26-May-2025
With new income tax changes taking effect from 1st April, companies have more payroll and statutory compliance actions to worry about. The burden and extra commitment can lead to higher costs, more errors, and legal disputes. Successful compliance efforts require a clear understanding of the components of payroll and legal obligations. Companies could face heavy fines and damaged reputations if they lack a firm knowledge of these requirements. Opting for payroll transfer to a skilled expert is one solution for the challenges of internal payroll compliance.
This blog looks at the payroll compliance network in India and how expert payroll services in India solve the challenges.
Why Payroll Compliance Exists in India
Indian statutory compliance in payroll is governed by several laws dating back to the 1952 Employees' Provident Funds and Miscellaneous Provisions Act.
This legislature ensures that employees receive benefits leading to social security, retirement funds, medical insurance, and fair taxation. The legal backing also ensures that businesses are legally bound and must contribute to these funds, allowing them to mature with time.
When firms don't comply with HR payroll compliance, they get legal issues, fines, and damage to employer branding. It makes adhering to payroll compliance in India mandatory for all qualifying companies.
Payroll Challenges Companies Face in Payroll Compliance
Payroll compliance can be tricky in India, even for well-established businesses.
Companies witness several issues in India's payroll compliance system because of:
- Continuous changes to taxation and compliance regulations.
- Human errors while making salary calculations.
- Delayed or incorrect filing of taxes.
- Difficulties understanding PF compliance and other deduction rules.
- A lack of HR payroll compliance knowledge.
Filing on time and correctly can hinder payroll tax compliance for small businesses in India, leading these firms to look for expert assistance.
Payroll services in India are the top-ranked solutions for businesses from all industries. These services are available from some of the best staffing agencies in India.
Payroll Compliance Components
Running a compliant payroll system requires a clear understanding of the individual components that make up HR statutory compliance, so here are the core elements:
1. Salary & Payslip Distribution
The first point on the statutory compliance checklist for Indian employers is to distribute salaries and salary slips each month with details of:
- Basic pay structure
- Special allowances
- Deductions
Timely allocation of monthly earnings and payslips is a fundamental part of Indian payroll compliance.
2. Provident Fund (PF)
The EPF scheme, or Provident Fund scheme, aims to help Indian employees build a significant retirement plan.
Passed as the Employees Provident Fund Act in 1952, PF is controlled by the Employees Provident Fund Organisation (EPFO). Under this act, employers and employees equally donate to an EPF account monthly, but the employer is tasked with depositing the full amount.
PF contribution instructs employees to obtain their Universal Account Number (UAN) from the governing body.
Organisations employing more than 20 staff must initiate the EPF scheme and have one month to apply after reaching the required staff numbers.
3. Employees' State Insurance Corporation (ESIC)
The Employees' State Insurance or simply the ESIC program covers employees throughout India through this Employees' State Insurance Act.
The ESIC rules ensure benefits and medical insurance are available to staff earning no more than a monthly wage of Rs.21,000. Employers have to put in 3.25% of the employee's gross salary.
Meanwhile, employees must set aside a lower amount of 0.75% of their gross amount.
4. Tax Deducted at Source (TDS)
Deducting TDS requires a Tax Deduction and Collection Account Number (TAN) and registration on the TRACES websites as a deductor.
With the TAN number in hand, businesses can deduct tax from the source, the employee's salary. The income tax slab rates in the current financial year and the employee's estimated yearly income influence the TDS deduction amount.
Apart from the regulated TDS deduction rules for salaried employees in India, firms must also consider previous employment details, incentives, bonuses, and tax-saving declarations.
5. Other Statutory Deductions
Apart from the three main salary deductions, firms must enforce complete payroll and statutory compliance and account for other deductions.
This initiative addresses the quality of living of employees through education, housing, and medical support and exists in a few states.
State governments levy professional tax in India, and that's why it varies from state to state.
- Bonus, Gratuity, & Leave Encashment
All bonuses, gratuity, and leave encashment must be calculated and reported annually as part of statutory compliance.
6. Annual Compliance Duties
After making the necessary deductions, a payroll and compliance process concludes with the following:
- Issuance of Form 16 to qualifying employees.
- Updating all employee records in internal systems.
- Filing annual PF and ESI returns.
- Reviewing the company's salary structure and their deductions.
These are yearly payroll management tasks that internal staff must handle.
Reasons to Partner with a Payroll Company
There's an increased interest in payroll outsourcing and it could be due to the increasing complexity of compliance in payroll activities and their ever-changing nature.
If your company is struggling with this area, some reasons to consider payroll and compliance services are:
- Expert Knowledge & Accuracy
These experts know the updated laws and how to calculate PF and ESIC in payroll without common errors, ensuring timely and legitimate filing practices.
- Cost-Efficient Assistance
When partnering with payroll processing companies, firms can reduce their in-house salary and tax teams and improve efficiency.
Hiring expert payroll services in Mumbai can fulfil the simple needs of startups or the complex requirements of larger corporations.
- Real-Time Actions & Legal Updates
Professional service providers take responsibility for keeping on par with the latest HR payroll and compliance laws.
- Focus on Business Responsibilities
Businesses outsourcing to third-party payroll companies have more time and resources to improve business operations.
Conclusion
Firms must follow all laws about payroll and statutory compliance in India. It includes error-free calculation, deduction, and filing of PF, ESIC, TDS, and other related deductions.
HR teams must know how and when to make filings, and any mistake can prove complicated and costly.
Outsourcing to experts in payroll services can ease the burden and lower legal risks.
Hiring the right payroll services in Mumbai or across India can ensure a compliant approach to payroll.
Contact us for a partner who confidently handles your payroll with compliance.
FAQs
What is the current PF contribution rate for employers and employees in India?
The current PF compliance rules state that employees and employers must equally contribute to the scheme with a 12% contribution from both groups.
Who is eligible for ESIC benefits?
Employees working for companies and earning a maximum monthly wage of Rs.21,000 are eligible for ESIC benefits.
How is TDS calculated on employee salaries?
The TDS deduction is based on the employee's income-tax bracket. These employees can receive reduced deductions through legal sections 80C, 80D, and 10 (14).
Is Professional Tax applicable across all Indian states?
Professional tax is a state-levied fee that applies in a few states based on the municipal and employee salary slab. Employees can check local state laws to check eligibility for professional tax deductions.
How often should payroll compliance audits be conducted?
Payroll and compliance audits should occur yearly to ensure accurate and timely legal filings. However, you can get extra confidence by conducting these audits every quarter to ensure full compliance.