Payroll: earnings and deductions

A payroll is the statement every organisation prepares showing the details of salary paid to its employees. A salary depends on the days worked, the pay rate, the allowances and the deductions. A payroll system keeps employee data, works out pay each period, prints salary statements and pay slips, and tells the bank the net salaries and statutory payments.

Earnings (what is added):

• Basic Pay (BP): the fixed pay in the employee's pay scale, plus Grade Pay. This much is paid in any case.
• Dearness Pay (DP): the part of Dearness Allowance that has been merged with Basic Pay.
• Dearness Allowance (DA): compensation for the price rise that eats into the employee's purchasing power; a percentage of basic pay (plus dearness pay).
• House Rent Allowance (HRA): help with renting a home.
• Transport Allowance (TRA): for travel to work.
• Other allowances: education, medical, washing and so on.

Deductions (what is taken away):

• Professional Tax (in some states).
• Provident Fund (PF): social security savings, a percentage of basic pay plus dearness pay.
• Tax Deduction at Source (TDS): the year's income tax spread over 12 months.
• Loan instalments, advances and any other deductions.

Pay is only for days actually present: Effective days present = days in the month − leave without pay − unauthorised absence. Then Basic Pay Earned (BPE) = Basic Pay × effective days / days in the month, and DA and HRA are worked out as percentages of BPE.

The two lines exams ask most: Gross pay = Basic Pay + DA + HRA + TA + other allowances, and Net pay = Gross pay − total deductions.