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What are payroll deductions and the top 9 payroll deductions?

Payroll deductions, simply put, refers to the monetary amount the employer deducts from the employee’s salary every month. These deductions can either be voluntary, as is the case with insurance and other benefits, or involuntary. The employer withholds a certain percentage of the employees’ paycheck every month to cover contributions towards state and central taxes, garnishments, child support payments, insurance premiums, investment plans, and retirement plans.

While the government-mandated taxes, employee provident fund, employee state insurance, and TDS are compulsory deductions and need to be implemented throughout the tenure of the employee, some other deductions are optional. 

According to the rules of The Government of India, any company with an employee strength that crosses 20 people needs to consider statutory deductions as mandated by laws. These deductions vary in size and are included in the Cost to Company (CTC) amount. Any sort of non-compliance can result in monetary punishments to the organization as levied by the regulatory bodies. This facet comes into play especially when a company is working from multiple locations with several offices. The company needs to make sure that the payroll deduction is withheld in accordance with the region’s laws without fail. These deductions are removed from the total earnings of the employee including bonuses, commissions, and stock options. 

Some larger MNCs also provide its employees with the option to forward a part of their income towards buying the company’s stocks at a discounted rate. This comes under the slab of voluntary deductions as the employee can decide when to participate in such a program and what amount to divert. 

As an organization expands, payroll deductions become complicated. According to the Evolution of Payroll Technology survey conducted by Kronos, 29% respondents said that their payroll solution is older than 10 years. Outdated software can cause compliance issues for the organization.The payroll master or HR manager must ensure that the required amount is deducted at the source every month. Here are the top 10 payroll deductions that you need to look out for:

 

INVOLUNTARY DEDUCTIONS

 

1. Employees’ Provident Fund

Similar to 401(K) in the USA, the EPF was introduced in India to help employees save up for their retirement corpus. Implemented in the 1960s, the EPF is deducted directly from the pre-tax salary of the employee. In many cases, employers are compelled to match that amount with their own monetary input. 

The rules suggest that a basic 12% cut from the salary is compulsory. But organizations have the option to deduct a fixed amount, too, based on a salary range. 

This amount can be withdrawn by the employee when they quit the company. 

 

2. Professional Tax

This is another pre-tax deduction that is levied by the state government in India. This is a small tax imposed on all members of any profession in the respective state. 

This category includes people from different occupations, trades, businesses, and salaried professionals. The slab for the tax is decided on the basis of the monthly earnings of the individual, though the maximum deduction is limited to Rs. 2500 per year. 

 

3. Employees’ State Insurance

The state insurance corpus is built via contributions from both, the employer as well as the employee. This amount is limited to a maximum of Rs. 15000 per month. 

1.75% of the employee’s official monthly salary is deducted to put towards this insurance. While the employer has to contribute 4.75% of the monthly salary. This is a compulsory deduction and can be used for tax benefits. 

 

4. Income Tax or TDS

Income tax is also known as Tax Deducted at Source. This amount is the primary tax that is paid to the central government. The percentage slabs for each individual are based on their monthly earnings which include all sources such as salaries, commissions, bonuses, dividends, interests, and capital gains. 

 

VOLUNTARY DEDUCTIONS

 

1. Health Insurance Premiums

Some companies provide their employees with healthcare benefits by tying up with insurance providers. These premiums are usually deducted from the salary itself to make sure that the health insurance scheme remains valid throughout. 

 

2. Retirement Plans

Apart from the compulsory EPF deductions, employees can also volunteer to join the retirement schemes provided by the employer by paying monthly premiums. These schemes can ensure that the employee, upon retirement, receives a monthly pension along with a one-time payment. 

 

3. Life Insurance Premiums

Some companies tie-up with leading insurance providers to help secure the financial future of their employees’ families. A monthly premium goes towards life insurance which guarantees monetary benefits to the families upon the employees’ untimely deaths. 

 

4. Job-Related Expenses

Some businesses, especially SMBs, cannot afford to cover additional benefits for their employees. Travel expenses, rentals, uniform charges, meal charges, and union dues are all deducted from the employee’s monthly salary. 

 

5. Investment Plans

Domino’s Pizza offers all eligible employees the opportunity to invest in company stocks at discounted rates. Similarly, many other organizations offer stock options to their employees as an investment plan. The employee can decide the amount to contribute towards buying stocks. 

 

Payroll deductions need to be managed effectively by the organization. In the case of a small enterprise, the owner is responsible for making sure that payroll complies with the State and Central laws.