A comprehensive guide to

payroll
compliance
in India
TABLE OF CONTENTS

Introduction 04

Payroll process 06

Payroll compliance 08

Major payroll statutes in India 09

The Employees' Provident Funds and

09
Miscellaneous Provisions Act, 1952

The Employees' State Insurance Act, 1948 10

The Labour Welfare Fund Act 12

Professional Tax Act 13

The Income Tax Act, 1961 14

Other payroll related acts in India 16

The Apprentices Act, 1961 16

The Contract Labour Act, 1970 16

The Employee's Compensation Act, 1923 17

Equal Remuneration Act, 1976 17

The Factories Act, 1948 18

The Shops and Establishment Act 18

The Industrial Disputes Act, 1947 19

02
The Industrial Employment
19
(Standing Orders) Act, 1946

Maternity Benefits Act, 1961 20

The Minimum Wages Act, 1948 21

The Payment of Bonus Act, 1965 22

The Payment of Gratuity Act, 1972 23

The Payment of Wages Act, 1936 24

New Labour Codes 25

The Code on Wages, 2019 26

The Code on Social Security, 2020 26

The Code on Industrial Relations, 2020 27

The Code on Occupational Safety,
27
Health, and Working Conditions, 2020

How you can ensure payroll

28
compliance

03
INTRODUCTION
India is emerging as the fastest-growing economy in the world, thanks
to the contribution of its multinational conglomerates, small and
medium enterprises, and startups. These micro, small, and medium
enterprises (MSME) employ a whopping 110 million people across
various services and play a significant role in the country's economic
growth. However, running an MSME or a startup comes with its own
set of challenges, including managing complex payroll and
complying with regulations.

The World Bank's Ease of Doing Business index ranked

India at 63 among 190 countries.

*This index ranks countries against each other based on

how each country's regulatory environment is
conducive to run a business.

Staying compliant with India's vastly distinct and regionally intricate

regulatory landscape is a huge challenge for businesses of all sizes.
There are 40 labour-related acts at the Central level alone which
govern how labour is employed and paid in each organisation.

With a lack of expertise and access to resources, business owners are

often left in a lurch to decode each of these laws by themselves and
comply with them.

04
We understand how overwhelming it can be for you to comprehend
these laws when you're putting your best efforts into growing your
business. That's why we did the groundwork for you. We researched
all payroll-related laws in India, and compiled this e-book in a
language that could be easily understood by anyone. By the end of
this e-book, you'll be able to:

Understand the intricacies of payroll compliance.

Learn all you need to know about the various payroll-related acts
in India.

Gain knowledge necessary to ensure compliance and avoid legal

and financial pitfalls.

05
PAYROLL PROCESS
In simple terms, payroll is the process of paying your employees for the work they
have done during a specific period.

However, payroll is not just calculating each employee's salaries; it is one of the
biggest spends and a critical function of every business. There are multiple moving
parts involved and stakeholders from different teams must work in tandem to get it
done on time. Here's a high-level overview of the series of steps involved in
completing payroll successfully from scratch:

1 2 3
Create salary
Define your
Onboard components for
company's
employees all compensation
pay policy
structures

6 5 4
Calculate the Collect input from
Pay salaries to all
salary to be paid employees and
the employees on
and deductions to other dependent
payroll
be made teams

7 8 9
Distribute Compile tax and Record payroll
payslips and tax statutory reports expenses
worksheets

06
Small business owners and startup founders new to the industry often have limited
resources and manpower to mange this complex payroll process. They end up han-
dling payroll manually or by relying on outdated technology.

According to a survey, 39% of businesses still rely on paper or spreadsheets

for payroll management.

Processing payroll manually can be extremely time consuming and highly prone to
human errors. People who use spreadsheets for their payroll needs tend to invest a
tremendous amount of time importing data into cells and battling with its formulas.
Adding to this complexity is the burden of staying up to date with the latest laws and
regulations of the land.

The better way: Use cloud-based payroll

software, like Zoho Payroll, to automate
payroll and compliance for your business.
The software is built to adapt to the
changing compliance landscape and the
Zoho Payroll team will ensure the software
is up to date with all the latest regulations.

