Statutory Compliance in Payroll- A Complete Guide

A lot of your organization’s time, effort and money go into ensuring that payroll is complaint through a statutory audit. From employee’s fair treatment of labor to protecting the company from unreasonable wage or benefit demands from trade unions or aggressive employees, every company faces a worrying number of potential legal issues relating to compliance. However, it may never be a company's intent to break these laws, but without necessary protection, it may easily slip through the cracks.

So how can you be sure that you can avoid the risk of non-compliance?

To address this, let's first understand what statutory compliance is and the various compliances required for Indian payroll.

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What is Statutory Compliance?

The word statutory means “of or related to statues”- rules and regulations. Compliance means adherence. Thus, Statutory Compliance means adhering to rules and regulations.

Statutory Compliance in HR refers to the legal framework that an organization should adhere to in dealing with its employees.

Why is it important?

Every country has its own set of state and central labor laws that companies need to comply with. Dealing with statutory compliance requires companies to be updated on all the labor regulations in their country. It is also mandatory for companies to adhere to them. Non-compliance with these regulations can cause a company a lot of legal trouble such as penalties and fines. That is why every company invests a huge amount of money, effort and time to meet compliance requirements from professional tax to minimum wages act. To help in this, the company seeks expert advice from labour law and taxation law experts.

In order to manage with demanding regulatory environment, every company should be well versed and take notice of all regulations in the labour laws. They need to formulate efficient ways to maintain compliance and minimize risks.

Need for Statutory Compliance

The complexity of doing business has increased tremendously and it has become very challenging to be in sync with the operational aspect of every business. As discussed earlier, organization seek the help of statutory compliance experts whose main focus is to be compliant with the ever-changing regulatory environment.

Also, a lot of companies also provide services on statutory compliance management and have a deeper understanding of the regulatory setting and provide specialized services to organizations. They streamline the process right from the day to day maintenance of prescribed forms and registers to the filing along with reports.

Is it different for organization

Statutory compliance for a partnership firm, private limited company, LLP, or any type of company does not change. Every organization that hires employees and pays salaries must comply with the labor laws.

Advantages of Statutory Compliance

The advantage of statutory compliance for employees

Ensures fair treatment of employees

Ensure they are paid fairly for the work they have done and their company complies with the minimum wage rate

Prevents employees from working for long hours or inhuman condition

The advantage of statutory compliance to organizations

Avoid penalty or fines because of their timely payments

Protects the organization from unreasonable wage or benefit demands from trade unions

Prevents legal troubles as the company is fully compliant

Mitigate risks and increases awareness about compliance

With compliance in place, there is a lower risk of an adverse incident

Risk of non compliance

If a company does not conform to rules and regulations it will risk:

Penal actions and financial losses to the organization

Loss of reputation and business integrity

Customer loyalty will be impacted severely

The Various Statutory Compliances Required For Indian Payroll

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Payment of Wages Act, 1936

The Payment of Wages Act, 1936 regulates the payment of wages to direct and indirect employees. The act warrants payments of wages on time and without any deductions except those authorized under the Act. According to this act, the payment should be made before 7th of every month where the no. of workers are less than 1000 and on the 10th day if greater than 1000.

The Payment of Wages Act, 1936 regulates the payment of wages to employees (direct and indirect). The Payment of Wages Act regulates the payment of wages to certain classes of persons employed in industry, and its importance cannot be underestimated. The Act guarantees payment of wages on time and without any deductions except those authorized under the Act. The wage period shall not exceed 1 month.

The Payment of Wages Act does not apply to employees whose wage is Rs. 10000 or more per month. The Act also provides to the effect that a worker cannot contract out of any right conferred upon him under the Act.

Under the act, the payment has to be made in cash. Cheque payment or crediting wages to a bank account is allowed with the consent of employee in writing. The deduction made by the employer should be made by this act only.

Under the act, payment has to be made in currency notes or coins. Cheque payment or crediting to bank account is allowed with the consent in writing by the employee. (Section 6)

This Act includes fines for (Section 8), absence from duty (Section 9), Damages or loss (Section 10), deduction for services (amenities) given by employer (Section 11) recovery of advances and loans (Section 12, 13) and payment to cooperative society and insurance (Section 13).

