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In every country, any business needs to function under the set of rules established by the government. These rules and regulations stated by the government are generally called Statutory compliances. Statutory compliance in India refers to the legal guidelines set by the central or state governments to control all corporate operations, including payroll.
Meaning of Payroll Compliance In India
Payroll compliance in India refers to the legal rules and regulations in the payroll management process to which organizations must adhere concerning the treatment of their workers and while disbursing salaries to them. Indian Payroll Compliance encompasses all of the state's labor and tax rules and every Indian company is required to abide by both national and state-level payroll laws. Let’s have a look at these compliances:
- Employees’ Provident Fund and Miscellaneous Act, 1952
- Labor Welfare Fund Act, 1965
- Employees’ State Insurance Act, 1948
- Payment of Gratuity Act, 1972
- Payment of Wages Act, 1936
- Payment of Bonus Act, 1965
- Minimum Wage Act, 1948
- Maternity Benefit Act, 1951
- Tax Deducted at Source (TDS)
- Professional Tax
- Equal Remuneration Act, 1956
Basic Statutory Compliance for Payroll In India
Every registered entity in India must follow the payroll statutory regulations, non-compliance with this will result in a lot of legal troubles for the organization. The following are the general statutory compliances that any company in India must follow for payroll management:
The Minimum Wages Act, 1948
In India, the minimum wages are determined by considering the cost of living, pay period, and type of job. It is determined by both central and state governments at various levels to prevent the exploitation of workers by fixing a minimum wage rate. This Act makes sure that employers pay at least minimum fixed salaries to employees on a timely basis.
Payment of Bonus Act, 1965
This act makes a provision for the payment of annual bonuses for organizations that employ more than 20 employees during an accounting year to instill a sense of ownership in them by distributing the company’s profits. The bonus is calculated by considering the company's profits and employees’ salaries.
Employees who have worked for 30 days and earned less than ₹ 21,000 per month (basic + DA, excluding other allowances) are eligible for the bonus, which is paid at a rate of 8.33 % with a maximum of 20%. Bonus payments must be made within eight months of the end of the fiscal year.
Employees’ Provident Fund Act, 1952
The Provident Fund allows employees to set aside a portion of their earnings for retirement benefits. Companies with at least 20 employees with a monthly salary of less than ₹ 15,000 (Basic + Dearness Allowance) must register for Provident Fund under EPFO (Employee Provident Fund Organization) laws and regulations. Under this act, both the employee and the employer must contribute around 12% of the basic salary to this fund, with DA taken into account if paid.
Payment of Gratuity Act, 1972
After completing a minimum of 5 years of service within an organization is an employee eligible to earn a gratuity from his or her employer as a token of appreciation for the work and commitment demonstrated to the company.
This act does not mention any maximum amount of gratuity that can be paid to an employee.
The gratuity is calculated using the following formula:
(15*last drew salary*years of service) / 26 = Gratuity amount to be paid
Here, the Last drawn salary includes basic pay, dearness allowance, and sales commissions.
Tax Deducted at Source (TDS)
It is a direct tax collected by Indian authorities from an individual’s regular and irregular income on a periodic or occasional basis under Income Tax Act, 1961. TDS is applicable for commission, salary, interests, dividends, rent, bank interest, etc.
Different TDS rates, nature of payment, and TDS threshold limits are specified in several parts of the Indian Income Tax Law. Various modifications in respect of TDS are introduced every year when the FM presents the Budget under Direct Tax Proposals.
Professional Tax (PT)
Professional tax, often known as PT, is a direct tax that applies to all individuals who generate money from work, trading, or professions such as doctors, lawyers, teachers, accountants, etc. Professional tax on every individual can be charged up to ₹ 2,500 per financial year by the State Government. This tax is recognized as a deduction from an employee’s gross income under Section 16 (iii) of the Income Tax Act 1961.
Employee State Insurance Act, 1948
The ESI Act is designed for the employees to assist their illness, death on the job, injury, maternity leaves, and so on to ensure their safety. This plan provides comprehensive medical coverage for the insured person and his or her dependents.
Employer contributions for ESI are 3.25 percent and employee contributions are 0.75 percent of monthly wages. ESI is required for firms with more than 10 employees working in a non-seasonal factory, but only for those earning less than ₹21,000 monthly.
In a Nutshell
All of the Indian statutory payroll compliances discussed above must be taken into account when calculating salary. Noncompliance with the law can result in significant fines and penalties. Hence, an organization must stay current on all tax and payroll legislation. These laws were enacted to uphold the dignity of labor and to provide workers assurance that their interests will be protected and that they will not be exploited.
Run Global Payroll : Payroll in India : Payroll Statutory Compliance in India
