Payroll year-end is almost here, and it’s time for HR and payroll managers to be prepared for an important annual activity. From a governance and compliance perspective, the Indian payroll year-end process is critical for organisations of all sizes.
The Indian Financial Year is from 1 April to 31 March. It is mission-critical for organisations to plan and charter all things-to-do items for the year-end processing and fulfill all obligations.
Usually, the financial year-end is a busy season for HR/Payroll/Accounting professionals. Transaction and query load can be very high. If employees are not rightly educated about Income Tax processes, they are likely to ignore investments and end up paying a higher tax amount in one or two months. This may even result in a lower take-home from January to March.
- Unlike many other countries, the year-end process in India involves income tax proof collection. Every employer is supposed to collect the proof documents towards income tax savings declared by employees before 31 March. As this process takes time, it’s better to give strict timelines to various parties (employees, verification team, etc.)
- It is important to check whether the submitted investment-proof documents match with the declaration or not. If not matching, recalculate the tax amount and deduct accordingly. Recompute the income tax liability based on the investment proof collection and verification from January onwards, and re-adjust deductions in the next two months.
- If the investment proof submitted is above the declared amount and produced evidence, the TDS for two months may be less or zero. If this is not taken care of before 31 March, then the employee has to wait for a refund from the IT department till return filing.
- Tax exemption should be given to employees only after checking and validating investment-proof documents. Also, keep track of the latest amendments and guidelines by the Income Tax Department, Auditors and other statutory agencies.
2. Prompt Tax Filing/Returns
While processing the monthly salary, TDS would be deducted by the employer. Every organisation is bound to deposit the tax and file Form 24Q quarterly.
- Make sure that all the previous quarters (April‒June, July‒September and Oct‒Dec) are filed and have no discrepancies.
- Get ready with final TDS calculations for the last quarter Jan‒March (Remember, 31 May is the due date of filing Q4). Consider the scenarios of recalculation when there is no match with actual proof and tax declaration by employees.
3. Bookkeeping ‒ Closure of Salary and Statutory Expenses
By the end of 31 March, organisations are supposed to close expenses like salary payout, TDS, social security contributions like EPF and ESI, Professional Tax payments (PT), Labour Welfare Fund (LWF) payments and other outstanding payments like arrears, reimbursements, etc.
- The EPF contribution deducted from employers and employees shall be paid every month, and the annual return would be due on 25 April. So, check for pending issues and discrepancies if any, and close this before 31 March.
- The ESI half-yearly return from 1 Oct to 31 March is due on 12 May. Contributions shall be filed within 42 days of the end of each half-year. So, check for pending issues and discrepancies if any, and close this before 31 March.
- Professional Tax (PT) is not applicable in all states and does not follow FY like Income Tax. Organisations are supposed to deduct and deposit PT, monthly. So from a payroll accounting perspective, make sure that PT computation and accounting are complete by 31 March.
- Labour Welfare Fund (LWF) is a one-time payment by organisations. Like PT, LWF is also state specific, and organisations are supposed to compute and deposit this amount annually. Unlike IncomeTax, LWF is also not strictly following FY. However, from a payroll accounting perspective, make sure that the LWF calculation and accounting is complete by 31 March.
- Make sure that you have cleared and provisioned expenses for all the full and final settlements for those who are relieved on 31 March.
- Check and validate that all approved payments towards overtime claims in the FY are cleared by 31 March.
- Check and confirm that payments on behalf of pending attendance regularisations, revocation of disciplinary actions and payment due on account of clerical errors are all settled and accounted for by 31 March.
4. Paid-Leave Accounting
In India, organisations follow a calendar year or financial year for leave accounting. As holidays are typically calendar-year based, a lot of organisations follow the calendar year for leave accounting as well. However, some organisations prefer financial year-based leave accounting as it simplifies the overall payroll year-ending process. This is applicable only for those following FY-based leave accounting.
- Make sure that Annual Leave or Earned Leave policies are intact (Finalise all sorts of changes in policy, tweaks in checks and balances, etc.) by 31 March.
- Make sure that Maternity Leave entitlements within the FY are accounted for by
- Get all pending leave applications cleared by 31 March.
- Ensure that auto encashment (if a policy exists) is completed by 31 March.
- Make sure to factor in any lapse (as per the policy) in the computation by 31 March.
- Make sure that leave accounting is proper for all new joinees.
5. Issuing Form 16
Form 16 is the certificate of tax deduction at source issued on tax deduction by the employer on behalf of the employees. These certificates provide details of TDS for various transactions between deductor and deductee. It is mandatory to issue these certificates to all taxpayers.
- All employers are supposed to generate Form 16 for employees for a financial year, and the due date is 15 June.
- To issue Form 16, the employer shall file Form 24Q for the last quarter (Jan‒March). So make sure that tax deductions and deposits are done properly.
6. Checking and Updating Data
It is quite usual to find gaps in employee data. However, it is recommended to clear all such gaps by 31 March.
- Check all the employee information like dependent details, nominee particulars, PAN, Aadhar, etc.
- Take a decision on any wage restructuring or revision (with retrospective effect) that is still under review but likely to be accepted in the FY.
- Collect the pending (if any) investment proof documents.
- Try to find a resolution for the filed grievances concerning data discrepancy or updates (if the employee does the request directly) with Income Tax and social security agencies.
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