07
PAYROLL COMPLIANCE
Payroll compliance means adhering to the laws and regulations put in place by the
central and state governments surrounding the payroll process. There are 18 such
central legislations in India and we'll be discussing in detail what each act states, so
you're well-informed about running a successful payroll operation.

The Employees' Provident

The Employees' State The Labour Welfare Fund
Funds and Miscellaneous
Insurance Act Act
Provisions Act

Professional Tax The Income Tax Act The Apprentices Act

The Employee's
The Contract Labour Act Equal Remuneration Act
Compensation Act

The Shops and The Industrial Disputes

The Factories Act
Establishment Act Act

Industrial Employment
Maternity Benefits Act Minimum Wages Act
(Standing Orders) Act

The Payment of Bonus The Payment of Gratuity The Payment of Wages

Act Act Act

Note: We have taken great care to ensure that the information mentioned here is
accurate and up to date as of June 2023. However, please be advised that the
deadlines and clauses mentioned are subject to change according to government
policy. We recommend that you regularly check for updates from the government.

08
MAJOR PAYROLL STATUTES IN INDIA

The Employees' Provident Funds and

Miscellaneous Provisions Act, 1952

What it is
An act that provides institution for provident funds (pension fund + deposit-linked
insurance fund) for enrolled employees in India.

When it is applicable
Compliance with the act is mandatory if your organisation has 20 or more employees
(including contract workers) or if your employee earns less than ₹ 15,000 per month.

How it works
Through this act, the statutory body, the Employees' Provident Fund Organisation
(EPFO), provides an EPF savings scheme to enrolled employees. Employers and
employees registered under the act contribute an equal share of 12% EPF wages every
month. Employees can use the corpus once they retire, resign, or during times of need.

What you must do

Register your business under the scheme through the EPF website within one
month of attaining the required employee strength.

Get your employees enrolled and make sure each of them has a Universal Account
Number allotted by the EPFO.

Deduct employee contributions before processing their salaries each month and
add your employer contributions.

Deposit the collected amount through the EPFO portal before the 15th of the
following month.

For more in-depth information, take a look at our guide on Employees' Provident Fund.

09
The Employees' State Insurance Act, 1948

What it is
An act that aims to provide social security and certain benefits to employees who are
unable to work due to unforeseen situations.

When it is applicable
All non-seasonal factories and companies with a minimum of 10 employees (in some
states, the minimum threshold is 20 employees) who have a salary of up to ₹ 21,000
per month must register under the act. Refer to this table for state-specific rules.

States requiring minimum States requiring minimum States where ESI Act is
of 10 employees of 20 employees not enacted

Andhra Pradesh Andaman and Nicobar Arunachal Pradesh

Bihar Assam Manipur

Chhattisgarh Chandigarh Mizoram

Delhi Dadra and Nagar Haveli Sikkim

Gujarat Daman and Diu

Haryana Goa

Jharkhand Himachal Pradesh

Karnataka Jammu and Kashmir

Kerala Lakshadweep

Odisha Madhya Pradesh

Pondicherry Maharashtra

Punjab Meghalaya

Rajasthan Nagaland

Tripura Tamil Nadu

Uttarakhand Uttar Pradesh

West Bengal

10
How it works
The employer and the employee need to contribute a combined 4% of the employee's
gross wage each month towards the Employees' State Insurance (ESI) fund managed
by the Employees' State Insurance Corporation (ESIC). Enrolled employees can utilise
the amount and get the benefits such as allowance and medical care.

What you must do

Get registered under the Act within 15 days from the date of applicability.

Collect employee's contributions, add your employer contributions, and deposit

the amount through the ESIC portal or through any one of the authorized banks
before the 15th of every month.

Submit half-yearly returns to the ESIC using the Return of Contributions form. The
due date to file returns for the contribution period from April to September is the
12th of November; the due date for the October to March period is the 12th of May.

Maintain records and registers of ESI payments and ESIC return reports, and pro-
vide them for verification whenever asked for.

Recent amendment
The maternity benefit amount for insured members in case of confinement has been
increased from ₹ 5,000 to ₹ 7,500.

