Payroll compliance in India means deducting, paying and reporting the right statutory amounts every month: Provident Fund (PF), Employees' State Insurance (ESI), Professional Tax, TDS on salary and, depending on your state and size, Labour Welfare Fund, bonus and gratuity. HRMS and payroll software keeps this accurate by calculating each deduction automatically from attendance and salary data, and producing the challans and returns on time.
This guide is a practical checklist for HR and finance teams. It covers each statutory item, the monthly and yearly calendar, common mistakes, and what to look for in payroll software.
Rates, wage ceilings and due dates change from time to time through government notifications and state rules. Use this as a checklist, and confirm current figures with the official portals or your compliance consultant.
Why payroll compliance is harder than it looks
Indian payroll combines central laws, state laws and tax rules. Each has its own wage definition, ceiling and due date. A mid-sized company typically has to manage:
- Different rules by state: professional tax, labour welfare fund and minimum wages vary.
- Different rules by employee: PF and ESI coverage depend on wage levels; contract and fixed-term staff have their own conditions.
- Different wage definitions: what counts as "wages" for PF, ESI, bonus and gratuity is not always the same.
- Strict deadlines: late payment attracts interest and damages, and errors take time to correct on government portals.
- Changing law: India's four Labour Codes consolidate many older labour laws, including new definitions of wages. Check how their rollout and your state's rules affect your salary structures.
The statutory payroll checklist
| Item | Who it applies to | Contribution (typical) | Usual due date |
|---|---|---|---|
| Provident Fund (EPF) | Establishments with 20+ employees; mandatory for employees with basic + DA up to ₹15,000/month | Employee 12%; employer 12% (split between EPF and pension) of basic + DA | 15th of the following month |
| Employees' State Insurance (ESI) | Covered establishments (generally 10+ employees); employees with gross wages up to ₹21,000/month | Employee 0.75%; employer 3.25% of gross wages | 15th of the following month |
| Professional Tax | Employees in states that levy it | State slab rates; maximum ₹2,500 per year | As per state (monthly, half-yearly or annual) |
| TDS on salary | Employees whose taxable income exceeds the exemption limit | As per income tax slabs and regime chosen | 7th of the following month; quarterly return and annual Form 16 |
| Labour Welfare Fund | Employees in states that have it | Small fixed amounts from employee and employer | As per state (half-yearly or annual) |
| Statutory bonus | Employees earning up to ₹21,000/month | 8.33% to 20% of eligible wages | Within 8 months of the financial year end |
| Gratuity | Employees after 5 years of continuous service (conditions apply) | 15 days' wages for each completed year of service | On exit, within 30 days of becoming payable |
Provident Fund (PF)
- Employee contribution is 12% of basic pay plus dearness allowance.
- Employer contribution is also 12%, split between the Employees' Pension Scheme (8.33%, on wages up to the ₹15,000 ceiling) and the EPF account.
- Admin and insurance (EDLI) charges are added on top.
- Payroll software should generate the monthly electronic challan-cum-return (ECR) for upload.
- It should also track each employee's Universal Account Number (UAN) and handle joiners and leavers.
Employees' State Insurance (ESI)
- ESI provides medical and cash benefits to covered employees.
- Coverage depends on gross wages, so an employee can move in or out of coverage when their salary changes. Contribution periods have specific rules for this.
- Good software tracks coverage automatically instead of relying on someone to remember.
Professional Tax
Professional tax is a state tax deducted from salary in states that levy it. Slabs, frequency and registration rules differ by state. Companies with employees in several states need state-wise calculation and separate payments.
TDS on salary
- Employers must estimate each employee's annual taxable income and deduct tax every month.
- The estimate uses the tax regime the employee chooses, their declared investments, and any previous employer's income.
- Tax deducted is deposited monthly and reported in a quarterly return.
- Form 16 is issued to each employee after the year ends.
- Proof collection near year-end often causes last-minute corrections. Software that collects declarations and proofs online reduces errors.
Bonus and gratuity
- Statutory bonus is payable to eligible employees under the bonus law, between a minimum and maximum percentage of eligible wages.
- Gratuity becomes payable on exit after the qualifying service period. The usual formula is 15 days' last-drawn wages for each completed year, using a 26-day month.
- Both should be calculated automatically, and gratuity should flow into the full and final settlement.
Other compliance to keep in mind
- Minimum wages: state-notified rates, often revised twice a year through variable dearness allowance. Salary structures must not fall below them.
- Shops and Establishments / Factories rules: working hours, overtime, leave and holidays as per state rules.
- Maternity benefit: paid leave for eligible women employees, which payroll must handle without breaking PF and ESI calculations.
