Given the dynamic nature of the Indian market, with its unique blend of cultural nuances, diverse labor laws, and frequent regulatory changes, mastering payroll compliance is an important task for businesses. As India continues to position itself as a hub for international business, ensuring payroll compliance becomes a cornerstone for sustainable and successful operations in the subcontinent.
In this guide, we'll delve deep into the intricacies of statutory rules governing payroll in India to equip businesses with the knowledge needed to maintain an impeccable compliance record, covering:
- What is payroll compliance?
- What is the need for it?
- What constitutes payroll compliance for India?
- How does staying compliant help both employees and employers?
Why is Payroll Compliance Important?
Payroll compliance in India, while intricate, plays a crucial role in shaping a company's success and credibility. Consistent compliance not only builds a solid rapport with governmental bodies but also instills confidence among stakeholders, laying the foundation for robust business growth. On the flip side, overlooking or misinterpreting these guidelines can result in substantial financial penalties, legal complications, and a potential blow to the company's image.
India's labor laws are multifaceted, stemming from its diverse work culture and the drive to protect employee rights. For businesses, this means that a thorough grasp of each regulation is indispensable. It's not just about ticking boxes; it's about understanding the spirit behind each law and implementing it effectively. In doing so, companies can ensure seamless operations, avoid unforeseen hiccups, and position themselves as responsible and trustworthy entities in the Indian business ecosystem.
What Constitutes Payroll Compliance in India?
While there are numerous regulations, for easy understanding, we'll cluster the payroll compliances into four broad categories: employee wages and benefits, social security, labour laws, tax liabilities, and employee benefits. It's noteworthy that in 2019, four labour codes were introduced to consolidate 29 central laws, providing a more streamlined approach to compliance.
Statutes on Employee Salaries and Benefits:
Payment of Wages Act, 1936
Established to ensure that employees, especially those in lower-income brackets, receive their dues in a timely manner, the Payment of Wages Act holds employers accountable.
For businesses with a workforce of under 1,000, wages should ideally be disbursed by the 7th of every subsequent month. However, for larger corporations, the leniency extends up to the 10th. This act predominantly caters to employees with a monthly compensation not exceeding ₹10,000. Although cash and cheque remain standard payment methods, bank transfers have also been incorporated but require the employee's explicit agreement.
It's worth noting that while the Act sets a broad framework, specific regulations may vary based on regional state directives.
Minimum Wages Act, 1948
The Minimum Wages Act is a central legislation designed to safeguard against the exploitation of workers, this act mandates a minimum wage.
This rate is not uniform across the board. Factors such as the state's economic condition, prevalent living costs, the nature of the job, and even the duration (hourly, daily, monthly) play a role in determining these wages.
Payment of Bonus Act, 1965
This act ensures that eligible employees receive an annual bonus, the amount of which is predicated on both the company's profitability and the employee's salary. To qualify, an employee must have been in service for a minimum of 30 working days and earn a monthly wage of ₹21,000 or less (basic + DA, excluding other allowances).
Maternity Benefits Act, 1961
This law guarantees women's employment during their pregnancies and provides them with a fully paid leave of absence from work. This law applies to all enterprises with more than 10 workers. It's also among the most significant legal requirements that the organizations must follow.
In order to qualify for the benefit, a female employee needs to have worked for an establishment for a minimum of 80 days in the previous year. The average daily wage for the time of actual absence is used to calculate payment during the leave.
This act applies to organizations, including factories, mines, plantations, government establishments, shops and establishments under the relevant applicable legislation, or any other establishment dictated by the Central Government.
The most recent amendment's maternity benefits include the following:
- Maternity leave will now last for 26 weeks instead of just 12.
- You can use maternity leaves for a maximum of eight weeks.
- An additional enabling element regarding women's "work from home" options has been included by the Maternity Benefit Amendment Act. These options can be used after the 26-week leave term has ended. The nature of the work will determine this.
Statutes on Social Security:
Employees' State Insurance Act, 1948
Introduced with the sole intent of shielding employees from financial hardships during challenging times, including medical emergencies, maternity leave, or disability situations related to the workplace the Employees' State Insurance Act (ESI) provides comprehensive coverage.
The employee contributes 0.75% and the employer contributes 3.25% for each paycheck. Employers with workers in non-seasonal factories employing more than ten people are required to provide ESI, but this requirement only applies to those making less than ₹21,000 a month.
Since ESI is only applicable to workers making less than ₹21,000, you should make sure the employee hasn't made more than ₹21,000 at every review cycle. The employee should continue to contribute to ESI till the conclusion of the contribution cycle after earning more than ₹21,000. Every six-month cycle of contributions runs from April to September or from October to March.
Employees' Provident Fund Act, 1952
The Employees' Provident Fund (EPF) is essentially a retirement savings platform.
- Both the employer and the employee contribute an equal 12% of the employee's basic pay and dearness allowance (DA) to this fund.
