Managing payroll in India isn’t just about calculating salaries and transferring funds. It involves adhering to a complex set of legal requirements that ensure employees are compensated fairly, statutory deductions are made correctly, and your business stays compliant with government regulations.
Whether you’re a startup just beginning to scale or an established enterprise, understanding payroll compliance is critical. This guide breaks down the key components every Indian business should know — and how to get it right from day one.
What is Payroll Compliance?
Payroll compliance refers to the process of managing employee compensation while adhering to applicable laws, regulations, and statutory deductions set by Indian authorities.
It includes:
- Accurate calculation of salaries and wages
- Timely deposit of taxes and statutory dues
- Filing mandatory returns and reports
- Maintaining proper employee records
Failing to comply can lead to penalties, employee dissatisfaction, or legal complications.
Key Components of Payroll Compliance in India
Let’s walk through the essential elements that make up payroll compliance for Indian businesses.
1. Employee Categorization
Before payroll can be processed, businesses must correctly classify employees. This classification determines eligibility for various statutory benefits.
Common categories:
- Full-time employees
- Part-time or contract staff
- Interns or trainees
- Gig or freelance workers (subject to different rules)
Classification affects how salaries, benefits, and taxes are handled — and errors here can lead to misreporting or disputes.
2. Salary Structure and Payslips
A structured salary format is essential for transparency and tax calculations.
A typical salary breakup includes:
- Basic Salary
- House Rent Allowance (HRA)
- Conveyance Allowance
- Special Allowance
- Provident Fund (PF) contribution
- Professional Tax (if applicable)
- Income Tax deductions (TDS)
What you must do:
- Issue monthly payslips to employees
- Ensure that the payslip reflects all earnings and deductions
- Maintain digital or physical records for audit purposes
3. Provident Fund (PF)
The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme for eligible employees.
Applicability:
- Businesses with 20 or more employees must register for EPF
- Employees earning up to ₹15,000/month must be enrolled (higher salary employees can opt-in voluntarily)
Contribution:
- 12% of basic salary from the employee
- 12% matched by the employer
Employers must deposit PF dues before the 15th of each month, based on the previous month’s payroll.
4. Employees’ State Insurance (ESI)
ESI is a health insurance and benefits scheme provided by the government for employees earning ₹21,000/month or less.
Applicability:
- Mandatory for companies with 10 or more employees (20 in some states)
Contribution:
- Employee: 0.75% of gross salary
- Employer: 3.25% of gross salary
Timely registration, deduction, and deposit are critical to staying compliant.
5. Professional Tax
Professional tax is a state-level tax applicable in several Indian states such as Maharashtra, Karnataka, Tamil Nadu, and West Bengal.
Applicability:
- Based on state rules and employee salary slabs
Employers are responsible for:
- Registering with the respective state authority
- Deducting professional tax from employees’ salaries
- Depositing it to the government within the prescribed timelines
Failing to do so can lead to penalties and interest charges.
6. Income Tax (TDS) on Salaries
Under the Income Tax Act, employers must deduct Tax Deducted at Source (TDS) from employees’ salaries based on their applicable tax slabs and declarations.
Employer obligations:
- Collect proof of investment and declarations (Form 12BB)
- Calculate and deduct TDS monthly
- Deposit TDS with the government before the 7th of the following month
- File quarterly TDS returns (Form 24Q)
- Issue Form 16 to employees annually
TDS compliance ensures that employees are not penalized later during their personal tax filings and also keeps the company audit-ready.
7. Labour Welfare Fund (LWF)
Some states mandate contributions to the Labour Welfare Fund, which supports worker welfare activities.
Applicability and contribution vary by state.
For example, in Maharashtra:
- Employee: ₹12
- Employer: ₹36
(Paid every six months)
Ensure you’re aware of your state’s LWF requirements and timelines.
8. Gratuity and Bonus
Gratuity:
Applicable if the employee has completed 5 years of continuous service. The employer is obligated to pay gratuity under the Payment of Gratuity Act, 1972.
Bonus:
Under the Payment of Bonus Act, companies with 20 or more employees must pay an annual bonus to eligible employees earning below ₹21,000/month.
Maintaining a reserve for gratuity and planning annual bonus disbursements helps with financial planning and compliance.
Mandatory Registers and Recordkeeping
Indian labour laws require employers to maintain several records, either digitally or physically. These include:
- Employee attendance records
- Salary registers
- Statutory deductions and deposit proofs
- Employee master data (designation, DOJ, PAN, Aadhaar)
- PF, ESI, and professional tax registration certificates
Having these records readily available is essential during inspections or audits.
Common Payroll Compliance Challenges
Despite good intentions, many businesses struggle with:
- Keeping up with frequent legal updates
- Managing compliance across different states
- Manual errors in tax calculations or deductions
- Delays in return filing or deposit timelines
These gaps can attract fines, audits, or damage employee trust.
Tips for Staying Compliant
- Stay updated with central and state-level changes in labour and tax laws
- Use payroll software to automate calculations, deductions, and report generation
- Set reminders for due dates (PF, ESI, TDS, returns)
- Conduct quarterly internal audits to catch discrepancies early
- Provide training to HR and finance teams on payroll compliance
- Maintain backup of documents to avoid trouble during audits
Final Thoughts
Payroll compliance is not just a legal necessity — it’s a reflection of how professionally your business treats its employees. Ensuring timely, accurate, and transparent payroll builds employee trust, protects your business from legal risks, and enhances your reputation as a responsible employer.
While the regulations may seem complex, setting up the right systems early on — and staying consistent — makes payroll compliance manageable, even for growing companies.
Leave a Reply