Get to know the forms and compliances for Karnataka Payment of Wages

Minimum Wages Act, 1948

Minimum wages rates in India are fixed under the Minimum wages Act, 1948 and is determined both by the Central Government and the Provincial governments. Minimum wages rates may be established for any region, occupation, and sector and declared at the national, state, sectoral and occupational levels. The minimum wages is determined by considering cost of living.

While fixing the minimum wages rate, it may be set for different work classes in the same scheduled employment or set for different scheduled employment. It may also be fixed by hour, day, month or any other wage period.

Under the Minimum Wages Act, both the Central and State Governments may notify the scheduled employments and fix/revise minimum wage rates for these scheduled employments.

    There are two methods for fixing/revising minimum wages:
  1. Under the committee method, the government sets up committees and subcommittees to hold inquiries and recommendations for fixing and changing minimum wages.
  2. In the notification method, government proposals get published in the Official Gazette for persons who are likely to be affected and specifies a date (not less than two months from the time of the notification) where the proposals are taken into consideration.

The government after considering the advice of committees and all the representations received by the specified date, fixes /revises the minimum wage of the concerned scheduled employment which comes into force after three months from the date of its issue.

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The Payment of Bonus Act, 1965

The Payment of Bonus Act provides an annual bonus to the employee in the certain establishment- including factories and establishments employing 20 or more persons Under the Act, The bonus is calculated by the employee’s salary and the profits of the establishment.

Employees drawing ₹21000 per month or less (basic + DA, excluding other allowances) and have completed 30 working days in that financial year are eligible for the bonus payment.

Salary or wages include only basic and DA for the bonus payment, and the rest of the allowances (e.g., HRA, overtime, etc.) are excluded. Bonus should be paid at a minimum rate of 8.33% and maximum rate of 20%. It needs to be paid within 8 months from the close of the accounting year.

Employees can be disqualified from bonus payments if they are dismissed by fraud, misconduct, or even absenteeism. The employer needs to ensure that on dismissal, the procedures of domestic inquiry, proper documentation and employee acceptance of the misconduct are all carried out as per the standing orders before disqualifying the bonus payment.

Know more on The Payment of Bonus Act.

Tax Deduction at Source (TDS)

TDS is deducted from the payments made by the individuals as per Income Tax Act. It is managed by the Central Board of Direct Taxes (CBDT), which comes under the Indian Revenue Services (IRS).

Under TDS, when an assessee gets his income, there will be a TDS deduction by the person (deductor) paying the assessee and is submitted to the income tax department.

The assessee then files the TDS return and the tax calculated from his income will be deducted and the final amount will be refunded.

    TDS is exempted in the following 2 cases:
  1. If the receiver gives a self-declaration saying that he had made the required investments in FORM 15G/15H
  2. If there is a certificate of exemption provided by the Assessing Officer

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Income tax slab for individual tax payers & HUF
(less than 60 years old) (both men & women)

Assessment Year 2018-19
Taxable income Tax Rate
Up to Rs. 2,50,000 Nil
Rs. 2,50,000 to Rs. 5,00,000 5%
Rs. 5,00,000 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Less: Rebate under Section 87A
Add: Surcharge and Education Cess

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In case of a resident senior citizen (who is 60 years or more at any time during the previous year but less than 80 years on the last day of the previous year)

Assessment Year 2018-19
Taxable income Tax Rate
Up to Rs. 3,00,000 Nil
Rs. 3,00,000 - Rs. 5,00,000 5%
Rs. 5,00,000 - Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Less: Rebate under Section 87A
Add: Surcharge and Education Cess

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In case of a resident super senior citizen
(who is 80 years or more at any time during the previous year)

Assessment Year 2018-19
Taxable income Tax Rate
Up to Rs. 5,00,000 Nil
Rs. 5,00,000 - Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Add: Surcharge and Education Cess

To understand the other tax slabs, refer here. Also to understand the various Rates for tax deduction at source, refer here.

