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Payroll Compliance Myths You Need to Stop Believing Today

Every organisation needs to process its payroll efficiently and with expertise. Its one of the most crucial tasks in any organisation. Going wrong with payroll can be intensely expensive and highly demotivating for employees. This holds for both SMEs and big companies, as the penalties of any error will be high regardless of your brand name and company size. Professionals need to keep in mind several factors when calculating salaries. These influence payments, tax cuts, contributions to the Employee Provident Fund, and more.

Yet, there are no specific rules for processing payroll and this leaves a few laws open to interpretation by businesses. But they arent always correct in their understanding of these rather vague rules.

To ensure smooth sailing in executing payroll, lets bust a few myths that surround this procedure.

Payroll Compliance Myths You Need to Stop Believing Today

Myth – Spreadsheet-Based Payroll is Easier and Free of Errors

Businesses normally process payroll using spreadsheets since that doesnt require initial investments. Using this manual method of payroll is essentially a budget-saving measure. But this practice can be a costly one in the long run because spreadsheets are prone to errors. Theyre time-consuming to calculate, lengthy, and there are high chances of mathematical errors as these details are manually entered. This method is considered outdated. Its more difficult to update spreadsheets with changes in compliance. Its also complicated to add and remove employees from existing sheets. Most of all, using these increases business costs as companies will have to hire skills pros to calculate payroll. Yet, more than 50% of Indian businesses depend on paper or spreadsheet-based payroll for calculations.

Instead, its much better to use modern cloud-based systems to streamline payroll processes. With such platforms, you can avoid duplications and data omissions.

Myth – Theres an Exact PTO Quota
Paid time off (PTO) is a flexible benefit and many companies are doing away with formalized PTO accruals and some others are even offering unlimited PTO. Whatever your company chooses to follow, its best if you keep documentation in place to make this process easier for both the company and employees.

Myth – PF Is Calculated on The Employees Basic Salary
Many companies calculate the amount to be allocated for the provident fund using only the employees basic salary as the basis. On 28th February 2019, a ruling by the Supreme Court rendered this practice obsolete. What must be done?

The reality is that the PF must be calculated on the employees fixed salary. PF contribution is calculated at the rate of 12% of the employees fixed wages. This includes basic pay, their special allowance. This doesnt include HRA, overtime, etc.

According to the same Supreme Court ruling, the allowance paid by the employer to its employees must be included as a part of their basic wages. Therefore, this is subject to PF contributions. There are exceptions to this rule:

  • Variable allowances that are linked to incentives. These refer to compensation that aims to create higher output from the employee
  • Allowances that are a part of the basic wage
  • Allowances were paid to those who availed of the opportunity
  • Allowances that are paid across the board to all of a particular categorys employees

Myth – Medical and Transport Allowance Must Be Included in the CTC
While several employers include medical and transport allowance in an employees CTC structure, this is an outdated practice. Years ago, it was common to find these allowances comprising the CTC. The employees would claim tax benefits on a medical allowance of Rs. 15,000 and a transportation allowance of Rs. 19,200. But since then, these exemptions were replaced with a standard deduction. This has made medical and transport allowance as a part of the CTC redundant. Today, employers can allocate these funds as special allowances. The threshold of this was increased to Rs. 50,000 in the Union Budget of 2020.

Myth – Employees Must Bear the Administrative Charges of PF
There is a certain charge incurred when managing a PF account and some employers transfer these onto the employees. They do this by making it a part of the CTC. This practice is wrong. The PF charges should be solely borne by the employer and no one else. If an employer gives 12% of the fixed wages (HRA excluded), 0.5% charges will be added to this. Thus, the total cost to the employer becomes 12.5%. Companies should treat this as an expense in the profit and loss of their balance sheet.

Myth – Software Vendors Wont Work with SMBs
This is no longer true today as modern-day vendors and payroll software providers have highly scalable solutions. These can be adjusted to work with teams as small as 5 people strong, or they can work with a company that has over 1000 employees.

Myth – LTA deductions can be claimed annually
There is a practice of employees submitting their LTA bills to their employers annually to claim tax benefits. This is incorrect and unethical. LTA deduction should only be claimed twice in a 4-year block. How this happens is that employees switch jobs and dont tell their new employers about previous LTA exemptions theyd claimed. But according to Income Tax laws, an employee can claim LTA exemption for only two domestic travels. This is valid within a block of 4 calendar years.

Myth – Medical and Transport Allowance Must Be Included in the CTC

This is available only on the LTA or travel cost received by the employee. While theres no way for employers to find out about their employees previous LTA claims,its in the best interests of the employees to inform their current employer about previously collected LTAs. Failing to do so can invite a notice from the Income Tax department.

There are many more myths in this arena and it can be tough for companies to navigate through them all.

Thats why its best to employ compliance experts zalike Core Integra to help you ensure your payroll compliance as smoothly as possible.