How to Set Up Payroll for a Small Business in India
To set up payroll, get a PAN and TAN, register under Shops and Establishments (plus EPF at 20 employees, ESI at 10 in covered states and professional tax where it applies), create employee records, design a simple salary structure, fix a pay calendar and follow a monthly routine. Move off spreadsheets once you pass a few people.
Starting payroll for your first employees feels heavy, but the work becomes simple once you set it up in the right order. Use this guide as a first-month checklist.
Step 1: Register the business and get the numbers
- ✓PAN and TAN for the company; TAN is needed to deduct TDS.
- ✓Shops and Establishments registration in your state.
- ✓EPF registration once you have 20 employees, or earlier if you choose to opt in.
- ✓ESI registration once you cross 10 employees in covered states.
- ✓Professional tax registration if your state levies it.
Step 2: Create employee records
Collect identity proof, PAN, bank details, address, emergency contact and, for PF, the UAN or details of any previous PF account. Issue a written appointment letter with role, salary and terms.
Step 3: Design a simple salary structure
Decide on basic, HRA and allowances, and the employer contributions. Keep it consistent and document the logic. Think about how much of the pay is fixed and how much is variable.
Step 4: Set the pay calendar
Choose a pay date, an attendance cut-off and a date for submitting claims. Consistency builds trust more than a fancy policy.
Step 5: Know your deductions
- ✓Employee PF and ESI where applicable.
- ✓Professional tax by state.
- ✓TDS on salary, based on each employee's regime and declarations.
- ✓Loan or advance recoveries.
Step 6: Choose your tool
A spreadsheet might work for two or three people, but it becomes risky quickly. A cloud payroll tool computes statutory deductions, generates payslips and bank files, and keeps up with rule changes.
Step 7: Run the monthly routine
Collect attendance, update changes, run payroll in draft, review, approve, pay, deposit dues and file returns. Keep a folder of proof for every month.
Common beginner mistakes
- ✓Paying cash without records.
- ✓Ignoring PF and ESI until a notice arrives.
- ✓Not collecting PAN, leading to higher TDS.
- ✓Mixing personal and business accounts when paying salaries.
Set up payroll the way you will want it to look when you have fifty employees.
Rules depend on state and headcount, so confirm what applies to your business with an accountant at the start.
Written by
HR Manager, Airwix Technologies (Sleet)
Nihit Dobariya is the HR Manager at Airwix Technologies in Ahmedabad, where he runs HR and payroll for the team behind Sleet. He writes about payroll, PF and ESIC, professional tax, the labour codes and everyday HR practice for Indian employers, and checks each rule against the official notification before it is published.
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