Every month, I talk to HR managers who are stressed about payroll. Not because they don’t know their job. But because payroll in India has a lot of moving parts — and one wrong formula can cause a chain reaction of errors. Wrong PF deduction. Wrong TDS. Wrong net salary. And then the questions start coming in from employees.
I’ve been working with hundreds of small and mid-size businesses across India, and I can tell you — most payroll errors don’t happen because HR managers are careless. They happen because nobody sat down and explained these formulas clearly, in one place, without making it feel like a CA exam. So that’s what this is. A simple, practical cheat sheet of every payroll formula you need — with real examples so you can actually use them.
Save this. Bookmark it. Come back to it every month if you need to.
Before We Get Into Formulas — Understand This First
One thing I always tell new HR managers — payroll is not just about one number. It’s a sequence. You start with CTC. You break it into gross salary. You apply deductions. You calculate statutory contributions. And what’s left is net pay. If you get the sequence wrong, everything downstream is wrong.
Here’s the sequence at a glance:
CTC → Gross Salary → Statutory Deductions → Net Pay
And here’s something that changed post November 2025 that you must know — under the new Labour Codes, your non-wage components like HRA, conveyance, and special allowances cannot exceed 50% of total CTC. If they do, the excess gets treated as basic wages — which increases your PF, ESI, and gratuity liability automatically.
So if your salary structures were designed to keep basic low, it’s time to revisit them.
Payroll Formulas Cheat Sheet
Formula 1 — Gross Pay
This is where payroll starts.
Gross Pay = Basic Salary + HRA + All Allowances + Overtime Pay (if any) + Other Earnings
Gross pay is what an employee earns before any deductions. It does not include employer contributions like PF or ESI — those are on top of gross, not inside it.
Example:
Rahul’s salary structure:
- Basic: ₹25,000
- HRA: ₹10,000
- Conveyance: ₹1,600
- Special Allowance: ₹5,000
Gross Pay = ₹25,000 + ₹10,000 + ₹1,600 + ₹5,000 = ₹41,600
Formula 2 — Overtime Pay
Not every company pays overtime. But if yours does — here’s the formula.
Overtime Pay = (Basic Salary ÷ 26) ÷ 8 × Overtime Hours × Overtime Multiplier
The overtime multiplier is typically:
- 1.5x for weekdays
- 2x for holidays and Sundays
This may vary based on your state’s Shops and Establishments Act or the applicable labour law.
Example:
Priya’s basic salary is ₹20,000. She worked 10 hours of overtime on a weekday.
Hourly rate = ₹20,000 ÷ 26 ÷ 8 = ₹96.15 Overtime Pay = ₹96.15 × 10 × 1.5 = ₹1,442
Formula 3 — LOP Deduction (Loss of Pay)
When an employee is absent without leave balance, you deduct LOP.
LOP Deduction = (Gross Salary ÷ Total Working Days in Month) × Number of LOP Days
Most companies use 26 as the standard working days divisor. Some use actual working days in the month. Whatever your policy — be consistent.
Example:
Amit’s gross salary is ₹30,000. He took 2 days LOP in a month with 26 working days.
LOP = ₹30,000 ÷ 26 × 2 = ₹2,308
His payable gross that month = ₹30,000 − ₹2,308 = ₹27,692
Formula 4 — Provident Fund (PF)
PF is one of the most important — and most miscalculated — statutory deductions.
Employee PF = 12% of (Basic Salary + DA)
Employer PF = 12% of (Basic Salary + DA)
- Of the employer’s 12% — 8.33% goes to EPS (Employee Pension Scheme), capped at ₹1,250 per month
- Remaining 3.67% goes to EPF
Important: PF is calculated on Basic + DA only — not on gross salary. This is where many small businesses make mistakes.
Also important: If Basic + DA is above ₹15,000 — the employer has the option to cap PF calculation at ₹15,000. Many employers exercise this option. But if an employee was already a PF member at a previous job, they remain a member regardless of salary level.
Example:
Sunita’s Basic = ₹25,000, DA = ₹0
Employee PF = 12% × ₹25,000 = ₹3,000 Employer PF = 12% × ₹25,000 = ₹3,000
- EPS portion = 8.33% × ₹15,000 = ₹1,250 (capped)
- EPF portion = ₹3,000 − ₹1,250 = ₹1,750
PF must be deposited with EPFO by the 15th of the following month. Late deposit attracts 12% interest per annum.
Check latest update with: EPFO
Formula 5 — ESI Contribution
ESI applies to employees whose gross salary is ₹21,000 per month or less. For persons with disability, the threshold is ₹25,000.
- Employee ESI = 0.75% of Gross Salary
- Employer ESI = 3.25% of Gross Salary
- Total ESI = 4% of Gross Salary
One thing that trips up a lot of HR managers — if an employee’s gross salary crosses ₹21,000 mid-year, ESI deductions do not stop immediately. They continue for the rest of that contribution period (April to September or October to March). They only stop in the next contribution period.
Example:
Vijay’s gross salary = ₹18,000
Employee ESI = 0.75% × ₹18,000 = ₹135 Employer ESI = 3.25% × ₹18,000 = ₹585 Total ESI = ₹720
ESI must also be deposited by the 15th of the following month. Late deposit can attract damages up to 25% of arrears.
Check the latest update with: ESIC
Formula 6 — Professional Tax (PT)
Professional Tax is a state-level deduction. Not all states have it — and the slabs vary by state.
