Payroll processing in India is a multidimensional, crucial responsibility of every organisation, which involves a clear understanding and adherence to statutory requirements, staff management, and accuracy from an accounting perspective.
Various central and state-level legislations govern the payroll compliance in India, such as the Payment of Wages Act, Minimum Wages Act, EPF Act, ESI Act, Income Tax Act, and Shops & Establishments Act, with each one having different requirements pertaining to salary structure, deductions, benefits, and compliance due dates.
Accordingly, it is the employer’s duty to diligently keep track of attendance and leave, while also calculating tax liabilities, submissions, and required documentation.
Payroll Compliance Checklist
Payroll compliance in India refers to the process of ensuring that all salary-related payments, deductions, filings, and statutory contributions are made correctly, clearly, and on time, as required by central and state labour laws. Non-compliance invites severe penalties, legal notices, and loss of reputation. The following checklist is intended as a step-by-step tool for the HR team, payroll managers, and business owners.
1. Employee Record and Documentation Compliance
Payroll accuracy depends on the correct maintenance of personnel documents. The following should be ensured by HR:
1.1 Personal and Employment Records
Employee personal details include
- full name, address, date of birth, Aadhaar, and PAN.
- Offer and appointment letters.
- Designation, department, and office location.
- Confirmation letter, probation period, and date of joining (DOJ).
- Information regarding work hours, weekly off days, and holiday schedule.
- Registration under the relevant state Shops & Establishment Act.
1.2 Statutory Documents
- Use PAN for TDS deductions.
- Aadhaar-based e-KYC for EPFO and ESIC.
- UAN for PF.
- Provide ESIC IP number for ESI coverage.
- Bank account details for salary disbursement.
- Nomination forms, like Form 2 for PF (Provident Fund).
1.3 Internal HR Documents
Attendance and timesheet records are updated. Records to be maintained include paid, casual, sick, and LWP. Overtime hours approved must be recorded. Salary structure and CTC breakdown must be drawn up. Reimbursement claims with bills are to be forwarded for reimbursement.
2. Compliance related to Payroll Calculations
Payroll should be processed in accordance with the relevant statutory regulations relating to pay, deductions, and employee benefits.
2.1 Components of Salary
Accurately classify
- basic salary and HRA.
- Special allowances
- Conveyance allowance
- Leave travel allowance – LTA
- Bonuses and performance incentives
- Employer PF contribution
- Gratuity provisioning
2.2 Minimum Wage Compliance
- Follow central or state-specific minimum wage rates, whichever is higher.
- Categorise employees: unskilled, semi-skilled, and skilled.
- Revise wages when the government notifies updates, usually half-yearly.
2.3 Working Hours & Overtime
- Maximum 48 hours/week, 9 hours/day as per Factories Act or S&E Act.
- OT must be paid at twice the normal wage rate.
- OT must be computed on basic wage + allowances as per state rules.
2.4 Leave & Attendance
Complying with:
- Proper Leave Without Pay deduction.
- Earned/privilege leave entitlements
- Sick leave
- Casual leave
- Holiday pay according to state law.
2.5 Bonus & Gratuity
- Bonus: Statutory payment under the Payment of Bonus Act, 1965, for workmen drawing wages up to ₹21,000 per month.
- Gratuity: Payable after 5 continuous years of service as per the Payment of Gratuity Act.
3. EPF Compliance Checklist
PF is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act of 1952.
3.1 Eligibility
- It is mandatory for employees receiving a monthly basic pay of up to ₹ 15,000.
- An available option for opt-in by those earning a higher salary.
3.2 Contribution Guidelines
Employee contribution is 12%. Contribution by an employer also amounts to 12%, shared between EPF and EPS. The proper allocation is as follows:
- EPF: 3.67%
- EPS: 8.33% – applicable for those employees getting a basic salary of ₹ 15,000 or less.
3.3 Monthly Compliance
Confirm that the PF challan is paid by the 15th of the subsequent month. File ECRs through the EPFO Portal. Create a UAN for newly hired employees. Complete KYC seeding and get approval.
3.4 Annual Compliance
- PF annual returns are generated automatically by EPFO.
- Distribute UAN statements to employees.
- Update nomination records.
4. Employee State Insurance – ESI Compliance
Governance of this activity falls under the ESI Act of 1948.
4.1 Eligibility
- Must have at least 10 employees in most states.
- Compulsory for workers who earn a monthly income of ₹ 21,000 or less (₹ 25,000 in the case of people with disabilities).
4.2 Contribution Rates
- The employee’s contribution is 0.75% of gross pay.
- Employers contribute 3.25% of gross pay.
4.3 Compliance Activities
- Register eligible employees and ESIC IP number generation.
- Payments are made monthly and are due by the 15th of the following month.
- Make bi-monthly contribution returns.
- Report employee removals and changes.
5. Professional Taxation (PT) Compliance
Professional Tax is levied by states, including Maharashtra, Karnataka, West Bengal, and Telangana.
