIATES                          ║
║           Main Road, Haldwani, Uttarakhand                  ║
║                                                              ║
║                    SALARY SLIP                               ║
║           Month: October 2025                                ║
║                                                              ║
║  Employee: Meera Joshi          Code: EMP-003               ║
║  Designation: Trainee           Department: Accounts        ║
║  PAN: ABCPJ1234K               UAN: 100987654321            ║
║  Bank: SBI Haldwani             A/c: 12345678901            ║
║                                                              ║
║  EARNINGS                 ║  DEDUCTIONS                     ║
║  Basic Salary    5,000    ║  Employee PF        600         ║
║  HRA             2,000    ║  Employee ESIC       78         ║
║  Special Allow.  3,400    ║  Professional Tax   100         ║
║                           ║  TDS                  0         ║
║                           ║                                  ║
║  Total Earnings 10,400    ║  Total Deductions   778         ║
║                                                              ║
║  NET PAY: Rs 9,622                                          ║
║  (Rupees Nine Thousand Six Hundred Twenty-Two Only)         ║
║                                                              ║
╚══════════════════════════════════════════════════════════════╝

"My first salary slip," Meera says quietly. She stares at it for a long moment. This piece of paper means she is earning. She is contributing. She is independent.

Sharma Sir notices. "Frame-worthy, isn't it?" he says kindly.

Step 5: Process Payment

1. Go to HR > Payroll > Pay Salaries
2. Select the approved payroll for October 2025
3. Payment mode: Bank Transfer (NEFT)
4. ERPLite generates a payment batch with three transfers:

5. Click Process to record the payment

The Accounting Entries for Payroll

"Now let's look at what happens in the books," Sharma Sir says. "This is the part that connects payroll to accounting."

When payroll is processed, ERPLite creates a journal entry:

Meera traces the logic:

• Salary Expense (Debit Rs 42,400) — The total gross salary is an expense to the business.
• Employer PF Expense (Debit Rs 2,520) — The employer's PF contribution is an additional expense.
• Employer ESIC Expense (Debit Rs 1,378) — Same for ESIC.
• Employee PF Payable (Credit Rs 2,520) — Money deducted from employees, to be deposited with PF authorities.
• Employer PF Payable (Credit Rs 2,520) — Employer's matching contribution, also to be deposited.
• Employee ESIC Payable (Credit Rs 318) — To be deposited with ESIC.
• Employer ESIC Payable (Credit Rs 1,378) — To be deposited with ESIC.
• Professional Tax Payable (Credit Rs 350) — To be deposited with state government.
• Bank Account (Credit Rs 39,212) — Actual money paid to employees.

"See how the total debits equal total credits?" Sharma Sir points out. "Rs 46,298 on each side. Double-entry never fails."

When to Deposit PF and ESIC

"Just like TDS, PF and ESIC have deadlines," Negi Bhaiya warns.

"For October salary, PF and ESIC must be deposited by 15th November."

"Late deposit of PF carries interest at 12% per annum, plus damages up to 100% of the amount. So never be late."

A Quick Note on TDS on Salary

"You noticed Meera's TDS on salary is zero," Sharma Sir says. "That's because her annual income is below the taxable limit under the new tax regime. But for employees with higher salaries, the employer must calculate and deduct TDS every month under section 192."

"How does the employer know how much TDS to deduct?"

"The employer estimates the employee's total annual income, calculates the total tax for the year, and divides it by 12. That monthly amount is deducted as TDS from each salary."

"We don't need to worry about it for our three employees right now. But it's good to know."

Payroll Compliance Calendar

Sharma Sir has a calendar on the wall with dates circled in red. He adds the payroll dates.

"Payroll is not a one-time task," Sharma Sir says. "It happens every month, and the deadlines are strict. Miss them, and there are penalties."

Quick Recap — Chapter 24

Payroll = Calculating employee salaries with all deductions and paying the net amount.

CTC > Gross Salary > Net Salary (Take-Home).

Salary Components: Basic (40-50% of CTC), HRA (40-50% of Basic), Special Allowance (balancing figure).

PF: 12% of Basic by employee + 12% by employer. Mandatory retirement savings.

ESIC: 0.75% of Gross by employee + 3.25% by employer. Applicable if gross salary is Rs 21,000/month or less. Provides health and insurance benefits.

Professional Tax: State-level tax deducted from salary. Varies by state and salary slab.

In ERPLite: Set up employees with salary structures, process monthly payroll, generate salary slips, and make payments.

Deadlines: PF and ESIC by 15th of next month. TDS by 7th of next month.

Practice Exercise — Try This Yourself

Exercise 1: Calculate the complete salary slip for an employee with the following details:

• Basic Salary: Rs 8,000
• HRA: Rs 3,200 (40% of Basic)
• Special Allowance: Rs 4,800
• Gross Salary: Rs 16,000

Calculate: Employee PF, Employee ESIC, Professional Tax, Total Deductions, and Net Salary.

Exercise 2: A company has 4 employees with these gross salaries: Rs 15,000, Rs 18,000, Rs 22,000, and Rs 10,000.

a) Which employees are covered by ESIC? (Hint: ESIC applies if gross is Rs 21,000 or less.)

b) Calculate the total employee PF for all 4 employees. (Assume Basic = 50% of Gross for all.)

Exercise 3: Write out the journal entry for the following payroll:

• Total Gross Salary: Rs 50,000
• Employee PF: Rs 3,000
• Employer PF: Rs 3,000
• Employee ESIC: Rs 200
• Employer ESIC: Rs 867
• Professional Tax: Rs 400
• Net Salary paid by bank: Rs 46,400

(Hint: Total debit should equal total credit.)

Answers for Exercise 1:

• Employee PF: 12% of 8,000 = Rs 960
• Employee ESIC: 0.75% of 16,000 = Rs 120
• Professional Tax: Rs 100 (salary is between 8,334 and 16,667)
• Total Deductions: 960 + 120 + 100 = Rs 1,180
• Net Salary: 16,000 - 1,180 = Rs 14,820

Answers for Exercise 2: a) Three employees are covered: Rs 15,000, Rs 18,000, and Rs 10,000. The employee with Rs 22,000 gross exceeds the Rs 21,000 ESIC limit. b) Basic (50% of Gross): 7,500 + 9,000 + 11,000 + 5,000 = 32,500. Total Employee PF: 12% of 32,500 = Rs 3,900.

Fun Fact

Here is something interesting about PF. The Employees' Provident Fund Organisation (EPFO) is one of the largest social security organisations in the world. It manages over Rs 18 lakh crore in assets and has more than 28 crore accounts. That is almost as many accounts as the entire population of the United States!

When Sharma Sir started working as a young CA in the 1990s, PF records were maintained in huge registers by hand. Today, everything is online. You can check your PF balance on your phone using the UMANG app or by giving a missed call to 011-22901406 from your registered mobile number.

And here is some motivation: PF is a powerful wealth-building tool. If Meera contributes Rs 600 per month (with Rs 600 matched by the employer) at 8.25% interest, by the time she is 60 years old, her PF balance will be over Rs 50 lakh. Starting young makes all the difference.

Next chapter, Meera discovers that even things like trucks and computers lose value over time. Fixed assets and depreciation — it sounds complicated, but Sharma Sir makes it simple.