- Registers and records: wage registers, attendance and leave records, and payslips must be maintained and available for inspection.
Monthly and yearly compliance calendar
| When | Task |
|---|---|
| Monthly, after payroll | Pay salaries; issue payslips |
| By the 7th | Deposit TDS deducted from last month's salaries |
| By the 15th | Pay PF and file the ECR; pay ESI contributions |
| As per state | Pay professional tax and labour welfare fund |
| Quarterly | File the TDS return for salaries |
| Year-end (Jan–Mar) | Collect investment declarations and proofs; finalise tax |
| By mid-June | Issue Form 16 to employees |
| Within 8 months of year-end | Pay statutory bonus |
| On every exit | Full and final settlement, including leave encashment and gratuity where due |
Common payroll compliance mistakes
- Wrong wage base: calculating PF on the wrong components, or ignoring how allowances are treated under current rules.
- Missing coverage changes: an employee's salary crosses the ESI limit, but deductions continue or stop incorrectly.
- Attendance not linked to payroll: loss-of-pay days, overtime and shift allowances keyed in manually, causing errors and disputes.
- State rules handled centrally: professional tax or labour welfare fund missed for employees in other states.
- Late deposits: waiting for approvals until after due dates, leading to interest and damages.
- Unplanned full and final settlements: gratuity, leave encashment and recoveries calculated by hand weeks after the employee leaves.
- No audit trail: manual changes to salaries or deductions without records, which creates problems during inspections.
What to look for in HRMS and payroll software
- Automatic statutory calculations: PF, ESI, professional tax, TDS and labour welfare fund, with state-wise rules and wage ceilings.
- Integrated attendance: shifts, leave, overtime and on-duty records flowing directly into payroll, including mobile and GPS attendance for field staff.
- Configurable salary structures: formula-based components, so you can adjust structures when rules or policies change.
- Compliance outputs: challans, return files and reports in the formats required by each authority.
- Employee self-service: payslips, tax declarations, proof uploads and Form 16 available to employees online.
- Full and final settlement: automatic calculation of pending salary, leave encashment, gratuity and recoveries on exit.
- Loans and advances: EMI deductions scheduled in payroll.
- Audit trail and approvals: every change recorded, with approval workflows for sensitive actions.
- Analytics: payroll cost by department and cost centre, overtime trends and attrition insights.
How Conquer Infotech helps
Conquer HRMS brings HR and payroll together in one platform for Indian businesses. Its payroll module includes:
- automated calculation of PF, ESI, professional tax, TDS and other statutory deductions, with compliance reporting and government filing support;
- a formula-based payroll engine for complex salary structures, variable pay, overtime and shift allowances;
- loans and advances, with automatic EMI deductions;
- ex-gratia and bonus processing with full audit trails;
- automated full and final settlement, including leave encashment, statutory deductions and gratuity;
- payroll analytics by cost centre.
Time and attendance in Conquer HRMS feeds payroll directly:
- flexible shift and leave policies;
- overtime workflows;
- a mobile app with GPS and photo-based attendance for field teams.
Recruitment, training, performance and exit management complete the employee lifecycle.
Contact us for a demo with your own salary structures and states.
Frequently Asked Questions
What statutory deductions apply to salaries in India?
The main ones are Provident Fund, ESI, professional tax (in states that levy it), TDS on salary and, in some states, labour welfare fund. Bonus and gratuity are statutory payments rather than monthly deductions.
What is the due date for PF and ESI payments?
Both are generally due by the 15th of the month following the salary month. Always confirm current due dates on the official EPFO and ESIC portals.
Is professional tax applicable in every state?
No. Professional tax is levied only by certain states, each with its own slabs and payment frequency, up to a maximum of ₹2,500 per year per employee.
Who is covered under ESI?
Employees of covered establishments whose gross wages are within the ESI wage limit, currently ₹21,000 per month (higher for persons with disability). Coverage must be tracked when salaries change.
How is gratuity calculated?
The usual formula is last-drawn wages × 15 ÷ 26 × completed years of service, payable after the qualifying service period. Eligibility conditions and limits apply.
How does payroll software help with compliance?
It calculates each deduction automatically from salary and attendance data, applies state-wise rules and ceilings, generates challans and returns, and keeps an audit trail. This reduces manual errors and missed deadlines.
Do the new Labour Codes change payroll?
The four Labour Codes consolidate older labour laws and introduce changes such as a uniform definition of wages, which can affect PF and gratuity calculations. Review your salary structures against the rules applicable in your states.
Want to see how this would work for your business? Talk to our team for a free consultation.
Contact Conquer Infotech