5.1 Monthly Deductions
Deductions are made from the employees’ paychecks according to their income level.
5.2 Employer Responsibilities
- Register and renew professional taxes.
- Pay challans monthly or quarterly, whichever is specified by various states.
- File PT returns (frequency may vary).
6. TDS on Salary Compliance – (Income Tax Act, 1961)
6.1 TDS Computation
- Collect employee investment declarations, Form 12BB.
- Forecast taxable income for FY.
- Calculate TDS as per the latest chosen tax regime – old/new.
- Monthly deduct TDS.
6.2 TDS Deposit & Returns
- Deposit TDS by the 7th of next month.
- Quarterly TDS returns in Form 24Q.
- Issue Form 16 to employees yearly.
6.3 Exemptions & Allowances
Ensure compliance with:
- HRA exemption rules
- LTA claims
- Section 80C, 80D, 80E investments
- Standard deduction
7. Compliance with Labour Welfare Fund
It applies in specific states, including Maharashtra, Gujarat, Karnataka, and Tamil Nadu.
7.1 Employer Responsibilities
- Make monthly or biennial LWF deductions for employees.
- Make employer contributions.
- Deposit LWF as per state timelines, i.e., Maharashtra: June/December.
8. Shops and Establishment Act Compliance
This varies by state.
8.1 Payroll-Related Areas
- Leave entitlements.
- Laws on working hours.
- Holiday list.
- Weekly offs.
- Payment of wages without delay.
8.2 Registers and Records
- Maintain registers for wages, attendance, overtime, fines, and advances.
- Currently, most states allow for digital registers.
9. Payment of Wages Act Compliance
- Ensure timely disbursement of salaries before the 7th or 10th, depending on employee strength.
- Avoid illegal deductions.
- Clearly communicate the wage breakdown.
10. Payroll Statutory Registers and Records
The following records will be maintained as statutory registers:
- muster roll,
- wage register,
- leave register,
- overtime register,
- PF register,
- ESI register,
- bonus register,
- gratuity records, and
- TDS and PT challans.
Most of these records are required to be retained for at least seven years.
11. Payroll Policies & Internal Controls
Strong internal policies guarantee the sustainability of compliance.
11.1 Key Payroll Policies
- Salary structure policy
- Attendance & leave policy
- Reimbursement policy
- Overtime policy
- Incentive policy
- Payroll approval workflow
11.2 Internal Controls
One person manages input while another checks. System-based attendance integration and monthly reconciliation of:
- Payroll vs. bank statements
- Payroll versus PF/ESI contributions
- Payroll vs TDS deducted
12. Audit & Reporting Compliance
12.1 Internal Audits
- Monthly payroll audit
- Verification of statutory payments
- Cross-check TDS and PF calculations
12.2 External Audits
- Labour department audits
- EPFO/ESIC inspections
- Statutory auditor checks for employer obligations
Annual Payroll Compliance Checklist
- Form 16 is to be issued to employees.
- Finalise PF and ESI annual records.
- Update salary structures for the new FY payroll.
- Review minimum wage revisions.
- Conduct an annual increment and appraisal cycle.
- Prepare income tax proof verification.
Role of HR in Payroll Compliance
The HR department is concerned with payroll compliance through employee data management, liaison with statutory authorities, and maintaining accurate wage-related records. Their involvement is crucial in evading legal penalties and ensuring that wages paid are transparent and free from errors.
- The HR personnel keep updated employee information pertaining to PAN, Aadhaar, bank, UAN, ESIC numbers, attendance records, wage structures, and so on for correct payroll calculations.
- The HR department does statutory registration for employees that includes updates for PF, ESIC, professional tax, and labour welfare funds. Attendance is tracked, leave managed, overtime approved, and LWP entries recorded to ensure that payroll processing is appropriately recorded by HR.
- HR ensures labour law compliance by keeping up-to-date with state minimum wage, overtime, holiday, and working hours policies.
- It is also responsible for statutory deductions like EPF, ESI, TDS, PT, and LWF from the monthly salaries.
- HR, in coordination with the finance and payroll teams, verifies salary sheets, resolves discrepancies, and maintains wage documentation.
- HR is responsible for timely filing and reporting of PF, ESI, TDS, and PT and for maintaining statutory records for audits and inspections.
- HR addresses employee inquiries regarding salaries, payslips, deductions, reimbursements, and tax declarations.
Conclusion
In India, payroll compliance goes above legal obligations to become a factor supporting ethical and environmentally friendly corporate activities. Compliance with labour laws, tax policies, and employee welfare policies guarantees that businesses run openly while safeguarding workers’ rights and financial interests.
Good payroll compliance strengthens relationships between company owners and staff, lowers legal risk, and helps businesses to avoid costly penalties. With the ever-evolving labour and tax environment in India, accurate record-keeping, timely submissions, and a compliant payroll system are gaining immense importance.
Eventually, robust payroll compliance will lead to efficient running of the business, higher employee satisfaction, and a stable, well-regulated work environment that supports employees and employers alike in the long run.
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