Additional resources
Article on the basics of ESI.
Guide on the ESI registration, payment, and more.

11
The Labour Welfare Fund Act

What it is
The act aims to improve the labourers' working conditions and living standards by
providing eligible employees and their dependants with medical care, housing,
education, and other benefits.

When it is applicable
The Labour Welfare Fund (LWF) is applicable only if your business is based out of these
states:

Andhra Pradesh Goa Kerala Punjab

Chandigarh Gujarat Maharashtra Tamil Nadu
Chhattisgarh Haryana Madhya Pradesh Telangana
Delhi Karnataka Odisha West Bengal

How it works
Since LWF is a state-specific statutory, the state governments decide the deduction
cycle and contribution rates. In most cases, the employer and the employee have to
contribute a fragment of the employee's wages to the fund, which is utilised to
provide benefits to enrolled employees. In some cases, the state government will also
contribute their share.

What you must do

Get your establishment registered within 15 days of commencement.
Collect LWF dues from your workers and contribute your share towards the fund
based on the rates determined by your state.

Remit payments to the state government before the deadline specified by your
state authorities.
File LWF returns using the correct form at the correct intervals.

For more details, read our in-depth guide on Labour Welfare Fund.

12
Professional Tax Act

What it is
It is a tax levied on all employees, freelancers, and individuals who earn a living by any
type of work from self employment to full-time professional jobs.

When it is applicable
Organisations operating out of the following 20 states, with at least one employee on
their payroll must comply with the Professional Tax (PT) regulations.

Andhra Pradesh Jharkhand Manipur Punjab

Assam Karnataka Meghalaya Puducherry
Bihar Kerala Mizoram Sikkim
Chhattisgarh Maharashtra Nagaland Tamil Nadu
Gujarat Madhya Pradesh Odisha Telangana

How it works
PT is a state-specific statutory and the commercial department of each state collects
this tax based on the individual's income. The collected amount is used to better the
infrastructure of the state and to improve services provided for professionals.

What you must do

Register your business through the state government's website within 30 days of
applicability.

Deduct tax from employees before processing their salaries based on the slab set
by the state authorities.

Deposit the collected amount to the government before the due date.

File yearly returns using the form prescribed by your legislature.

Maintain reports of PT annual return summary and PT statements for future

references.

For additional learning, have a look at our definitive guide to professional tax.

13
The Income Tax Act, 1961

What it is
The Income Tax (IT) Act is a comprehensive statute that governs taxation in India. It
sets the rules and regulations for the collection and recovery of income tax.

How it impacts your payroll operations

Section 192 of the IT Act makes it mandatory for employers to deduct a tax at source
(TDS) on the salary payable to employees as per the rates set by the government.

Income tax slabs according to the old and the new tax regime for FY 2023-2024:

Income threshold New tax regime rates

Up to ₹ 3 lakhs Nil

₹ 3 lakhs to ₹ 6 lakhs 5%

₹ 6 lakhs to ₹ 9 lakhs 10%

₹ 9 lakhs to ₹ 12 lakhs 15%

₹ 12 lakhs to ₹ 15 lakhs 20%

Above ₹ 15 lakhs 30%

Income threshold Old tax regime rates

Up to ₹ 2.5 lakhs Nil

₹ 2.5 lakhs to ₹ 5 lakhs 5%

₹ 5 lakhs to ₹ 10 lakhs 20%

Above ₹ 10 lakhs 30%

Note: The tax slab and rates are subject to change according to government
policy. We suggest you check for the latest updates from the government.

14
When it is applicable
The act applies to all organisations from the very first employee whose income
exceeds the exemption limit.

What you must do

Calculate and deduct TDS from your employees' salaries before processing them
each month, as per the income tax slab they fall under.

Track your company's TDS liabilities and make payments to the government
before the 7th of the following month.

File returns once every quarter using Form 24Q.

Generate and distribute Form 16 to your employees at the end of the fiscal year
after the successful filing of TDS returns.

Recent amendments
The new tax regime will be the default regime starting in the 2023-2024 financial
year for all taxpayers.

