Payroll Processing in Tally Prime: Complete Step-by-Step Guide

Payroll is one of the most compliance-intensive tasks for any Indian employer. Between PF, ESI, professional tax, TDS on salary, and monthly returns — the regulatory burden is significant. Tally Prime has a complete built-in payroll module that handles all of this.

This guide covers Tally payroll setup, monthly payroll processing, statutory compliance (PF, ESI, PT), and report generation — step by step.

What Tally Payroll Covers

• Salary structure creation (basic, HRA, DA, allowances, deductions)
• Employee master data management
• Monthly salary calculation and payslip generation
• Provident Fund (PF) — employee and employer contributions
• Employee State Insurance (ESI) — for eligible employees
• Professional Tax (PT) — state-specific deduction slabs
• TDS on salary (Section 192) — with Form 16 generation
• Gratuity and leave encashment calculations
• Payroll reports — register, summary, statutory forms

Step 1: Enable Payroll in Tally

Payroll is not enabled by default. To activate it:

1. Press F11 (Company Features)
2. Go to HR & Payroll section
3. Enable Maintain Payroll → Yes
4. Optionally enable Maintain Cost Centres for Job Costing if you track payroll by department
5. Press Ctrl+A to save

Step 2: Set Up Pay Heads

Pay Heads are the components of salary — both earnings (what the company pays) and deductions (what is withheld from employees). Navigate to: Payroll Info → Pay Heads → Create

Common earnings pay heads

Common deduction pay heads

Employer contribution pay heads

Step 3: Create Employee Groups and Employee Masters

Employee Groups

Groups allow batch processing. Create groups like "Permanent Staff", "Contract Staff", "Sales Team", or department-wise groups.

Navigate to: Payroll Info → Employee Groups → Create

Employee Master

For each employee, create a master record. Navigate to: Payroll Info → Employees → Create

Fields to fill:

• Name, employee group, date of joining
• PAN number (mandatory for TDS)
• PF UAN number, ESI number (if applicable)
• Bank account details (for salary transfer)
• Passport/Aadhaar details (optional)
• Salary Details — attach the salary structure (pay heads with amounts)

Step 4: Create Salary Structure

Salary structures define the formula for each employee's CTC. Navigate to: Payroll Info → Salary Details → Create

You can set each pay head as:

• Fixed amount — e.g., Basic = ₹25,000
• Formula-based — e.g., HRA = Basic × 50%, PF = Basic × 12%
• As computed value — calculated from other heads

Step 5: Process Monthly Payroll

At the end of each month, process payroll for all employees. Navigate to: Payroll Vouchers → Payroll

1. Select the payroll period (e.g., April 2026)
2. Select the employee group or individual employees
3. Tally auto-calculates salary, PF, ESI, PT, and TDS based on the configured structures
4. Review the salary statement — verify totals for each employee
5. Make adjustments for leaves taken, bonuses, or advances
6. Press Ctrl+A to generate the payroll voucher

Tally posts the accounting entries automatically:

• Dr: Salary Expense accounts (for each pay head)
• Cr: Employee Net Salary Payable, PF Payable, ESI Payable, PT Payable, TDS Payable

Step 6: Generate Payslips

After processing payroll:

1. Go to Display → Payroll Reports → Payslip
2. Select the period and employees
3. Press Alt+P to print or Alt+E to export as PDF
4. Email payslips to employees using Alt+M

Step 7: Statutory Compliance in Tally

Provident Fund (PF)

• PF contribution = 12% of Basic by employee + 12% by employer (employer's 12% split: 8.33% to EPS, 3.67% to EPF)
• PF is applicable for employees earning basic salary ≤ ₹15,000/month (mandatory) or those who opt in voluntarily
• Tally generates PF Challan for monthly deposit (due by 15th of following month)
• Export ECR (Electronic Challan cum Return) for EPFO portal upload

In Tally: Display → Payroll Reports → Statutory Reports → Provident Fund → PF Challan

Employee State Insurance (ESI)

• ESI applicable for employees earning ≤ ₹21,000/month gross
• Employee contribution: 0.75% of gross, Employer contribution: 3.25% of gross
• ESI return filed half-yearly (April–September, October–March)
• Tally generates ESI Challan and ESI returns data

Professional Tax

• State-specific — rates vary (Karnataka, Maharashtra, and West Bengal have different slabs)
• Not applicable in all states (not applicable in Delhi, Haryana, HP, J&K, Rajasthan, UP)
• Monthly or quarterly deposit depending on state regulations

TDS on Salary (Section 192)

• TDS on salary is based on the employee's projected annual income and their Income Tax slab
• Tally calculates monthly TDS based on declarations submitted by employees
• TDS must be deposited by the 7th of the following month
• Form 16 issued to employees by 15 June each year

Key Payroll Reports in Tally

Common Payroll Mistakes in Tally

• Not updating PF/ESI wage limits — wage ceilings change periodically; failing to update means wrong deductions
• Incorrect HRA exemption calculation — HRA exemption has specific rules (least of: actual HRA received, 50% of Basic for metro / 40% for non-metro, actual rent paid minus 10% of Basic)
• Forgetting employer contributions in salary cost — CTC must include employer's PF and ESI; many businesses understate their true payroll cost
• Not updating employee investment declarations — if employees submit 80C/80D declarations late, TDS is overcalculated and then refunded at year-end
• Processing payroll before all leaves are updated — leave without pay calculations must happen before payroll is processed

Too Complex? Outsource Your Tally Payroll

Payroll compliance in India is genuinely complex — PF, ESI, PT, TDS, Form 16, ECR uploads. Many SMEs outsource payroll entirely.

AutoTally's payroll processing service handles your monthly payroll in Tally — salary calculation, all deductions, challan preparation, payslip generation, and statutory reports. Starting at ₹3,000/month for up to 10 employees.

Get a free quote today.