Complete Payroll Guide for India

Employee Benefits and Deductions

In addition to salary and tax obligations, employers in India are required to provide various statutory benefits to employees, including paid leave, gratuity payments, and mandatory deductions for social security schemes.

Statutory Leave and Paid Holidays

Under the Factories Act and the Shops and Establishments Act, employees in India are entitled to paid leave, which includes:

• Annual leave: Employees are entitled to a minimum of 12 days of paid leave per year after completing 240 days of service.
• Sick leave: Employees are entitled to a certain number of paid sick leave days, depending on state-specific labor laws.
• Maternity leave: Female employees are entitled to 26 weeks of paid maternity leave under the Maternity Benefit Act.

Employers must ensure that these leave entitlements are accurately reflected in the employee’s payroll and that all leave is properly tracked and documented.

PF, Employee Insurance, and Gratuity Payments

As discussed earlier, employers are required to make mandatory contributions to the provident fund and employee insurance schemes. In addition, businesses with 10 or more employees must also provide gratuity payments to employees who have completed at least five years of continuous service. The gratuity amount is calculated as:

Gratuity = (Last drawn salary × 15 × years of service) / 26

Employers must ensure that gratuity payments are made in accordance with the Payment of Gratuity Act, 1972, and that all statutory benefits are properly accounted for in the payroll system.

When Non-Compliance May Occur

Non-compliance with payroll regulations in India can result in significant penalties, legal action, and reputational damage for businesses. Below are some common areas where non-compliance may occur and how to avoid them:

Late Salary Payments

Employers are required to pay employees on time according to the payroll cycle specified in the employment contract. Delays in salary payments can result in penalties under Indian labor laws and employee grievances. To avoid this, businesses should ensure that payroll is processed on time and that employees receive their wages as agreed.

Missed Provident Fund (PF) Contributions

Employers who fail to make provident fund contributions by the deadline may face fines, interest on unpaid amounts, and legal action from the EPFO. To avoid non-compliance, employers should automate their payroll systems to ensure that contributions are calculated accurately and submitted on time.

Incorrect Income Tax Withholding

Inaccurate tax deductions or failure to file TDS returns on time can result in penalties from the Income Tax Department. Employers must ensure that taxes are withheld correctly based on each employee’s income and that quarterly TDS returns are filed in accordance with Indian tax laws.

Non-Compliance with Employee Benefits

Employers who do not provide mandatory benefits, such as provident fund contributions, employee insurance, or gratuity payments, may face legal claims from employees. It is essential for businesses to understand their obligations under Indian labor laws and ensure that all statutory benefits are provided in a timely and accurate manner.

How AYP Can Help

Managing payroll in India can be challenging, especially for businesses unfamiliar with the country’s complex labor and tax regulations. AYP provides a range of services to help businesses manage payroll efficiently and ensure full compliance with Indian laws.

Professional Employer Organisation (PEO) Services

AYP’s PEO services allow businesses to outsource their payroll management, ensuring that salary payments, provident fund contributions, and tax deductions are handled accurately and on time. Our PEO services ensure that your payroll processes are fully compliant with Indian regulations.

Employer of Record (EOR) Services

As an Employer of Record, AYP takes on the legal responsibility for your workforce in India, handling all payroll and HR functions, including compliance with labor and tax laws. This allows businesses to focus on growth while ensuring that their payroll is managed efficiently and in compliance with local laws.

Payroll Outsourcing Management (POM) Services

AYP’s Payroll Outsourcing Management (POM) services provide a comprehensive payroll solution, handling everything from calculating salaries to submitting provident fund contributions and tax reports. By partnering with AYP, businesses can avoid non-compliance risks and ensure that their payroll processes are streamlined and accurate.