A Comprehensive Guide to Payroll Compliance in India

A Comprehensive Guide to Payroll Compliance in India

Every company in India is expected to pay tax and follow compliance guidelines regardless of its size. Therefore, a large sum of money is invested in statutory compliance activity, including audits, compliance policies and governance structure.

To help you tackle this, we have created a comprehensive guide to payroll compliance in India.

Do you want to avoid compliance risks in your business?

Explore how you can achieve this.

Importance of Payroll Compliance in India

In every country, you will find HR and payroll related rules and regulations. These include labour laws, maternity laws and wages rules amongst others and they are mandatory for companies in every country to protect the rights of employees and in many cases, employers.

If companies fail to adhere to these regulations, it could lead to jail time and fines.

Companies should therefore put in time and effort to ensure they remain compliant and avoid any room for error around taxation and labour regulations.

Compensation and Benefits for Workers

In this section, we‘ll focus on the main payroll regulations in India.

Payment of Wages Act, 1936

The Payment of Wages Act, 1936 is a law to regulate indirect and direct payments made to employees. According to this act, every employer is expected to pay wages on a timely basis including deductions authorized under the act. The employer can’t deduct anything other than what is legally permitted in that particular country or state.

The act also mandates employers to send payments before the 7th of each month if they have 1000 or fewer workers. If you have more than 1000 workers, you need to send payments by the 10th of every month.

Businesses should recognise the importance of this compliance rule as it requires employers to make payments within one month.

However, it is necessary to note that the Payment of Wages Act doesn’t apply to anyone who earns INR 10,000 or more. Since we are talking about a pot of employees earning less than INR 10,000, this act ensures that employers pay in cash in the first instance and via cheque or bank transfer only if the employee agrees.

Under the act, fines are defined as absence from duty, the deduction for services that the employer offers, and loss or damage.

Minimum Wages Act, 1948

The second important act on the list is the Minimum Wages Act, 1948, recognized by Provincial and Central governments. The Minimum Wages Act is defined for any occupation, region or sector and for local, state, national, and occupational levels. In short, the Minimum Wage is defined as the cost of living. Therefore, when deciding minimum wage rates for various working classes, it is important to consider different and same schedule employment and to fix minimum wages on a per monthly, daily, or hourly basis.

Under this act, State and Central Governments can identify and review minimum wages for any given scheduled employments. Here are the two methods defined for revising and fixing minimum wages: • •

The government needs to create a committee or sub-committee to hold recommendations and inquiries for changing or fixing minimum wages.

The government needs to publish a proposal in the official Gazette for people who may be affected by the change with a minimum of two months’ notice.

Upon approval of the above methods, the changes are applied after three months starting from the date of issuance.

Amendments to Maternity Benefits Act, 1961

The Amendments to Maternity Benefits Act, 1961 is applied to every pregnant woman. These women fall under both Employees’ State Insurance Corporate Act, 1948, and Maternity Benefit Act, 1961.

The Maternity Benefit Act of 1961 includes: • •

Regulating women’s employment in an establishment for a given period before and after the child’s birth.

Offering certain types of maternity benefits to women.

Who Falls Under This Act? • • •

Any establishment, including plantations, factories, mines, etc., must adhere to this act.

Any shop or establishment under the law that has ten or more employees or where the person has been employed within the previous 12 months.

Any woman not falling under ESIC is eligible for benefits under this act.

Employees Provident Fund (PF) and Miscellaneous Provisions Act, 1952

Another important payroll compliance in India is the Employee Provident Fund (PF), which is designed to improve employee welfare. When employees start their employment, they will start to contribute to this fund every month and their employer must consistently make an equal contribution too.

Who falls under this act?

Any company with 20 or more employees is expected to deduct PF for employees.

For every employee, PF contributions are deducted according to their dearness allowance and basic pay. This calculation does not include bonus, overtime allowance, house rent allowance, food allowance, commission, etc. The wage limit that covered by PF is INR 15,000 every month. Every employer pays 3.67% of the employee’s wage, as suggested by the Central Government. Similarly, the employee also pays the same contribution to PF. Tax Deduction at Source

This is the last important payroll compliance in India, Tax Deduction at Source. Every working individual is expected to pay Income Tax as per the Income Tax Act.

As per the TDS law, every employee has TDS automatically deducted by the employer when he or she gets their salary. The employer must submit these deductions to the tax department as per regulations.

The employee files the TDS return at the end of every fiscal year to claim back the extra tax amount. Typically, the employee’s tax liability is calculated, and a portion of it is sent to the tax department, with the remainder being returned to the employee.

Employees are exempt from this law in the following cases: • •

They offer a self-declaration as per their future investments They have exemption certification from the assessing officer.

Benefits of Payroll Compliance in India What are the benefits of payroll compliance in India? Here are some reasons why every company should follow regulations to protect employer and employee rights.

• • • • • •

Employers treat every employee in the organization fairly, regardless of their position.

Employers pay every employee reasonably, following the minimum wage rules, which protect the rights of employees.

Employees are not forced to work extra hours without pay nor will they experience unreasonable behaviour.

The employee will be paid on time.

Employers are protected from any unreasonable raises or requests from trade unions.

Improved employer-employee relationships.

Payroll Outsourcing Services in India If you are worried about payroll compliance in India, and its stringent rules, then you can gain help from a payroll service provider. Payroll outsourcing services in India are designed to streamline your compliance structure.

• • • • •

The provider streamlines compliance-related workflows and processes.

A proper governance model is designed to improve compliance.

You receive expert guidance from skilled professionals employed by the HR services provider.

The automation applied for tax deduction at source and other compliances reduces manual tasks for your HR team.

Automated processes along with the experience of the provider can help you to reduce compliance errors, which may otherwise lead to penalties and fines.

• •

You can reduce your overall compliance budget with accurate processes and seamless structure.

Any changes to rules and regulations are followed by the payroll outsourcing provider, which reduces hassle for your team.

TopSource Worldwide Payroll Outsourcing Provider TopSource Worldwide is a leading payroll outsourcing provider in India, offering a range of statutory compliance services. With decades of experience in the field, TopSource Worldwide can help you follow laws and regulations, including taxes, reporting, PF, etc. The provider helps you to follow guidelines such as your industry and state regulations.

Penalties and fines implied for non-compliance are significantly large for almost every company. For this reason, we can help you to stay on top of these rules and regulations.

Learn more about our statutory filing services here.

Summary Compliance rules and regulations are designed to protect both employers and employees from any type of unverified and unfair behaviour. Explore the above details related to compliance, plan a strategy to avoid non-compliance, and create a strong foundation for compliance structure.

If you are facing issues, consider working with a payroll outsourcing provider. They can help you with payroll, HR, and statutory compliance activities.