Payroll Processing in India: Allowances and Benefits of Software

Payroll management is a multifaceted process. As a part of payroll, businesses generally compute and withhold government taxes like social security and individual income taxes from an employee’s salary. Many companies also have benefit plans like health insurance, which include deductions of premiums from its employees’ salaries according to employee customization, adding another layer of activity for payroll processing.
To help shed some light on this complicated process, in this article we discuss the various types of allowances and the benefits of payroll processing through software.
Taxable Allowances:

1. Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of living adjustment allowance paid to the employees to cope with inflation. DA paid to employees with salary is fully taxable. The IT Act mandates that tax liability for DA along with salary must be declared in the filed return
2.  Entertainment Allowance: Employees are allowed the lowest of the declared amount –one-fifth of basic salary, actual amount received an allowance or Rs. 5,000. However, Government employees can claim exemption in the manner provided in section 16 (ii). All other employees have to pay tax on it.
3. Overtime Allowance: Employers may provide an overtime allowance to employees working over and above the regular work hours. This is called overtime and any allowance received for this is fully taxable.