PT = As per the applicable slab in the employee’s work state
- States that have PT: Maharashtra, Karnataka, Andhra Pradesh, Telangana, West Bengal, Tamil Nadu, Gujarat, Madhya Pradesh, and a few others.
- States with no PT: Delhi, Rajasthan, Haryana, UP, and others.
Example — Maharashtra slab:
| Monthly Gross Salary | PT Amount |
| Up to ₹7,500 | Nil |
| ₹7,501 to ₹10,000 | ₹175/month |
| Above ₹10,000 | ₹200/month (₹300 in February) |
So for an employee in Maharashtra earning ₹30,000 gross — PT = ₹200/month.
Formula 7 — TDS on Salary
TDS is calculated on estimated annual taxable income — not monthly salary. This is why it changes throughout the year as employee declarations and actual investments get updated.
Step 1: Estimate annual gross salary Step 2: Subtract standard deduction (₹75,000 for FY 2026-27 under new regime) Step 3: Apply applicable tax slab rates Step 4: Divide annual tax by 12 to get monthly TDS
Under the new tax regime (default from FY 2026-27):
| Annual Income | Tax Rate |
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
Note: Income up to ₹12.75 lakh is effectively zero tax under the new regime for salaried employees — because of the ₹75,000 standard deduction and Section 87A rebate of ₹60,000.
Formula 8 — Total Deductions
Once you have all the individual deductions calculated — add them up.
Total Deductions = Employee PF + Employee ESI (if applicable) + Professional Tax + TDS + Any Other Deductions (loan recovery, advance, etc.)
Example (continuing Rahul’s example from Formula 1):
Rahul’s gross = ₹41,600, Basic = ₹25,000
- Employee PF = 12% × ₹25,000 = ₹3,000
- ESI = Not applicable (gross above ₹21,000)
- PT (Maharashtra) = ₹200
- TDS = ₹800 (assumed based on annual income)
Total Deductions = ₹3,000 + ₹200 + ₹800 = ₹4,000
Formula 9 — Net Pay (Take Home Salary)
This is what actually hits the employee’s bank account.
Net Pay = Gross Pay − Total Deductions
Example:
Rahul’s gross = ₹41,600 Total deductions = ₹4,000
Net Pay = ₹41,600 − ₹4,000 = ₹37,600
Formula 10 — Total Payroll Cost to Company
This is the actual cost the employer bears — which is higher than what the employee receives or even the gross salary.
Total Payroll Cost = Gross Salary + Employer PF + Employer ESI + Gratuity Provision + Any Other Employer Benefits
Example:
Rahul’s gross = ₹41,600 Employer PF = ₹3,000 Employer ESI = Not applicable Gratuity provision = ₹41,600 × 4.81% = ₹2,001 (approximate monthly provision)
Total Cost to Company = ₹41,600 + ₹3,000 + ₹2,001 = ₹46,601/month
This is why CTC is always higher than gross salary — it includes employer-side contributions that never appear on the employee’s payslip.
Full Payroll for One Employee
Let me pull everything together with one complete example.
Employee: Kavya
- Designation: Marketing Executive
- Basic: ₹20,000
- HRA: ₹8,000
- Conveyance: ₹1,600
- Special Allowance: ₹4,000
- Work Location: Bengaluru (Karnataka — PT applicable)
- Tax Regime: New regime
Step 1 — Gross Pay ₹20,000 + ₹8,000 + ₹1,600 + ₹4,000 = ₹33,600
Step 2 — Employee PF 12% × ₹20,000 = ₹2,400
Step 3 — ESI Gross = ₹33,600 — above ₹21,000 — ESI not applicable
Step 4 — Professional Tax (Karnataka) ₹33,600 gross — PT = ₹200/month
Step 5 — TDS Annual gross = ₹33,600 × 12 = ₹4,03,200 Less standard deduction = ₹75,000 Taxable income = ₹3,28,200 Tax = Nil (below ₹4,00,000 threshold under new regime) TDS = ₹0
Step 6 — Total Deductions ₹2,400 + ₹200 + ₹0 = ₹2,600
Step 7 — Net Pay ₹33,600 − ₹2,600 = ₹31,000
Step 8 — Total Cost to Company Gross ₹33,600 + Employer PF ₹2,400 + Gratuity provision ₹1,616 = ₹37,616/month
The Honest Problem with Manual Calculations
I’ve shown you the formulas. And if you have 5 employees — you can probably manage this manually. But if you are in a company with 30, 50, 100 employees and doing all these calculations in excel then probably you and your company are making a huge mistake. Because if you did mistake in basic salary, tds calculation, ESI threshold – you may be invited compliance mess that takes days to untangle. And sometimes results in notices from EPFO or ESIC.
This is exactly why we built Runtime HRMS the way we did. Every formula in this article — gross pay, PF, ESI, PT, TDS, net pay — is automated. You configure the salary structure once. Every month, the calculations run automatically, statutory deductions update based on current rules, and payslips are generated without you touching a single formula.
The goal was simple — give HR managers their time back and give businesses the accuracy they need to stay compliant.
👉 Book a Free Demo — See How Runtime HRMS Automates Payroll →
Frequently Asked Question
What is the difference between CTC and gross salary?
CTC means is what the company pays, gross salary is what the employee earns, and net salary is what the employee takes home.
Is PF calculated on basic salary or gross salary?
PF is calculated on Basic Salary plus Dearness Allowance — not on gross salary.
When does ESI not apply?
ESI does not apply when an employee’s gross salary exceeds ₹21,000 per month (₹25,000 for persons with disability).