The rebate limit increased from ₹ 5 lakh to ₹ 7 lakh and a standard deduction of
₹ 50,000 has been introduced in the new tax regime.

The highest surcharge rates for taxpayers who earn more than ₹ 5 crore in a year is
reduced from 37% to 25% in the new tax regime.

To learn more about the current tax rates, take a look at our detailed blog on the
Union Budget 2023.

15
OTHER PAYROLL
RELATED ACTS
IN INDIA

The Apprentices Act,

1961
Purpose
To provide training to unskilled workers
and improve their employability.

Apprentices
The Contract Labour
The act defines apprentices as those Act, 1970
who work for low pay to learn a skill or Purpose
trade. To govern the employment of contract
labour in various industries.
Applicability
Every establishment with 30 or more Applicability
regular and contract employees must Every organisation employing 20 or
take in apprentices. more contract workers on any day of
the preceding 12 months must obtain a
Employer responsibilities license from the government.
Provide a safe working environment,
ensure compliance with training Employer responsibilities
standards, and pay stipends to Pay wages to contract workers at par
apprentices. with the wages of regular employees
for the same work.

Provide them with employment

contracts, pay slips, and social
security benefits such as provident
fund, gratuity, and bonuses.

16
The Employee's
Compensation Act, 1923
Purpose
A social welfare act that provides
financial aid to employees or their
dependents in the event of an
employment injury or death.

Applicability Equal Remuneration Act,

Applies to employees who work in
1976
hazardous environments and those who
are not covered by the Employees' State Purpose
Insurance Act. To ensure equal pay for men and
women for the same work or work of a
Employer responsibilities similar nature.
Pay compensation to the employee
or their dependents in the event of a Applicability
workplace injury. All organisations, including
government and private firms.
Report the injury or death of an
employee to the state authority and
What it states
maintain a record of accidents that
Employers cannot discriminate against
occur in the workplace.
women in matters related to
recruitment, wages, promotions, and
working conditions.
Did you know: This act was called
the Workmen's Compensation
Employer responsibilities
Act when it was enacted in 1923.
Maintain registers containing details of
all employees, including their wages at
all times.

Non-compliance
Those who violate the act can face legal
actions such as fines and
imprisonment.

17
The Factories Act, 1948
Purpose
To regulate the working conditions in
factories and ensure the safety, health,
and welfare of workers.

The Shops and

Applicability
All factories employing 10 or more
Establishment Act
workers. Purpose
A state-level legislation that regulates
Employer responsibilities working conditions of employees in
Ensure the safety of workers by shops, commercial establishments, and
providing them with protective similar places.
equipment and safe working
conditions. Applicability
The act applies to all kinds of shops and
Offer 12 days of leave for those who establishments operating in a state.
have worked for at least 240 days in a Eligibility of coverage under the act is
calendar year. determined by the state authorities

Restrict working hours for all workers based on the nature of the

to a maximum of 48 hours per week establishment and the work being

and for workers who work in carried out, rather than the number of

hazardous environments to nine employees. For instance, a shop with

hours per day. only one employee may still be covered

by the act.

Employer responsibilities
Obtain a license to run an
establishment from the state
government and renew the license
periodically.

Ensure basic amenities such as

canteens and restrooms are provided
for employees at work.

Maintain records related to

employment.
18
The Industrial Disputes
Act, 1947
Purpose
To govern the settlement of disputes
between employers and employees,
including those related to wages,
layoffs, retrenchment, and other
employment conditions.
The Industrial
Applicability Employment (Standing
All industrial establishments, including Orders) Act, 1946
public and private sector companies.
Purpose
Employer responsibilities To ensure employees access to safe
Provide workers with statutory working conditions, social security
benefits such as minimum wages, benefits, and protect them from
overtime pay, and leave. exploitation at work in certain
industries.
Give notice of change to workers and
government authorities before
Applicability
effecting any layoffs, retrenchment,
All industrial establishments where 50
or closures.
or more workers are employed.

Recent amendment
Employer responsibilities
The 2020 amendment mandates that
Define the terms and conditions of
establishments employing more than
employment in consultation with the
300 workers must seek prior
workers.
government approval before
retrenching workers. Get approval for standing orders
from the government authority.

