How to Set Up Payroll in Tally Prime

Processing salaries in Tally Prime goes beyond recording a monthly payment entry — it means structuring each employee’s pay correctly, calculating statutory deductions like PF and ESI automatically, and producing payslips your employees can actually understand. Done right, it also feeds into your accounting entries automatically, saving you double entry across HR and finance.

This guide covers the full payroll setup from scratch.

What You Need Before You Start

• Tally Prime installed, with your company already created
• Employee details — name, designation, department, date of joining, bank account, and PAN
• Your salary structure decided — basic pay, HRA, special allowance, and any other components you pay
• PF and ESI registration details if applicable (PF registration number, ESI registration number)

Step 1: Enable Payroll

1. Gateway of Tally, then F11 (Features), then F1 (Accounting Features)
2. Set Maintain Payroll to Yes
3. If you want department-wise tracking, also enable Use Cost Centres for Payroll — see our guide on how to use cost centres in Tally Prime
4. Press Ctrl+A to save

Step 2: Create Payroll Units (Attendance Units)

1. Gateway of Tally, then Payroll Info, then Units (Work), then Create
2. Create attendance units you’ll use — for example, Days (for daily attendance), Hours (for overtime tracking), or Pieces (for piece-rate workers)
3. Save

Step 3: Set Up Attendance/Leave Types

1. Gateway of Tally, then Payroll Info, then Attendance/Leave Types, then Create
2. Create types you track — Present (days worked), Leave with Pay, Leave without Pay, Absent, Overtime, etc.
3. Save each

Step 4: Create Pay Heads (Salary Components)

Pay heads are the individual components that make up a salary — earnings and deductions:

1. Gateway of Tally, then Payroll Info, then Pay Heads, then Create
2. Create earning pay heads: Basic Salary, House Rent Allowance (HRA), Conveyance Allowance, Special Allowance, etc.
3. For each earning head, set the Pay Head Type (typically Earnings for Employees), the calculation method (whether it’s a fixed amount per employee, or a percentage of another head like Basic), and the relevant account ledger under Indirect Expenses for accounting purposes
4. Create statutory deduction heads: PF Employee, ESI Employee, Professional Tax, and any others applicable to your business
5. Create employer contribution heads if you also want to record the employer’s side: PF Employer Contribution, ESI Employer Contribution
6. Save each pay head

Step 5: Create Employee Groups (If Applicable)

1. Gateway of Tally, then Payroll Info, then Employee Groups, then Create
2. Group employees by department or category (for example, Sales, Production, Management)
3. Assign a common pay structure at the group level if most employees in a group share the same components, reducing the need to configure every individual separately

Step 6: Create Employee Masters

1. Gateway of Tally, then Payroll Info, then Employees, then Create
2. For each employee, enter:
   • Name and Employee Number
   • Date of Joining
   • Department/Group
   • Designation
   • PAN and Aadhaar
   • Bank account details for salary payment
   • PF and ESI numbers if applicable
3. Assign their pay structure — either inheriting from the group or setting individual amounts/percentages for each pay head
4. Save

Step 7: Record Attendance

Before calculating salaries for a month, you need to record attendance:

1. Gateway of Tally, then Payroll Vouchers, then Attendance Voucher
2. Select the period (usually a calendar month or your payroll cycle)
3. Enter days present, leave days, and overtime for each employee
4. Save the attendance voucher

Step 8: Process Payroll (Payroll Voucher)

1. Gateway of Tally, then Payroll Vouchers, then Payroll Voucher
2. Select the payroll period
3. Tally Prime calculates each employee’s gross earnings based on their pay heads and attendance recorded, and their deductions (PF, ESI, Professional Tax, etc.) based on the deduction pay heads configured
4. Review the calculated amounts for each employee before saving
5. Save the payroll voucher — this simultaneously posts the accounting entries (salary expense, PF/ESI payable, net salary payable) without needing a separate journal entry

Step 9: Print Payslips

1. From the payroll voucher or through the Payroll Reports section, select the payslip print option
2. Choose individual employees or a group/all employees for bulk printing
3. Customize what appears on the payslip if needed, similar in principle to invoice print configuration
4. Print or save as PDF to distribute to employees

Step 10: Pay Salaries and Record the Payment

1. After the payroll voucher, record the actual bank payment to each employee’s account
2. Gateway of Tally, then Vouchers, then F5 (Payment)
3. Credit the Bank ledger and debit the Salary Payable or Net Salary ledger, settling the liability created by the payroll voucher

Step 11: Deposit and Account for PF, ESI, and Professional Tax

1. The payroll voucher records PF, ESI, and Professional Tax as payable liabilities automatically
2. When you deposit these with the relevant authorities, record the payment against those payable ledgers to clear them
3. File the relevant statutory returns (PF ECR, ESI monthly return, Professional Tax returns) through the respective government portals, using the data from Tally Prime’s payroll reports

Common Mistakes to Avoid

• Skipping attendance recording and just manually entering calculated salary amounts, which defeats the purpose of the automated calculation and leaves no attendance audit trail
• Not linking pay heads to the correct accounting ledgers, so the payroll entries post incorrectly in your profit and loss report
• Forgetting to set up employer contribution pay heads separately from employee deduction heads, which understates your actual employment cost
• Not depositing PF/ESI promptly after processing payroll, attracting interest and penalties for late deposit
• Processing payroll without reviewing the calculated amounts before saving, letting configuration errors silently produce incorrect figures for months

FAQs

Can Tally Prime handle different salary structures for different employees? Yes, each employee can have their own pay structure configured individually, overriding group-level defaults where needed, so you can accommodate variable salaries without issues.

Does Tally Prime file PF and ESI returns automatically? Tally Prime provides the data and reports to support filing, but actual return filing (PF ECR, ESI returns) happens through the respective government portals, not within Tally Prime itself.

Can I handle part-month joining and attendance-based proration automatically? Yes, if you’ve configured your pay heads to calculate based on attendance units, Tally Prime prorates the salary based on actual attendance recorded, including for employees who join mid-month.

How do I handle variable pay components like monthly incentives or bonuses? These are typically created as separate pay heads and entered as additional earnings in the relevant payroll voucher period, rather than as fixed monthly components.

Is Tally Prime’s payroll module suitable for large organisations? It’s well-suited for small to mid-sized businesses. Very large organisations with highly complex payroll requirements (hundreds of employees with many variable components, complex leave policies) sometimes find dedicated HRMS software more appropriate, with Tally Prime then receiving accounting entries from that system.