All you need to know about Payroll Compliances in HR in India

Payroll Compliances in HR in India

The countries which are governed on the objective of welfare are regulated by laws which take care of their working population. They draft the laws from the viewpoint of the workers and not of the employers; non-compliance of which may result in hefty fines and in some cases suspension of the business. These laws have been made to protect the interests of the workers and maintain the dignity of labour. In India, there are a number of laws that protect the interests of the labour. However, from the viewpoint of the employer organisations, it is a tedious process and involves a lot of compliances. Every business organisation that employs a prescribed number of employees needs to fulfil the mandated payroll compliances under multiple statutes.

What are payroll compliances?

The payroll compliances are actually a subset of large set of statutory compliances that an organisation is bound to comply. These compliances are generally related to the Human Resource management that have been formulated by the government of India and respective states for the welfare and benefit of the workforce. These are statutory compliances that need to be strictly followed by all the eligible entities running their business failing which government can impose penalties, suspension and termination of operations etc. which can be harmful for the smooth operations of any business. On the other hand complying with the provisions mentioned in the act actually benefits the organisations in terms of high employee retention rate, better stability, attraction from the view point of investors among others.

Statutes under pay roll compliances

Minimum Wages Act, 1948: This act was passed by the Central Government keeping in view the exploitation of labour done by the employers. This act makes it mandatory for the employers to give minimum wages to the employee by fixing a minimum wage rate.

The minimum wage rate is not a universal phenomenon for the whole of India. It varies from state to state and sector to sector and the state governments get to decide the minimum wage rate. The minimum wage is determined on the basis of type of job, the wage period and the cost of living in a particular state. The minimum wage rate for Delhi will vary from the minimum wage rate of West Bengal.    

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Payment of Bonus Act, 1965: This act is made by the government in order to instil a sense of ownership among the employees when the profits made by the organisation are distributed among the employees. This act makes a provision of payment of bonus for annual bonus for those organisations and factories who employee more than 20 employees at any time during an accounting year.

There are certain limitations as to the category of employees who will be available to the bonus under the act. If an employees’ salary is less than Rs. 21,000 and he/she has served a period of more than thirty days, then he/she becomes eligible for statutory bonus payment.

Registration under Employees Provident Fund Act, 1952: The organisations that are employing more than 20 employees in the last accounting year are mandated by the act to open an EPF account in the name of those employees and those who employers who are employing less than 20 employees can get the registration done voluntarily.

It is meant for those employees whose salary is less than Rs 15,000 per month. For computing salary in case of EPF account, the basic salary plus dearness allowance shall be taken into account while calculating the salary.

Here both the employee and the employer need to deposit 12 % each into the provident fund.   

Registration under ESI Act, 1948: the purpose of this act is to provide security cover to deal with the unforeseen circumstances in the form of injuries, medical emergencies, instances of disability while working at the workplace itself. For every pay check given to the employee, the employer contributes 3.25 percent of the pay check and the employee contributes 0.75 percent.

This contribution is mandatory for those establishments where the employees are working in non-seasonal factories and the salary of the employee is less than Rs. 21,000.

Payment of Gratuity Act, 1972: The payment of Gratuity Act[1] provides welfare to the employees who have rendered not less than five years of continuous service to the organisation. It is the amount that is given by the employer to the employee as an acknowledgement for the work and loyalty shown towards the organisation.

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The act does not prescribe a ceiling limit for the extent of gratuity is payable to the employee. The gratuity can be calculated using the formula as:

(15*Last drawn salary*tenure of working in years) / 26 = Gratuity amount payable

Tax Deducted at Source (TDS) Deductions: This is a fiscal provision which mandates every business entity to deduct the applicable taxes on the salary of their employees and submit the same to the government. This is the duty of the employer to deduct the applicable taxes from the salary of the employees only at the time when the salary is paid and not at the time when the salary is accrued.

Benefits of complying with the Payroll compliances

There are two fold benefits for complying with the statutory compliances related to Human Resource management. These include:

  1. Keeping the employees happy when they receive the benefits
  2. Keeping the company out of legal troubles.

Following are some of the benefits that can be enjoyed by the company if they comply with all the prescribed statutory compliances:

  1. Low employee attrition rate: The statutory compliances are meant for the betterment and benefit of the employees. If the employer follows all the prescribed beneficiary provisions, the employees are happy that their interests are being taken care of. As a result the employees get a sense of security and do not want to leave the organisation. This results in companies’ employee attrition rate coming down which means companies do not have to expend more resources in hiring and training of the new employee.
  2. No legal penalties: If the organisation fulfils the necessary legal prescriptions in managing its employees, then it can save itself from the dangers like penalties, cancellation of operation license, closing down of operations and committing offences under various statutes.
  3. Reduces wastage of organisations’ resources: If the organisation does not invest in keeping all the compliances in check, it may lead the organisation into legal pitfalls which are not only a financial burden on the company but also wastes the resources and energies of the company which could have been used to expand the business of the organisation. Therefore, in order to increase the productivity of the employees and channelize the resources of the organisation into productive tasks, it is necessary that the organisations fulfil all the prescribed compliances.
  4. Increased confidence of the stakeholders and investors: When an organisation is found to be statutorily compliant, it generates confidence amongst the stakeholders of the company regarding the business and financial hygiene of the company. This is further responsible for attracting external investments when the investors feel that the organisation is statutorily compliant. 
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Challenges associated with the Payroll compliances

Every company desires to be in compliance of all the prescribed regulatory obligations. However, certain challenges exist in the path of an organisation becoming fully compliant. These are:

  1. Incompetent Compliance Department: Most organisations want to comply with all the human resource compliances. But they face a big problem in the form of untrained human resource management which are unaware of the human resource legal regulatory framework. This results in gaps in compliances which may result in heavy penalties on the organisation.
  2. Multiple compliances distributed across plethora of statutes:  Another challenge that the organisations are faced with is the lack of a single code which lists down all the necessary compliances that an organisation is supposed to comply with. Instead, the provisions related to compliances are segregated and spread over a number of statues which makes it difficult for the compliance team to fulfil all the necessary compliances. 
  3. Dynamic nature of compliances: Last but not least is the challenge of dynamism in the nature of the compliances. Keeping in view the existing conditions of the workforce and the industry, the nature of compliances keeps evolving from time to time. This makes the task of compliance challenging to be fulfilled.


Compliance of Labour laws by every organisation is very important for the eligible organisations. These legislations have been made with the view to maintain dignity of labour and provide security to the workforce that their interests are being taken care of and that they shall not be exploited. This is a necessary step for maintaining a healthy working environment. Further, it is even more important for the eligible entities to carry out all the compliances to save themselves from the legal troubles and at the same time from the viewpoint of depicting itself as a legally sound business entity to attract investment and generating investor confidence.

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