Running a business involves more than finding the right employee and paying them on time; it also includes ensuring that the employee payments comply with legal requirements. To put it another way, payroll management is indelibly linked to statutory compliance. Statutory compliance is simply the act of conforming to the laws and regulations that surround employee payments, taxation, and benefits in India.
Knowing and understanding payroll compliance is vital for HR teams, accountants, and business owners. Any payroll mistake can have serious consequences, such as penalties, legal disputes, and a loss of trust from employees. In this guide, we will provide everything you need to know about payroll and statutory compliance in India.
What Is Payroll Compliance?
Payroll compliance refers to the process of compensating salaries of employees according to the applicable laws and statutory provisions. It also ensures that employees are receiving their rightful salaries, benefits, and deductions. Also, it ensures that employers deduct and deposit taxes and contributions correctly. Further, it also ensures that companies remain legally compliant and avoid penalties. Hence, we can say that payroll compliance is simply about paying employees accurately, fairly, and legally.
What is Statutory Compliance?
Statutory compliance includes complying with government rules and regulations that relate to employee remuneration, taxation, and labor laws. In the context of payroll, a statutory compliance check ensures that organizations are deducting and depositing the contributions for the Employees’ State Insurance (ESI), Provident Fund (PF), Professional Tax, and Income Tax (TDS) correctly and on time. Compliance can also be an advantage, like gratuity, bonuses, and maternity leave, depending on employee qualifications for bonuses. For organizations, statutory compliance is an obligation and not just a legal requirement or obligation, as it keeps them away from penalties and creates trust among employees, and demonstrates ethical and responsible behavior in business conduct.
Why Is Statutory Compliance Important in Payroll?
Any error in payroll compliance is more than just a legal obligation; it can affect your business in several ways. Below, we have listed why statutory compliance is important in payroll.
Key Statutory Requirements in Indian Payroll
Payroll in India involves a wide range of statutory components. Some of the most important ones have been mentioned below.
| Compliance | Description |
|---|---|
| Income Tax (TDS on Salaries) | Income Tax (TDS on Salaries) is a tax that an employer will deduct at source from the employee’s salary rate based on their income slab and pay it to the government. |
| Employees’ Provident Fund (EPF) | The Employees’ Provident Fund (EPF) is a retirement savings scheme where the employer as well as the employee contribute a percentage of the employee’s monthly salary. By contributing to the EPF monthly, employees can help build a nest egg for retirement. |
| Employees’ State Insurance (ESI) | Employees’ State Insurance (ESI) is a social security plan in India wherein employees earning less than ₹21,000 per month receive medical, sickness, maternity, and disability benefits, funded by contributions from employers and employees. |
| Professional Tax | Professional Tax is a tax levied by the states of India. It is paid by salaried employees, professionals, and traders and is deducted from the salaries of employees by the employer and paid to the respective state government based on the income slabs prescribed by the state. |
| Payment of Gratuity Act, 1972 | The Payment of Gratuity Act, 1970, is an Indian legislation that stipulates that organizations must pay gratuity (a one-time cash benefit) to employees who have provided at least five years of continuous service as recognition of their contribution to the organization over a long period of time. |
| Labour Welfare Fund (LWF) | Labour Welfare Fund (LWF) is a legal contribution run by state governments of India for worker welfare, which is based on small contributions made by both employers and workers for the purpose of using those contributions to program initiatives involving healthcare, housing, education, and other secondary social security benefits. |
Final Thoughts
In conclusion, payroll and compliance with statutory regulations go hand in hand in India to protect employees from unfair salary or wages, and to ensure employers are compliant with the law. There are laws governing all aspects of payroll, such as EPF, ESI, TDS, gratuity and bonus, and these must be complied with by employers. Compliance is about trying to avoid penalty or fine, but for organisations, it is ultimately about trust, employee happiness, and delivering responsible business practices. There is a new generation of payroll solutions where organisations can seamlessly facilitate transparent, automated, compliant payroll processing. In conjunction with India’s forthcoming labour codes, those businesses that can gain efficiencies, retain talent and succeed over the long-term by adopting worthy payroll compliance practices.
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