How to Run Payroll for a Small Business in India

Payroll in a small business usually works until the day the one person who does it is on leave. Then somebody opens last month's sheet, changes a few numbers, and hopes the formulas still point at the right cells.

A pharmacy chain in Mangaluru has four outlets and 22 staff. The owner's sister does the accounts, and payroll takes her the first three days of every month. She asked us for the order to do it in, so that a new hire in accounts could follow it without her. This is that order, with a real month worked through.

The payroll process for small business owners, in eight steps

1. Close attendance on a fixed day. Pick a cut-off, say the last day of the month, and stop taking corrections after it. Late ones go into next month as arrears.
2. Collect the changes. Joiners, leavers, salary revisions, overtime, advances given, loan instalments due and expense claims to be paid with salary. Get them in writing, even if the writing is a WhatsApp message you screenshot.
3. Work out payment days. Days in the month, less unpaid leave and absence, and only the days employed for anyone who joined or left part-way. Decide once whether you divide by 30, by the calendar or by working days, and use the same basis every month.
4. Work out the gross, then the deductions. Each earning prorated by payment days, then employee PF on Basic plus DA, ESI on the gross if it's ₹21,000 or less, professional tax by your state's slab, and TDS from each person's projected tax for the year.
5. Compare with last month. Anyone whose pay moved by more than about 10% should have a reason written against their name before the run goes further.
6. Get it approved by somebody else. The person who prepares payroll shouldn't be the one who signs it off. In a family business that's often the owner, and it's ten minutes of their month well spent.
7. Pay, and send the payslips. Upload a bank file rather than keying transfers one by one, and give everybody a payslip the same day.
8. Deposit what you deducted. PF and ESI by the 15th of the next month, TDS by the 7th, and professional tax on your state's date. Karnataka's is the 20th.

Under the Code on Wages, monthly wages have to be paid before the 7th day of the next month ends. The deposits in step 8 come after that, which is why step 7 can't wait for them.

September at the pharmacy, in rupees

Five of the 22, run through the same engine as our salary slip generator. Karnataka professional tax, PF on Basic up to the ₹15,000 ceiling, and September's 30 days as the divisor:

Three things in that table catch people out. The billing clerk pays ESI of ₹135 because her gross is under ₹21,000, and the pharmacist beside her pays none because his is ₹26,000. The pharmacist pays professional tax of ₹200 and the clerk pays nothing, since Karnataka's tax starts at ₹25,000 of gross. And the rider who joined on the 12th is paid for 19 days, with his PF and ESI worked out on the ₹8,867 he earned, not on his full-month salary.

If you'd like to see where the PF and ESI figures come from, the PF and ESI calculator takes one person at a time, and PF and ESI for a small business explains when each one starts to apply.

How to process payroll in India without redoing it every month

Most payroll mistakes aren't arithmetic. They're a change that didn't reach the sheet: the advance given on the 18th, the raise agreed in the corridor, the leave approved on paper that never made it to attendance. So the most useful thing you can do is fix where each change comes from.

• Attendance and leave come from one register, not from the outlet managers' memories.
• Salaries come from each person's structure, with the date a revision takes effect.
• Advances and loans have a balance and an instalment, so recovery happens without anyone remembering it.
• Claims to be paid with salary are approved before the cut-off, or wait for next month.

Set Basic the same way for everybody while you're at it. CTC to in-hand salary covers how.

A monthly payroll checklist you can pin up

Every PF, ESI and TDS date for the year is on the compliance calendar, which you can add to your own calendar.

The payroll compliance checklist for India, once a year

A few jobs come round once a year rather than once a month, and they're the ones that get forgotten.

• Ask for investment declarations in April, so TDS is right from the first month rather than corrected in February.
• File the quarterly TDS return after each quarter ends, and issue each employee's Form 16 (renumbered under the Income-tax Rules 2026; check the new number on TRACES) by 15 June.
• Check ESI coverage in April and October, when each contribution period starts.
• Pay statutory bonus to everyone it covers, within eight months of the year's close.
• Keep the registers of wages and attendance. An inspection starts with them.

Going live with payroll software, one month at a time

We go live on a single line or department, never the entire plant on one Monday morning.Arpit Tak, The First 30 Days of a Shop-Floor Software Rollout

I wrote that about factories, and payroll software for a small business in India goes live the same way. Don't switch everything over on the 1st. Run one month in the new system beside the sheet you already trust, compare the two person by person, and pay from the old one until they agree. At the pharmacy, that month turned up a pharmacist whose ESI had been deducted for a year after his pay crossed the limit.

If you're weighing up whether it's time to move at all, signs your business has outgrown Excel for HR is the place to start.