- Mandatory for organisations employing 20 or more individuals, and have to comply with PF regulation.
- While contributions accrue over the tenure of service, they can be withdrawn at retirement.
Employers who are not adhering to this compliance regulation face severe fines or, in extreme scenarios, imprisonment.
Labour Welfare Fund Act, 1965
The wellbeing of workers in certain industries is the primary concern of the Labour wellbeing Fund (LWF). It gives laborers access to facilities that will enhance their living standards, social security, and working circumstances.
Certain state authorities are in charge of overseeing the statutory contributions for LWF. The state labor welfare board sets the frequency and amount of the contribution, which varies from one state to the next. The payment is made yearly in a few states (Andhra Pradesh, Karnataka, Tamil Nadu). In Madhya Pradesh and Maharashtra, the contributions are made every six months in other states.
Payment of Gratuity Act, 1972
Essentially, it's a token of appreciation extended by the employer to acknowledge the continuous service and commitment of the employee. To qualify for this benefit, an employee should have rendered at least 5 years of continuous service in the organization.
The gratuity amount isn't set at a fixed percentage; rather, it's computed based on a formula that incorporates:
- The last salary drawn by the employee.
- The total number of years they've served.
The Payment of Gratuity Act bifurcates non-government employees into two categories for calculation purposes: those covered by the act and those who aren't.
For Employees Covered Under the Act:
Formula: Gratuity = (15 * Last drawn salary * years of service) / 26
Note: The 'Last drawn salary' includes components like basic pay, dearness allowance, and sales commissions.
Illustration: If an employee's final monthly salary stands at ₹80,000, and they've been with the organization for 22 years and 7 months, the gratuity can be computed as: (15 * 80,000 * 23) / 26.
In this scenario, 23 years is taken into account since the employee has worked beyond half of the 22nd year.
For Employees Not Governed by the Act:
Formula: Gratuity = (15 * Last drawn salary * years of service) / 30
Again, 'Last drawn salary' factors in basic wage, dearness allowance, and sales commissions.
Illustration: Consider an employee earning a final monthly salary of ₹75,000, having worked for 21 years and 4 months. Here, the gratuity would be: (15 * 75,000 * 21) / 30.
For this category, the complete years of service is counted, disregarding any additional months. Thus, the calculation is based on 21 years.
Understanding and correctly implementing these calculations ensures that employees receive their deserved benefits, reinforcing trust and loyalty within the organization.
Statutes on Tax Liabilities:
TDS (Tax Deducted at Source):
Individual income tax in India is calculated based on a progressive tax rate system. The tax rates vary depending on the income slab into which an individual falls.
Old Tax Regime:
- Under the old tax regime, taxpayers can avail of a wide range of deductions and exemptions such as the standard deduction, house rent allowance, deductions under Section 80C for investments, etc.
- The tax rates under this regime are progressive, with slabs ranging from 5% to 30%, depending on the individual's income level.
New Tax Regime (Introduced in Budget 2020):
- The new tax regime offers reduced tax rates but comes with a catch – the taxpayer has to forgo most deductions and exemptions available under the old regime.
- Tax rates under this structure range from 5% to 30%, but the slabs are adjusted so that many individuals might fall into lower tax brackets than they would under the old regime.
The idea is to simplify the tax system by eliminating the myriad of exemptions and deductions while offering lower rates.
While the Indian labor laws can seem intricate, staying abreast with them is crucial for business longevity, employee trust, and brand reputation. With the assistance of Employer of Record Services, businesses can simplify these complexities, ensuring that they can focus on their core objectives without the shadow of non-compliance looming over them.
Entrust Wisemonk to simplify your journey. As specialists in providing Employer of Record (EOR) services in India, we mitigate the complexities associated with payroll compliance, ensuring seamless operations and letting businesses concentrate on what they do best.
What is an Employer of Record(EOR)?
An Employer of Record, is a professional entity trusted by businesses to handle all aspects of hiring and employment. By managing tasks like payroll, benefits, and legal compliance, an EOR ensures that companies can concentrate on their core operations with confidence, knowing that all employment matters are in expert hands.
Read our comprehensive guide on Employer of Record Service in India.
How frequently do payroll laws change in India?
While major reforms might not occur every year, small amendments and updates can be frequent. Businesses need to regularly monitor government notifications and stay connected with HR communities or consultants to remain updated.
What happens if a business fails to meet these compliance standards?
Non-compliance can lead to financial penalties, legal actions, and a tarnished business reputation. The severity of consequences often depends on the nature and extent of the non-compliance.
What is the difference between an EOR and Professional Employer Organisation (PEO)?
Read our blog on EOR vs PEO. EOR becomes the legal entity that is officially employing your staff, while you, as the client, retain operational control over the day-to-day management of the employees. Whereas when you engage a PEO, they enter into a co-employment relationship, sharing employer responsibilities with you. While you retain control over the day-to-day activities of your employees, the PEO takes care of various HR tasks, including payroll administration, benefits management, and HR compliance.