Notify the workers of any changes

made to the standing orders.

19
Maternity Benefits Act, 1961
Purpose
To regulate the employment of women in establishments for a certain period before
and after child-birth.

Applicability
All establishments employing 10 or more employees excluding those who are covered
by the Employees' State Insurance Act will come under the purview of this act.

Benefits
Female employees are entitled to a paid maternity leave of 26 weeks, if they have
worked for the employer for at least 80 days in the preceding 12 months.

In case of miscarriage or medical termination of pregnancy, the employee is

entitled to six weeks of additional leave.

Employer responsibilities
Inform female employees of their rights under the act.

Provide employees maternity leave with paid leave and medical allowances.

Recent amendments
Provision to work from home during the maternity leave period.

Mandatory facility of crèche if the establishment employs 50 or more employees.

20
The Minimum Wages Act, 1948
Purpose
To ensure workers in certain scheduled employments, such as construction, mines,
and factories, receive fair wages for their work, and to prevent exploitation.

Applicability
All establishments with 1,000 or more employees in a state.

How it works
Minimum wage varies from one state to another as both the central and the state
government fix and revise this wage based on the type of employment and the cost of
living in each state.

Employer responsibilities
Pay workers at least the minimum wage fixed by the state government.

Maintain records of employees and their wages.

Recent amendments
Extension of the act to all employments including those in the unorganised sector.

Automatic revision of minimum wages every five years based on the consumer
price index.

21
The Payment of Bonus Act, 1965
Purpose
To incentivize employees in certain establishments with a bonus payment-based on
the company's profits and the employee's salary.

Applicability
Every establishment which employs 20 or more people.

Eligibility
All employees, including part-time employees who earn less than ₹ 21,000 per month
(basic + dearness allowance, excluding other allowances), and have worked for 30
days in that accounting year.

Employer responsibilities
Calculate annual bonus amounts based on employees' wages and profits earned by
the establishment.

Pay a minimum of 8.33% and a maximum of 20% of wages as a bonus to eligible

employees within eight months from the closing of the accounting year.

Pro tip: Use Zoho Payroll's bonus calculator to quickly calculate your
employees bonus payout for this year.

22
The Payment of Gratuity Act, 1972
Purpose
To ensure eligible employees receive a one-time payment of gratuity after completing
a minimum of five years with the same organisation.

Applicability
Every establishment with 10 or more employees.

Calculation
Gratuity is calculated based on the employee's last drawn salary which includes basic
salary, dearness allowance, and their years of service. Here's the gratuity formula for
non-government employees who are covered under the act:

(15 * Last drawn salary * Tenure of working)

Gratuity =
26

Pro tip: Use Zoho Payroll's free gratuity calculator tool to compute your
employees' lump sum amounts and learn all about gratuity from our guide on
The Payment of Gratuity Act.

Employer responsibilities
Calculate and process gratuity payouts within 30 days from the date an employee
becomes eligible for it.

Either use the establishment's finances to make gratuity payments or obtain a

group gratuity plan from LIC to cover these expenses.

Recent amendment
The central government has increased the maximum limit of gratuity that can be paid
from ₹ 10 lakhs to ₹ 20 lakhs.

23
The Payment of Wages Act, 1936
Purpose
It ensures employees from various industries are paid on time by having penalties for
wages paid late by a month.

What it states
Organisations with less than 1,000 employees must pay their employees before the
7th of every month. Organisations with more than 1,000 employees must pay wages
by the 10th of every month.

Applicability
The act applies to every organisation where an employed person's monthly wage does
not exceed ₹ 24,000.

Employer responsibilities
Calculate and disburse wages to employees within the stipulated time frame.

Pay wages either through cash or cheque. Direct salary transfer to the employee's
bank account can be made only after getting prior consent from the employee.

24
NEW LABOUR CODES
While these laws offer much-needed benefits both to the employer and the
employees, the sheer volume of laws has led to compliance complexity.

