Statutory compliance: Guide to payroll compliance in India

Guide8 mins read12.7K views | Posted on August 11, 2023 | By Christopher

Every business function is governed by a set of rules, and payroll is not an exception. If you've been actively doing payroll in India, you would have definitely come across the term statutory compliance. In this guide, we will learn about the statutory rules that govern payroll in India so you get a clear understanding of how to stay compliant. We will be covering:

  • What is statutory compliance?
  • What is the need for it?
  • What constitutes statutory compliance for India?
  • How does staying compliant help both employees and employers?

Let's get started with the basics.

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What is statutory compliance in payroll?

Statutory compliance refers to the legal framework put in place by the central or state government to regulate business operations. In this case, it's the framework surrounding payroll.

Why is statutory compliance important?

Every country has its set of payroll laws, and for business owners operating in that country, compliance is a must. Maintaining a spotless compliance record can benefit your business in many ways. It can facilitate business expansion within the country because you create trust with the government. It also shows that you know how to treat your employees well by adhering to labour laws.

In cases of non-compliance, there is a lot at stake for the businesses, such as monetary penalties and a tarnished brand reputation.

Therefore, dealing with statutory compliance requires companies to be well-versed with the labour regulations in the country of operation.

What constitutes statutory compliance in India?

Depending on the industry and type of business, there are many labour laws that an organization has to comply with. For example, in order to protect the social security industrial workers, there's the Shops and Establishments Act and the Factories Act. For easy understanding, we'll classify the statutory compliances under five broad categories: statutory for social security, employee wages, labour laws, tax liabilities, and benefits.

Update: In 2019, the Ministry of Labour and Employment introduced four codes to consolidate 29 central statutory laws. These bills were classified into four major categories like labour wages, industrial relations, social security, and occupational safety, health, and working conditions. Read more about the four labour codes.

payroll-laws-in-india

Statutes on employee salaries and benefits

Payment of Wages Act, 1936

The Payment of Wages Act ensures that employees from various industries are paid on time by having penalties for wages paid late by a month.

According to this rule, employees should be paid before the 7th of every month for organizations with less than 1,000 employees. If the organization has more than 1,000 employees, they need to be paid by the 10th of every month.

This is not applicable for people earning salaries of more than ₹10,000 every month. The preferred mode of salary payments under the act is cash or cheque. Bank transfers are allowed only after consent from employees. The rules and regulations vary from state to state.

Payment-of-wages-act-in-india

Minimum Wages Act, 1948

The Minimum Wages Act is a central legislation designed to prevent the exploitation of labour by fixing a minimum wage rate.

The minimum wage varies from state to state or sector to sector since provincial governments also have a say in this.

Some of the most common factors considered before fixing minimum wages include the cost of living, wage period (hourly, weekly, or monthly), and job type.

Minimum-wages-act-India

Payment of Bonus Act, 1965

The practice of paying a bonus in India appears to have originated during the First World War when certain textile mills granted 10% of wages as a war bonus to their workers in 1917.

The Payment of Bonus Act provides an annual bonus to employees in certain establishments, including factories and organizations that employ more than 20 people. Under the act, a bonus is calculated based on an employee's salary and the profits of the organization.

Employees that have completed 30 working days and have earned ₹21,000 per month or less (basic + DA, excluding other allowances) are eligible for receiving the bonus from their respective organization.

Payment-of-bonus-act-in-India

Maternity Benefits Act, 1961

This act protects the employment of women during the time of her maternity and grants her full paid absence from work. This act is applicable for all organizations that have more than 10 employees. It's also one of the most important statutory regulations that the organizations have to follow.

For a female employee to be eligible for the benefit, they must have been working as an employee in an establishment for a period of at least 80 days within the past 12 months. Payment during the leave period is based on the average daily wage for actual absence.

This act applies to organizations, including factories, mines, plantations, government establishments, shops and establishments under the relevant applicable legislation, or any other establishment dictated by the Central Government.

Maternity benefits according to the latest amendment include the following:
  • The duration of maternity leave has been increased from 12 weeks to 26 weeks.
  • Prenatal leaves can be applied up to a period of 8 weeks.
  • The Maternity Benefit Amendment Act has also introduced an enabling provision relating to "work from home" for women, which may be exercised after the end of the 26-week leave period. This is dependent on the nature of work.

Statutes on social security

Employees' State Insurance Act, 1948

This act aims to help employees overcome unforeseen circumstances, including medical emergencies, maternity leave, or disability situations related to the workplace. For each paycheck, the employer contributes 3.25% and the employee contributes 0.75%. ESI is mandatory for employers who have employees working in a non-seasonal factory with more than 10 employees, but only for employees who are earning less than ₹21,000 per paycheck.

Because ESI is applied only to employees who earn less than ₹21000, you should always check the appraisal cycle to confirm that the employee has not surpassed ₹21,000. Once the employee earns more than ₹21,000, the contributions towards ESI should continue until the end of the contribution cycle. Each contribution cycle lasts six months, from April to September or October to March.

For example, if an employee is earning ₹20,000 in the month of June, and starts to earn ₹22,000 from July post-appraisal, the deduction towards ESI should still continue until September. Starting in October, they need not contribute to ESI.

Learn in detail about the ESI scheme, its registration, and payment process here.

Employees-state-insurance-act

Employees' Provident Fund Act, 1952

The Employee Provident Fund and Miscellaneous Act is one of the biggest social welfare contributions for an employee. As part of this, both the employer and the employee contribute 12% of basic pay and dearness allowance (DA) to the employee's retirement chest.

Under Section 80C of the Indian Income Tax Act, an employee's contribution towards their PF account is deemed eligible for tax exemption, which results in higher take-home pay for employees.

