The most vital aspect of any business, company, or organization is payroll, which directly affects employee satisfaction, financial accuracy, and organizational compliance. Payroll management, especially in India, goes beyond just calculating and distributing salaries; it also includes staying compliant with various rules and regulations that protect the rights of both the employer and employee. These laws, also known as payroll compliance laws, make sure that businesses are fulfilling their due responsibilities towards taxes, social security contributions, and employee welfare schemes. For startups and SMEs, dealing with payroll compliance comes with its own set of rules, contribution rates, deadlines, and documentation requirements. Missing even one compliance deadline can result in penalties, legal exposure, and audits, thus damaging employees’ trust and the company’s reputation in the field. To simplify the process, in this blog, we have put together a comprehensive payroll compliance checklist for Indian businesses to make sure that employers stay on track while keeping their operations legally sound.
What Is Payroll Compliance?
Payroll compliance is simply the task of ensuring compliance with all legal obligations in respect of employee payments, which entails calculating salaries, paying the salaries, deducting the taxes, making contributions to social security (if required), filing the returns required by your statutory bodies, and, more importantly, filing them on time and correctly. If we are taking India as an example, there are a significant number of obligations/regulations in India, including Income Tax regulations, Employees’ Provident Fund (EPF), Employees’ State Insurance (ESI), Professional Tax, Payment of Bonus Act, Payment of Gratuity Act, Labour Welfare Fund, etc. To put it simply, payroll compliance is no longer an option but a requirement when dealing with statutory obligations. It does not matter if you are a start-up, mid-sized, big, or multinational company; all businesses are implicated by proof of your statutory obligations or face penalties, legal issues, and audits. While the penalties associated with non-compliance are a serious risk for companies, the effects of non-compliance can stretch to serious reputational damage for the company, and can result in employees losing trust in the organisation.
Top Payroll Compliance Checklist
1. Income Tax (TDS on Salaries)
- Deduct TDS from the salary of employees according to their income slab, exemptions, and declarations.
- Deposit the deducted tax with the government before the due date.
- Issue Form 16 annually to employees as proof of TDS.
- File quarterly TDS returns using Form 24Q.
- Keep records of the declarations and investment proof.
2. Employees’ Provident Fund (EPF) Compliance
- Deduct 12% of employees’ basic wage and ensure to match it with an equal employer contribution.
- Deposit contributions with the Employees’ Provident Fund Organization (EPFO) by the 15th of every month.
- File monthly EPF returns using Electronic Challan cum Return (ECR).
- Make sure of the timely registration of eligible employees with EPFO.
- Provide employees with their universal account number (UAN) for online access.
3. Employees’ State Insurance (ESI) Compliance
- This is applicable for employees earning up to Rs 21,000 per month.
- Employer contribution should be 3.25% of wages, and employee contribution should be 0.75% of wages.
- Submit contributions to the Employees’ State Insurance Corporation (ESIC) by the 15th of every month.
- Remember to file half-yearly returns and maintain proper and accurate records of employees covered under ESI.
- Register new employees under ESI within 10 days of joining.
4. Professional Tax Compliance
- Deduct the Professional tax (PT) from the employee salaries where applicable.
- Deposit the deducted amount to the respective state government as per the due dates.
- File returns with the state tax department.
- Maintain employee records for PT liability and deductions.
5. Payment of Bonus Act, 1965
- Applicable to employees earning Rs 21,000 per month.
- Ensure to pay an annual bonus ranging between 8.33% to 20% of an employee’s salary, according to the profits or productivity.
- Ensure payment within 8 months from the close of the accounting year.
- Maintain proper registers and records of bonus payments.
6. Payment of Gratuity Act, 1972
- Applicable to employees completing at least 5 years of continuous service with a company.
- Gratuity will be calculated – (15 × Last Drawn Salary × Years of Service) ÷ 26.
- Employees must be paid gratuity within 30 days of it becoming due.
- File returns and maintain records as required under the act.
7. Labour Welfare Fund (LWF)
- This law is applicable in certain states
- In this, both employers and employees contribute a nominal amount.
- Ensure to deposit contributions with the respective state’s Labour Welfare Board as per the timeline.
- Maintain records of contributions and employee eligibility.
8. Maternity Benefit Act, 1961
- This law provides 26 weeks of paid maternity leave to eligible female employees.
- Employers must also provide nursing breaks and protect employees from termination during maternity leave.
- Maintain records of maternity benefits provided.
9. Shops and Establishments Act (State-Specific)
- Ensure to govern conditions of employment in commercial establishments, like working hours, overtime, wage payments, and holidays.
- Employers must register their establishments under the act.
- Maintain statutory registers and records of employees, attendance, and wages.
10. Timely Filing of Returns and Maintenance of Records
- Make sure to file all statutory returns for TDS, EPF, ESI, PT, and Bonus as per deadlines.
- Maintain records of salary registers, attendance, PF contributions, tax deductions, and gratuity payments.
- Make sure to conduct regular internal audits to ensure compliance accuracy.
Conclusion
In India, payroll compliance is complicated for many reasons, including multiple central and state laws that require constant monitoring, calculation, and reporting. Each component of compliance, including TDS, PF, ESI, gratuity, professional tax, and welfare funds, is intended to regulate employee rights while protecting company interests.
While the obligations and duties each company has are formidable, with a structured payroll compliance checklist, one can establish workplace compliance while also minimizing legal and financial compliance risk, and enhancing employee trust and a compliant, professional workplace environment. Utilizing a contemporary payroll management system or working with payroll outsourcing companies may also simplify the process of payroll compliance and allow one to focus on business growth without sacrificing legal protections.
In today’s dynamic society, compliance is not based on choice; it’s established with a sense of sustainable growth. Employers that demonstrate focus on payroll compliance are distinguished as responsible employers, flexible for employee welfare, and future-ready organizations.
By following this payroll compliance checklist, Indian businesses can stay legally compliant and avoid costly penalties