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Payroll & Human Resource Statutory Compliances

Payroll compliance or statutory compliance in India refers to the legal framework which companies or organisations must adhere with regard to the treatment of their workers or employees. Most of the company’s money and time goes into safeguarding compliance with these laws. Everything from being compliant to the minimum wages payment to maternity benefits to provident funds needs not only a lot of time but also experts who can give advice on all of these compliance measures. Therefore, the companies dealing with payroll compliances need to be well-versed with the different labour laws or labour regulations in India.

Payroll Compliance

Payroll is a list of employees who get paid by the company. Payroll also refers to the total amount of money employer pays to the employees. As a business function, it involves:

  1. Developing organization pay policy including flexible benefits, leave encashment policy, etc.
  2. Defining payslip components like basic, variable pay, HRA, and LTA
  3. Gathering other payroll inputs (e.g., organization’s food vendor may supply information about the amount to be recovered from the employees for meals consumed)
  4. The actual calculation of gross salary, statutory as well as non-statutory deductions, and arriving at the net pay
  5. Releasing employee salary
  6. Depositing dues like TDS, PF, ESI etc. with appropriate authorities and filing returns


In short, we can say that payroll process involves arriving at what is due to the employees also called as ‘net pay’ after adjusting necessary taxes and other deductions.


The equation for calculating the net pay
Net pay = Gross Income- Gross Deduction, Where,
Gross income or salary = All types of regular income + allowances + any one-time payment or benefit
Gross deduction = All types of regular deductions + statutory deductions + any one-time deductions

What are the various Stages in Payroll ?


A payroll officer needs to do careful planning. There are always ongoing tasks that need attention and a constant need to monitor changes to withholdings, contribution to social security funds, etc. The entire process can be split into three stages, pre-payroll, actual payroll and post payroll activities.

Stages in a Payroll

Pre-Payroll Activities

Defining payroll policy

The net amount to be paid is affected by multiple factors. The company's various policies such as pay policy, leave and benefits policy, attendance policy, etc. come into play at that time. As a first step, such policies need to be well defined and get approved by the management to ensure standard payroll processing.

Gathering inputs

Payroll process involves interacting with multiple departments and personnel. There can be information like mid-year salary revision data, attendance data, etc.

Mind Map of Payroll

In smaller organisations, these inputs are received from a consolidated source or fewer teams. However, in a larger organization, the task of gathering data may look overwhelming. If you are using a smart payroll software having integrated features like leave and attendance management, employee self-service portal, etc. inputs collection process does not remain a problem.

Input validation

Once inputs are received, you need to check data validity concerning adherence to company policy, authorization/ approval matrix, right formats, etc. You also need to ensure active employee inclusion & inactive employee exclusion from the records for salary payment.

Actual Payroll Process 

Payroll calculation 

At this stage, the validated input data is fed into the payroll system for actual payroll processing. The result is the net pay after adjusting necessary taxes and other deductions. Once payroll process is over, it is always a good practice to reconcile the values and verify for accuracy to avoid any errors.

Post-payroll process

Statutory compliance

All statutory deductions like EPF, TDS, ESI are deducted at the time of processing payroll. The company then remits the amount to the respective government agencies. The frequency can vary depending on the type of the dues. In most cases, payment of dues is made via challans. After all dues are paid return/report are filed. E.g., for filing PF return, ECR is generated and filed.

Payroll accounting

Every organization keeps a record of all its financial transactions. Salary paid is one of the significant operating costs which has to be reported in the books of accounts. As part of payroll management, it is essential to check that all salary and reimbursement data is fed accurately into accounting/ERP system.

Payout

You can pay salary by cash, cheque or bank transfer. Typically organizations provide employees with salary bank account. Once you complete payroll, you need to ensure that company’s bank account has sufficient funds to make the salary payment. Then you need to send a salary bank advice statement to the concerned branch. This statement is issued with particulars like employee id, bank account number, amount of wages, etc. If you are opting for a payroll software that has employee self-service portal, you can easily publish the payslips and employees can log-in to their account and access the payslips.

Reporting

Once you complete payroll run for a particular month, finance and high management team may ask for reports such as department wise employee cost, location wise employee cost, etc. As a payroll officer, it becomes your responsibility to dig into the data and extract required information and share the reports.

Statutory compliance in Indian payroll

When you run payroll, being statutory compliant means that you are paying as per the applicable employment norms set by the central and state legislation. The common statutory requirements that apply to Indian businesses include the provision for minimum wages, payment of overtime wages to workers, TDS deduction, contribution to social security schemes such as PF, ESI, etc.