Organizations that have 20 employees or more have to comply with PF regulation.

EPF-contribution-split-up

Employers who are not adhering to this compliance regulation face severe fines or, in extreme scenarios, imprisonment.

Get in-depth information on how to get your business EPF ready from our business owner's guide to Employees' Provident Fund.

Labour Welfare Fund Act, 1965

The Labour Welfare Fund (LWF) focuses on the welfare of employees working in specific industries. It provides facilities for labourers in order to improve their working conditions, provide social security, and raise their standard of living.

The statutory contributions for LWF are managed by individual state authorities. The state labour welfare board determines the amount and frequency of the contribution, and it differs from state to state. In some states, the contribution is made annually (Andhra Pradesh, Karnataka, Tamil Nadu). In other states, the contributions happen every six months (Madhya Pradesh, Maharashtra).

Since these laws change from state to state, here is a list of all the states that fall under LWF.

  • Andhra Pradesh
  • Chandigarh
  • Chattisgarh
  • Delhi
  • Goa
  • Gujarat
  • Haryana
  • Karnataka
  • Kerala
  • Madhya Pradesh
  • Maharashtra
  • Odisha
  • Punjab
  • Tamil Nadu
  • Telangana
  • West Bengal

Read further details about this scheme in our comprehensive guide about the Labour Welfare Fund.

Payment of Gratuity Act, 1972

Along with EPF, gratuity is one of the biggest factors of an employees' welfare, and it's one of the most important statutory regulations for organizations. Gratuity is given by the employer to their employee for the services rendered by him during employment. An employee is applicable to receive gratuity only if they've completed a minimum of 5 years of service within an organization.

There is no set percentage stipulated by law for the amount of gratuity an employee is supposed to receive. The employer can use a formula-based approach where gratuity payable depends on two factors.

  • The employee's last drawn salary amount
  • Years of service

For calculating gratuity, the Payment of Gratuity Act has divided non-government employees into two categories: employees that are covered under the act and those that aren't.

Gratuity calculation for employees covered under the act
Formula

Gratuity = (15 * Last drawn salary * tenure of working) / 26

Last drawn salary includes basic pay, dearness allowance, and sales commissions.

Example: Let's assume the employee's last drawn salary is ₹70,000, and the employee has worked with the company for 20 years and 8 months. The formula to calculate gratuity will be: (15 * 70,000 * 21) / 26

We are considering the tenure of working to be 21 years because the employee has already worked for more than 6 months into their 21st year of employment. If the employee had worked for 20 years and 5 months, then only 20 years would be considered.

Gratuity calculation for employees not covered under the act
Formula

Gratuity = (15 * Last drawn salary * tenure of working) / 30

Last drawn salary includes basic pay, dearness allowance, and sales commissions.

Example: Let's assume the employee's last drawn salary is ₹70,000, and the employee has worked with the company for 20 years and 8 months. The formula to calculate gratuity will be: (15 * 70,000 * 20) / 30

We are considering the tenure of working to be 20 years because, in this scenario, only the number of completed years is taken into consideration.

Learn in detail about gratuity from our guide on gratuity.

Statutes on tax liabilities

TDS (Tax Deducted at Source)

This is one of the most important statutory regulations that every organization has to adhere to. It was introduced to collect tax from the source of an individual's income. TDS is applicable on various income types such as salaries, interest, and commission.

Every employee is taxed at a different tax rate depending on their salary. With the latest union budget announcements, employees in India can choose between two different tax regimes.

Here's the classification of tax slabs for employees, based on which the TDS is computed.

Old tax-regime

Income tax slabTax rate
Up to ₹ 2,50,000Nil
₹ 2,50,001 - ₹ 5,00,0005% above ₹ 2,50,000
₹ 5,00,001 - ₹ 10,00,000₹ 12,500 + 20% above ₹ 5,00,000
Above ₹ 10,00,000₹ 1,12,500 + 30% above ₹ 10,00,000

New tax-regime

Income tax slabs for FY 2023-24Tax rate
Up to ₹ 3,00,000Nil
₹ 3,00,001 - ₹ 6,00,0005% on income which exceeds ₹ 3,00,000
₹ 6,00,001 - ₹ 9,00,00010% on income which exceeds ₹ 6,00,000
₹ 9,00,001 - ₹ 12,00,00015% on income which exceeds ₹ 9,00,000
₹ 12,00,001 - ₹ 15,00,00020% on income which exceeds ₹ 12,00,000
Above ₹ 15,00,00030% on income which exceeds ₹ 15,00,000

The way forward

We're sure it wasn't easy to get through this guide, even though we've only highlighted the basic information that businesses need to be aware of. Now, imagine if you have to manage all these compliance requirements manually or through outdated systems?

Statutory compliance can make or break a company's reputation. There's tons of rules and regulations involved, and these have to be adhered to perfectly, every time. Some are modified by the Central or State government, as well. Historically, payroll administrators did this manually. Today, there are systems that can help reduce the burden on payroll teams. With cloud-based payroll software, you can put statutory compliance on auto-pilot mode and always keep a spotless compliance record.

Zoho-Payroll-payroll-software-with-compliance

References

Comments(4)

  • Selva Jeevitha V AJune 17, 2024 at 1:05 PM

    Crystal Clear Explanations! Kudos! ZOHO!

    Reply
  • PavanichowdalaMay 14, 2024 at 12:49 PM

    Easy to understand

    Reply
  • sarika akhareApril 24, 2024 at 5:37 PM

    Great and easy to understand. Keep posting

    Reply
  • Sangeetha DMarch 22, 2024 at 4:14 PM

    It is good and easy to understand

    Reply

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