Payroll is one of the most important functions, which is at the core of any business, company, or organization. It plays a vital role in ensuring that employees are paid accurately and on time for the work they have done, along with staying compliant with various evolving tax rules and regulations. Especially in India, payroll management is also about adhering to the various labor laws, taxation rules, and social security laws, along with the disbursement of salaries. This concept is referred to as statutory compliance in payroll.
For businesses like small and medium enterprises (SMEs), dealing with and keeping up with statutory compliance may often seem complicated, and failing to adhere can have a severe impact, including legal exposure, audits, and penalties. Hence, in this blog, we will discuss what statutory compliance in payroll means, why it is important, and many more such things. So, scroll down for more information.
Understanding Statutory Compliance in Payroll
Statutory compliance simply means those legal frameworks that every organization, business, and company must adhere to when handling employees’ salaries, wages, and benefits. Also, it means adhering to laws and regulations related to taxation, provident fund contributions, insurance schemes, gratuity, bonuses, and labor welfare.
Thus, every employer in India, whether a small company or a multinational, is bound to follow these statutory compliance to avoid any legal exposure, audits, financial & reputational damage, and penalties. However, employers must keep in mind that these regulations vary according to employee strength, industry type, and state-specific rules. Hence, in simple terms, statutory compliance ensures that employees receive the benefits they are entitled to while employers fulfill their legal obligations to avoid any risks.
Why Statutory Compliance Matters?
Businesses, companies, and organizations often underestimate the importance of statutory compliance until they face some risks. Here is why statutory compliance matters.
- Avoiding penalties and legal actions – Non-compliance can easily make you face penalties, legal exposure, financial & reputational damage, and penalties. Thus, staying compliant with statutory compliance minimizes such risks.
- Protecting employee rights – Statutory compliance ensures the protection of employees’ rights. It ensures that employees receive fair wages, retirement benefits, health insurance, maternity benefits, and other entitlements as mandated by law.
- Building employee trust – Timely payment of statutory benefits, including those of EPF or ESI, is a kind of reassurance to the employees that their future and well-being are secure. This, in turn, increases employee trust.
- Enhancing business reputation – Companies that maintain compliance are perceived as responsible and ethical. This, in turn, boosts their reputation with employees, regulators, investors, and customers.
- Operational Efficiency – A structured compliance framework ensures fewer errors. It also streamlines payroll processes and prevents disruptions due to disputes or inspections.
Key Statutory Compliance Laws in Payroll
India has a complex payroll compliance structure that is governed at both the central and state levels by various laws. It is incumbent on employers to keep abreast of the shifting landscape and meet compliance deadlines. Below are the key statutory payroll compliance requirements:
1. Income Tax Act (TDS on Salaries)
Employers must make sure to deduct Tax Deducted at Source (TDS) from employees’ salaries based on applicable income tax slabs and exemptions. Further, deducted amounts must be deposited or submitted with the income tax authorities by the 7th of every month. Moreover, employers must file quarterly TDS returns (Form 24Q) and issue Form 16 to employees annually.
2. Employees’ Provident Fund (EPF) Act, 1952
This compliance applies to organizations with 20 or more employees. In this, both the employer and employees contribute 12% of basic wages plus dearness allowance. Further, employers must fill monthly EPF returns using the Electronic Challan-cum-Return (ECR).
3. Employees’ State Insurance (ESI) Act, 1948
This compliance applies to employees earning Rs 21,000 per month. In this, the employer contribution will be 3.25% of wages, and the employee contribution will be 0.75% of wages. Further, employers must submit contributions by the 15th of every month and file half-yearly returns.
4. Professional Tax
This tax is levied by certain governments, including Maharashtra, Karnataka, and West Bengal. In this, employers must deduct professional tax from employees’ salaries and submit it to the respective state authorities.
5. Payment of Bonus Act, 1965
This statutory compliance is also applicable to employees earning up to Rs 21,000 per month. Thus, employers must pay an annual bonus ranging from 8.33% to 20% of the salary. However, this depends on the company’s profitability. Make sure that payments must be made within 8 months from the close of the accounting year.
6. Payment of Gratuity Act, 1972
This statutory compliance is applicable to employees who have successfully completed 5 years of continuous service in an organization. Remember, gratuity is calculated as (15 × Last Drawn Salary × Years of Service) ÷ 26. Moreover, the employer must pay gratuity within 30 days of it becoming due.
7. Labour Welfare Fund (LWF)
This statutory compliance is also applicable in certain states like Maharashtra, Gujarat, Karnataka, and Punjab. In this, both employers and employees contribute small amounts to the funds, which are used for employee welfare activities, including housing, healthcare, and education.
8. Shops and Establishments Act
This statutory compliance governs working conditions, hours of work, leave policies, and wage payments in commercial establishments. Further, employers must register their businesses under the act and maintain prescribed registers and records.
9. Maternity Benefit Act, 1961
This statutory compliance provides six to eight weeks of paid maternity leave to eligible female employees. Also, employers must ensure compliance with maternity benefits and provide nursing breaks.
Best Practices for Statutory Compliance in Payroll
- Maintain Current Documentation: Keep staff information, attendance, and payment records current.
- Set Deadlines for Reminders: Utilize compliance calendars to prevent delays in remissions and the filing of documents.
- Do Internal Audits: Regular audits are essential to reduce the risk of errors and penalties.
- Keep an Eye Out: Regularly monitor any notifications from the Department of Labor or the federal or state tax office.
- Use Technology: Consider purchasing payroll management systems in order to automate compliance where possible.
Conclusion
Statutory compliance in payroll is more than a legal obligation; it is a fundamental principle of ethical and effective business. Every law designed to protect employee rights and to promote fair dealings in the workplace can be associated with some aspect of payroll law, income tax, provident fund, gratuity, maternity benefits, and state-based taxes.
Statutory compliance has an even broader context than just exposure to penalties; it breeds trust, aids in reputation growth, and protects businesses in the longer term. Payroll software exists to make the process easier, and businesses also perform taxable functions.
In today’s fast-approaching, accelerating regulatory compliance, payroll systems are no longer optional but a necessity. Businesses that make regular compliance a priority are monitoring themselves for legal risk, while internally developing a culture of openness and transparency that supports a positive organization in a manner that is healthy for the employee, but that benefits the organization as well.
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