# Payroll Procedure and Deductions

## Step-by-Step Payroll Process

Step 1 — Attendance & Time Details

Time Keeping Department sends to Payroll Department:

Payroll Department then calculates bonus and overtime using time booking records.

Step 2 — Employee List & Wage Rates

HR Department sends list of employees and their wage rates to Payroll Department.

Step 3 — Computation of Wages & Incentives

Payroll Department calculates wages using data from Steps 1 and 2.

Step 4 — Payment to Employees

All statutory deductions are made before payment:

Step 5 — Deposit of Statutory Liabilities

Employee deductions plus employer's contributions (PF, ESI) are deposited to respective statutory bodies.

---

## Types of Deductions

### Statutory (Mandatory) Deductions

Deduction	Rule
Provident Fund (PF)	Employee's contribution deducted from wages; Employer contributes an equal amount
ESI (Employee State Insurance)	Employee's contribution deducted from wages
TDS	Deducted if net salary exceeds the maximum exemption limit

### Non-Statutory (Voluntary) Deductions

Deduction	Nature
Voluntary PF	Contribution above statutory requirement
Benevolent Fund	Voluntary, employee-initiated
Loan Deductions	EMI on loans availed from employer
Other Advances	E.g., festival advance recovery

Worked example

### Example 1

Q: Which departments interact in the payroll process and what does each contribute?

Time Keeping Department → Provides attendance/output data
HR Department → Provides employee list and wage rates
Payroll Department → Computes wages, makes deductions, disburses payment, and deposits statutory liabilities

The flow is: Time Keeping + HR → Payroll Department → Employees & Statutory Bodies

⚠️ Common exam mistakes

Stating employer's PF contribution is deducted from the employee's wages — it is NOT. The employer pays its own contribution separately; only the employee's share is deducted from wages.
Confusing statutory and voluntary deductions — PF, ESI, TDS are statutory (mandatory); benevolent fund and voluntary PF are non-statutory (employee's choice).
Forgetting Step 5 — deposit to statutory bodies is a separate step after payment to employees.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

Payroll Procedure and Statutory Deductions

Worked example