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TDS Last Dates of FY 2018-2019 for Return Filing

Quarter Period Last Date of Filing
1st Quarter 1st April to 30th June 31st July 2018
2nd Quarter 1st July to 30th September 31st October 2018
3rd Quarter 1st October to 31st December 31st January 2019
4rd Quarter 1st January to 31st March 31st May 2019

The TDS certificate will be given as

  • Form 16 for the people receiving the salary
  • Form 16A for the people receiving income from any other source
  • Form 16B- TDS on sale of any immovable property

For late filing of TDS return, there is a penalty of Rs. 200 per day or the amount of TDS payable whichever is lower out of the two.

Professional Tax

Professional Tax is levied by the state government. This tax is paid by every individual who earns. The limit is Rs.2500 per year and the calculation and amount collected may differ from one state to another.

States which impose Professional Tax in India

Since it is a tax that is levied by the state government, it tends to differ from one state to another. Each state has a slab set, and the professional tax is deducted based on these slabs.

PT is collected by the employers from employees monthly salaries, and it then paid to the government. Failure to collect or to pay professional tax may result in penalties.

Also if you're not working for an employer, you are liable to pay the professional tax yourself. For professionals, not working with any employer, can register by applying through a form. Once the form is received, a registration number will be issued to the individual. Payment of the professional tax can be made under these registration numbers at banks.

Amendments to Maternity Benefit Act, 1961

The Maternity Benefit (Amendment) Act 2016, was passed by the Rajya Sabha in August 2016 and Lok Sabha in March 2017.

    Under the law:
  • The maternity leave is increased to 26 weeks, and the prenatal leaves are also extended from 6 to 8 weeks.
  • A woman is entitled to 12 weeks of maternity leave if she already has 2 or more children and in this case, the prenatal leaves remain 6 weeks.
  • The act also provides adoption leave of 12 weeks for a woman who adopts a child below 3 months.
  • Female civil servants are entitled to maternity leave for 180 days for their first two live-born children.
  • Also, a commissioning mother gets about 12 weeks of leave when the child is handed over to her.

The act also further requires an employer to inform women about her rights under this act during her appointment day. This must be given to her in writing and also in the email.

Only on completion of at least 80 days in an establishment in the 12 months before her delivery date, the maternity leave is awarded full pay. Apart from 12 weeks of salary, a female worker is entitled to a medical bonus of 3,500 Indian rupees.

Know more on the compliance and rules in The Maternity Benefit Act, 1961

Equal Remuneration Act, 1976

The Equal Remuneration Act, 1976 provides for the payment of equal remuneration to men and women workers for the same work and prevents discrimination, on the ground of sex, against women in the matter of employment, recruitment and for matters connected in addition to the that or incidental to it. This Act applies to virtually every kind of establishment.

Refer here to know more about the compliance in this act.

Shops & Establishments Act

The Shop and Establishment Act is to regulate the employment condition of workers in shops and establishments. This includes work hours, rest intervals, overtime, holidays, termination of service, etc.

Registration needs to be done within 30 days from the date of commencement of business. Even if there is no employee, the entity has to get registered under this act.

An application has to be submitted along with the fee and the scanned documents online. Within 15 days of successful document submission, the department approves the registration. The registration certificate can be downloaded from the portal.

A registration certificate is valid for 5 years and should be renewed after that.

In case of a change in address, status, partners intimation has to be given to the department within 30 days of change through an online application.
The registration fee depends on the number of employees hired by the entity. Additional fee has to be paid through filing an online application when there is an increase in headcount, pay, etc.

The annual return should be filed online in Form U on or before 31st January of the subsequent year.

The Employees' State Insurance Act, 1948

The ESI Act provides certain benefits to employees in case of sickness, maternity and employment injury. The act applies to non-seasonal factories using power and employing more than 10 employees, and non-power using factories and certain other establishments employing 20 or more employees.

All benefits are provided in ESIC hospitals, clinics and approved independent medical practitioners. The wage ceiling under this act has been enhanced from Rs. 7500 to Rs. 10000 per month.

The act provides period payments to women in case of confinement, miscarriage or related sickness. This is applicable only to the insured women. They can also claim maternity benefits of about 70% of their salary.

Know more about the ESI Act and its compliances..

