Deduction

Meaning & Definition

An employee’s gross salary is deducted from other amounts, called deductions; so deductions make up net pay. There can be two types of deductions: statutory and voluntary. Statutory deductions include things like provident funds and taxes. Voluntary deductions include things like insurance premiums and loan payments. The deductions are clearly displayed on an employee’s pay slip.

Importance in HR & Payroll Management

• Assist with the precise calculation of an employee’s take-home pay.
• Promote statutory compliance as well as tax compliance.
• Assist with providing employees with an understanding of their salary structure and different components.
• Create transparency in processing and reporting payroll.
• Decrease errors in payroll processing, as well as reduce employee questions related to payroll.

Compliance Requirements

• The Payment of Wages Act, 1936, provides limits on how much can be deducted from pay and when those deductions must occur.
• The Income Tax Act of 1961 governs income tax-related deductions (TDS).
• Employees’ Provident Funds Act 1952 and Employees’ State Insurance (ESI)1948. Statutory deductions must be made.

All deductions have to be within legal limits, and the employee must be made aware of the deductions.

For more info, visit: Payroll Software