While computing salary you need to consider all these deductions and contributions. Income tax is one such deduction. At the beginning of the year, the employee is asked to make a declaration about his additional incomes, tax saving investments, etc. called as ‘income tax declaration.’ Accordingly, employee’s tax liability is calculated, and TDS is deducted.

Let’s see how to calculate tax for any individual. In India, we have four tax brackets with an increasing tax rate.




Based on above tax slabs, you can calculate monthly tax liability and deduct TDS. The TDS is then deposited monthly with the government, and a quarterly report of all deductions is also filed. Once you complete TDS returns for the fourth quarter, you can issue form 16 to employees. The employees use this form 16 as proof of tax deducted at the time of filing their individual income tax return.


Non-adherence with the statutory law can lead to hefty fines and penalties. That is why you need to be up to date on all tax and payroll statutory changes.

Challenges in handling payroll management process

The payroll process becomes challenging due to two main reasons.

The requirement to stay statutory complaint

As mentioned before, non-adherence to statutory laws can lead to levy of fines and penalties and in the worst case may even threaten the existence of the business. Today there are some advanced payroll management software that automatically processes payroll in compliance with statutory laws.

Dependence on multiple payroll inputs sources

Before payroll can be processed, you need to get all the data together from sources such as attendance register, conveyance facility availed record, data from HR team like salary revision information, etc., making it a complicated process. For many years HR and payroll officers were managing payroll on excel sheets, but excel sheets have problems like dependency on excel formulas for salary calculation, complexity in adding and removing employees and other limitations like manual data entry, difficulty in extracting information, etc.

Various methods available to do payroll for your business

The possible options for running payroll can be

  • Excel based payroll management
  • Payroll outsourcing
  • Using payroll software

Excel based payroll management

Many businesses who are at an initial stage of operations and have a handful of employees usually go for excel based payroll management.

Excel based payroll management involves doing payroll calculation on excel sheets using standard payroll calculation template. The mathematical formulas are set that help the payroll officer do the computation. While this method does not involve any cost, but it has its inherent limitations like

  • High chances of clerical and mathematical errors as data is entered manually
  • Difficulty in adding and removing employees from payroll list
  • Chances of duplicate data and omission of entries at times
  • Need to monitor tax updates and other statutory changes like PF, PT etc

Payroll outsourcing

Outsourcing payroll means you want an external agency to take care of your payroll function. Many organizations who do not have a dedicated person for payroll go for this option. Based on their pay cycle, every month they provide employee salary information and other data such as attendance, leaves, reimbursement details, etc. to the payroll service provider. The service provider then computes payroll and also takes care of statutory compliance. Since payroll is a crucial function and businesses want to have full transparency and control over it, they often hesitate in outsourcing payroll.

Payroll software

As discussed above, for running successful payroll, you need to ensure that payroll inputs are coming from every source in a timely and seamless manner. The intent of using software is to reduce the friction in getting the inputs. There are advanced payroll management software available in the market that not only automates payroll computation but also serve as a holistic leave and attendance management, HR management and employee self-service portal. Depending on the size of your business and use cases you can opt for an appropriate payroll software for your business.

Best Payroll Software for your organisation

The move from manual payroll system to automated one can save a lot of time. It not only helps in faster and accurate payroll processing but also keeps the employees, management and regulatory bodies happy. There are some features that you should consider while selecting a payroll software.

Ease of operation

Payroll function can be very cumbersome. You should opt for a system which has comprehensive but straightforward workflows. If the software is intuitive, it reduces the need for software training and guidance. Also, make sure that the software provider is providing well-updated documentation so that you can access the information anytime as you may need.

Scalability

As organisation size increases your software also need to serve you appropriately. The limitation can be in terms of employees data it process or in terms of the availability of features like leave and attendance management, reimbursement model, etc. The software offerings should be such that you can opt for advanced features at a reasonable price without much difficulty.

Employee self-service module

One of the primary payroll input providers is the employee. He provides information such as income tax saving investment declaration, type of flexible benefit opted, etc. The interaction between the payroll officer and employee is usually very event-based. To understand the significance of ESS module let’s assume a case of income tax declaration in two scenarios:


ESS Portal


So, we saw how a simple tool like employee self-service portal can reduce the manual intervention and automate payroll data collection for accurate tax computation.

Integration with time, attendance and leave management system

Time Management

Typically this module is used to track time spent on projects or specific activities. Consulting firms such as audit firms, specialist doctors, etc., who manage critical projects require a robust time management module for tracking time and at times this data may also be used for billing clients.