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

The Employee Provident Fund (PF) and Miscellaneous Provisions Act, 1952 is created for the social welfare of an employee. When one begins the employment, they are expected to contribute monthly to their PF funds. The employer is also expected to contribute to its employee retirement fund.

Any factory or establishment having 20 or more employees directly or through contract is liable to be covered under this act.

The PF contribution is calculated on the basic wages and the dearness allowance. It doesn't include food allowance, House Rent allowance, overtime allowance, bonus, commision, etc.

The wage limit to be covered under this Act is Rs.15,000/- per month.

The employer contribution is calculated at 3.67% of wage in general prescribed by the Central government. Just like the employer, the employee should also pay an equal contribution.

Contribution Employee Employer
Provident Fund 12% 3.67%
Employee Pension Fund - 8.33%
Exemptions -No tax exempt
-Eligible for deduction under 80C
-Tax exempt

The employer is liable to fines for being a defaulter. However, this can extend up to imprisonment of 3 years and a fine of Rs.10,000/-

The voluntary contribution is also covered under the Employee Provident Fund and Miscellaneous Provision Act, 1952 for an establishment having less than 20 employees.

The admin charges are highlighted below:

EPF Admin Charges EDLI Admin Charges
1. 0.85% of total employee PF wages 1. 0.01% of total EDLI salary
2. Minimum of Rs. 75 per month in the case of an non-functional establishment having no contributory member 2. Minimum of Rs. 25 per month in the case of an non-functional establishment having no contributory member
3. Minimum of Rs. 500 per month for contributory members 3. Minimum of Rs. 200 per month for contributory members

The Payment of Gratuity Act, 1972

The Payment of Gratuity Act applies to every shop or establishment in which 10 or more persons are employed or were employed on any day of the preceding 12 months.

There is no percentage set by the act for the gratuity amount an employee is entitled. An employer can use the formula-based approach or even pay higher than that.

Gratuity depends on 2 factors:

  • Last drawn salary
  • Years of service

To calculate how much gratuity is payable, the Payment of Gratuity Act, 1972 has divided non-government employees into two categories:

  • Employees covered under the Act
  • Employees not covered under the Act

Calculation of gratuity

1. For employees covered under the Act

The amount of gratuity payable is calculated using the below formula. The formula is based on the 15 days of last drawn salary for each completed year of service or part of thereof more than six months.

The Formula:

(15 X Last Drawn Salary X Tenure of Working) divided by 26

Last Drawn Salary= Basic Salary, Dearness Allowance, and Commissions Received on Sales

2. For employees not covered under the Act

There is no law restricting an employer from paying gratuity to his employees even if the organization is not covered under the Act. The amount of gratuity payable to the employee can be calculated based on half month's salary for each completed year.

The Formula:

(15 X Last Drawn Salary X Tenure of Working) divided by 30

Last Drawn Salary= Basic Salary, Dearness Allowance, and Commissions Received on Sales

As per the government pensioners' portal, retirement gratuity is calculated like this: one-fourth of a month's basic pay plus dearness allowance is drawn before retirement for each completed six monthly periods of qualifying service.

In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh.

Labour Welfare Fund Act, 1965

Labour Welfare Fund focuses on the welfare of the workers and provides services and facilities to the labourers by the employer to improve their standard of living, working conditions and give social security.

These facilities are offered by the contribution from the employers and the employee. The contribution rate differs from state to state.

The Labour Welfare Fund Act extends to housing, family care & worker's health service by providing medical examination, A clinic for general treatment, infant welfare, women’s general education, workers activity facilities, marriage, education, funeral. etc. State-specific Labour Welfare Funds are funded by contributions from the employer, employee and in few states, the government also.

This act has been implemented in only 15 states. The act is applicable only to a selected category of employees, and it depends on the wages earned and the employee designation. And this also depends on each state.

This Welfare Fund contribution can be made monthly, half-yearly or annually. The frequency depends upon each State.
The employer needs to make the deduction from the salary of the employee and submit the same to the Labour Welfare Fund board in the prescribed form before the due date.

Highlighting some of the Labour Welfare Fund Act for various states

Andhra Pradesh Delhi Haryana Karnataka Kerala
Maharashtra Odisha Punjab Tamil Nadu West Bengal
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