To simplify compliance for employers and promote ease of doing business in India,
the central government introduced four new labour codes in 2020. Once
implemented, the four codes will consolidate over 100 state laws and 40 central laws
that regulate various aspects of labour such as working conditions, wages, and social
security.

The four Benefits for

Objective Features
new codes employers

To consolidate The code on Universalization Greater flexibility

the existing wages of minimum in hiring and
labour laws and wages. firing.
The code on
facilitate ease of
social security Simplification of Improved dispute
doing business in
compliance resolution.
India. The code on
requirements.
industrial More
relations Better social empowerment of
security workers.
The code on
coverage.
occupational
safety, health,
and working
conditions

25
The code on wages,
2019
The code universalizes the minimum
wage for all employees in both the
organised and unorganised sectors.
Employers' liabilities under this code
include:

Ensuring timely payment of

minimum and overtime wages to
The code on social
employees. security, 2020
Avoiding exploitation of workers by This code extends the reach of social
employing them for only eight hours security schemes such as provident
a day with a one-hour break. fund, insurance, and gratuity to all
sectors of work, including gig workers
Providing equal payment of wages to
and platform workers. To stay
both men and women for the same compliant with the code you need to
nature of work.
do the following things:
Maintaining an employee register
Register establishments and
either digitally or through a records
employees with various social
book.
security bodies—EPFO, ESIC.
Generating and distributing pay slips
Deduct contributions from
with the details of the organisation
employee's salaries, add their
and employees' CTC.
employer contributions, and make
payments towards social security
schemes.

Provide benefits such as maternity

leave and gratuity payouts to eligible
employees.

Disclose all social security related

information to employees.

26
The code on industrial
relations, 2020
This streamlines the laws related to trade
unions, employment conditions for
industries, and industrial disputes. The
code emphasises building a stronger
employer-employee relationship, The code on
creating better working conditions, occupational safety,
collective bargaining, and employee re-
health, and working
skilling. Under this code, employers are
required to do the following:
conditions, 2020
The code aims to ensure employees
Maintain an industrial relations policy
across all sectors are treated equally
and inform employees of their rights
and have safe working conditions. The
under the code.
legislation will be applicable to every
Form one or more grievance organisation that employs more than
handling committees if you employ 10 employees across various industry
20 or more workers. sectors and businesses. Employer
responsibilities under this code
Seek permission from the include:
government before retrenching
employees if you employ 300 or Facilitating a risk-free workplace and
more employees. providing employees with robust
equipment.
Give one month of notice or an
equivalent pay for the same period Registering with the appropriate
along with 15 days of wages for every governing bodies if the
year of continuous service before establishment falls under the
retrenching employees. "Hazardous" category.

Offering social security benefits,

medical check ups, and suitable
working conditions for inter-state
workers.

Providing a letter of appointment to

all employees at the beginning of
their service to formalise their
employment.
27
HOW YOU CAN ENSURE PAYROLL COMPLIANCE
The sheer depth of these payroll regulations and acts can be overwhelming even
though we have only included the basic information you need to be aware of. Now,
imagine if you have to manage all of these compliance requirements manually or
through outdated systems.

Today, there are systems that can help reduce the burden on payroll teams. With
cloud-based payroll software, like Zoho Payroll, you can put statutory compliance on
autopilot mode, and always keep a spotless compliance record.

Here's how Zoho Payroll can ensure compliance for you:

The software comes with built-in EPF, ESI, PT, LWF, and TDS compliance.

It always makes accurate statutory deductions and provides real-time

visibility into the deductions made.

It can generate statutory reports and forms such as EPF-ECR reports, ESIC
returns, Form 24Q, and others so you can file returns easily.

It can help you generate and distribute Form 16 so your employees can
understand their tax liabilities.

Whenever there's a change in tax laws, the engineers on the backend will
update the software so you can keep your business on good legal footing.

Beyond this, the software has the capability to automate various aspects of the payroll
workflow. Quickly import employee details, calculate payroll automatically, pay and
distribute payslips on time, and stay compliant with confidence with Zoho Payroll.

Sign up for a free trial and see how we're simplifying payroll for thousands of
businesses in India.

28
Contact us

18005726671

[email protected]

zoho.com/payroll

Follow us