Integration with the accounting system

Your accounting/ERP system needs to record every financial transaction including payroll information like department wise employee cost, individual payroll components like reimbursements, tax due and paid, etc. Some payroll software have integration with accounting software via API( a way to push data directly from one software to another).

In the absence of such integration, the payroll officer needs to provide all transaction details to accounts department. The accountant then manually posts it in the form of journal entries in accounting/ERP software like Tally ERP, SAP, Quickbooks, etc. These integrations can help finance and payroll team work together and avoid any manual entry of data.

Attendance

While most small organisation go for manual attendance system, medium and large organisations have started using smart automated tools such as biometric method, auto-tracking via system log-in, access cards, iris capture, etc. The data is stored in a system and linked to the payroll software that uses this data to calculate attendance days, overtime, etc. For seamless payroll processing, check that software supports attendance management and is configurable with access control machines.

Leave Management

In every organisation, employees are entitled to take a certain number of leaves such as privilege or annual leave, casual leave, sick leave, holiday, etc.

If the software has leave management feature, HR can directly credit these leaves to the account of every eligible employee. As and when required, the employee can apply for leave through the system. A good system should also be able to define a workflow to notify the employee’s manager for either approval or rejection. A robust payroll software with built-in leave management feature can help attain accurate payroll.

Tax Registrations for Above

Organization Adhering to Minimum Wages

Minimum Wages come under the Minimum Wages Act, 1948. The minimum wage rates are given by both the Central Government and the State Government. The wage rates vary from the employment, sector, and type of employee.

According to this act, the employer is responsible to pay wages at least every month on a timely basis. Wage period may be fixed according to the convenience of the employer on a daily, weekly or monthly basis

Registration of Company for ESIC

The ESIC social security scheme brings reasonable healthcare to employees and their family members. As per the ESIC Act, all the companies consisting of more than 20 employees whose monthly salary falls under Rs.21,000 should register under the Act. 

So, if the company falls under the ESIC Act compliance than the Employees CTC needs to be updated including the ESIC employer and employee contribution.

Registration of company for (EPF) Provident Fund

The Provident Fund allows the employees to save some part of their income. The Provident Fund is an amount of funds accumulated through regular and monthly contributions made by an employee and their employer. 

According to EPFO (Employee Provident Fund Organisation) rules and regulations, any company which has 20 or more employees should register for Provident Fund. If the company fails to comply with EPFO rules and regulations, then it will be charged with heavy penalties.

Including Gratuity in Employee CTC

According to the Payment of the Gratuity Act, 1972, Gratuity is applicable to all the establishments such as NGO's, hospitals and educational institutions with 10 or more employees. As gratuity is a fixed contribution from the side of the company, it is shown as part of the CTC. Thus, making Gratuity as part of the employees CTC is mandatory.

Why Outsourcing your Payroll to TaxaJ?

 There are dedicated players of every wing of business. You must be in a business of sales or service, and i am sure you must be good at that. Similarly we're awesome at our business & our business is to develop yours.

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Lower Risk

The entire payroll process is automated and therefore, the risk of error is significantly reduced.

Reliable Service support

Our tax specialist is ready to answer questions and helps in solving problems 24×7.

Integration Efficiency

When you partner with TAXAJ, you benefit from the speed and simplicity that comes your way by using a single provider. We are competent enough to connect your payroll functions with other taxation related issues, etc.

Peace of mind

By outsourcing you avoids all nasty, like incorrect payments to staff, penalties. A fully outsourced service offers complete peace of mind by ensuring that your pivotal business functions are well taken care of and your company is also legislation compliant.

Improve the morale of employee

 If your employees feel like their job is not stable and they are not being paid on time, they might start to look elsewhere. A Payroll Management system will ensure that all last-minute glitches and manual errors are taken care of so that your employees’ morale is always high.

Lower tax bills

If you do not manage your employees’ records, you may end up in a situation where you have to pay fines for mismanaged records. It is important that taxes and TDS be deducted from the salary and all of these be recorded properly. In this sense, a Payroll Management software can be of help and help you reduce the chances of paying legal fines.

It helps even new startup owners

If you are a new startup owner, you will have to don many hats in the initial stages. One of them is managing payroll. Now, instead of doing this on your own and risking manual errors, you can use an established management software and handle your company’s finances.

 It can reduce overheads

Instead of doing it in-house outsourcing your payroll to someone else,  will save you a lot of money. Plus you’ll have better control of your own finances. This way you can focus on your core business activities