Guidelines govern the functioning of any organization’s department, and payroll is not an exception. Besides the company-set policies, employees and departments must refer to government laws to streamline processes and avoid any negative impact on the business. Organisations must ensure the legal framework is in place as the relevant central and state government has instructed by comprehending and navigating their payroll compliance.
Firms face many possible legal challenges to compliance, from paying workers fair salaries to safeguarding the business from unjustified salary or benefit demands from trade unions. Even while breaking these rules may never be on a company’s agenda, it might nevertheless happen unknowingly without the proper safeguards.
Therefore, it becomes noteworthy for organisations to mitigate these compliance risks and ensure positive employee morale. Let us first examine the significance of payroll compliance and the risks of non-compliance.
Significance of Payroll Compliance
Dealing with payroll-related statutory compliance requires companies to know Indian labour regulations. Non-compliance with these regulations can invite legal issues, including penalties and fines. Every company invests a huge amount of money, effort, and time in meeting compliance requirements from professional tax to the Minimum Wages Act. Following are some other reasons that make statutory compliance an essential part of an organisation:
- Safeguarding Employee Rights: Payroll compliance ensures an efficient and accurate payment system is in place. The legislation provides for the payment of fair wages and benefits to employees. Adhering to payroll regulations helps safeguard employees against exploitation or unfair practices.
- Tax Regulations: Adhering to payroll compliance ensures businesses accurately compute and withhold the right amount of taxes. It aids companies in the proper collection and remittance of taxes to the government, avoiding any tax evasion issues.
- Social Security Benefits: Payroll legislation makes it mandatory to offer social security benefits such as healthcare, insurance, gratuity, and pension, as mandated by labour laws, to employees. These benefits foster a sense of financial security and belongingness.
- Reputation and Image: Adhering to statutory regulation helps businesses maintain goodwill among the employees and in the market. It significantly impacts a company’s image and reputation, improving the profitability and creditworthiness of the company. It also helps companies attract high-quality talent and retain employees.
Payroll compliance in India is pivotal in ensuring fair treatment of employees, fulfilling tax obligations, and maintaining legal and ethical business practices. The fundamentals of payroll compliance require the computation of TDS (tax deducted at source), PF (provident fund), ESI (employees’ state insurance), and PT (professional tax).
These computations involve the collection of payroll data for each employee of the business. Each one of these statutory deductions is calculated differently. Let’s learn how!
Tax Deductions and Other Regulatory Requirements
Navigating tax slabs and payroll compliance in India requires understanding the different tax slabs and complying with the various regulations. Here are some steps to help payroll providers navigate the process:
Every working individual is required to pay Income Tax as per the Income Tax Act. As per Section 192 of the Income Tax Act, every employee has TDS automatically deducted by the employer when they get their salary. The employer must submit these deductions to the tax department within the stipulated period. However, a few employees are exempted under the following conditions:
- If an employee submits a self-declaration as per their future investments, or
- If an employee submits an exemption certification from the assessing officer
Steps for Navigating the Taxation Process
- Understand Tax Slabs
In India, individual tax slabs are categorised based on an individual’s income. Tax rates vary accordingly for each category. Depending on their pay, every employee is subject to a particular rate of taxation.
With the most recent union budget statements, Indian employees can select between the old and new tax regimes to get their income taxed. Here’s the classification of employee tax slabs based on which the tax calculations are done:
- Old Tax Regime
Income Tax Slab
Up to ₹2.5L
₹2.5L to ₹5L
5% above 2,50,000 lakhs i.e ₹ 12,500
₹5L to ₹10L
₹12,500 + 20% of total income exceeding ₹5L
₹1,12,500 + 30% of total income exceeding ₹10L
- New Tax Regime
Income Tax Slab for FY 2020-21
New Tax Rate
Up to ₹2.5L
₹2.5L to ₹5L
₹5L to ₹7.5L
₹7.5L to ₹10L
₹10L to ₹12.5L
₹12.5L to ₹15L
- Compute Taxable Income
Determine the taxable income by subtracting deductions and exemptions from each employee’s gross salary, including the basic salary, allowances, and perquisites.
- File Quarterly Returns
Business owners must submit a TDS return statement to the income tax department every quarter. This quarterly statement summarises all TDS-related transactions carried out in a quarter.
- Issue Form 16
The payroll team must issue Form-16 to the employees. The TDS certificate, or Form 16, is what the employer issues when TDS is withheld. This form contains the income taxes deducted and deposited with the IT department.
Compliance with Other Payroll Regulations
- Payment of Wages Act, 1936
The Payment of Wages Act 1936 is a law that governs how indirect and direct payments are made to certain classes of employees. The act directs employers to pay wages on time, including deductions authorised under the act.
The act also mandates employers to pay employees before the 7th of each month if they have 1,000 or fewer workers. If an organisation employs more than 1,000 workers at a given time of the year, the payments must be made by the 10th of every month. Under the act, various fines and deductions in case of absence from duty and loss to the property have also been defined.
- Minimum Wages Act, 1948
The Minimum Wages Act defines the minimum wage rates for employees regarding the cost of living. The act allows central and state governments to identify and review minimum wage requirements for scheduled employment.
The act aims to prevent employees from unfair wage practices and provide basic physical needs, good health, and comfort. Additionally, the act serves as a tool for eliminating gender discrimination and poverty.
This system has been created and developed to support and strengthen other social and employment policies, including collective bargaining, establishing employment terms and working conditions.
- Maternity Benefit Act, 1961
The Maternity Benefit Act was enacted to regulate women’s employment in an establishment for a given period before and after the child’s birth. The act entails regulations regarding monetary and non-monetary benefits during the maternity period, such as maternity leave, payment of full wages during the maternity leave, exemption regarding the type of work before the maternity period, etc.
- Employees Provident Fund (PF), 1952
Employees’ Provident Fund (PF) is another prominent act related to payroll compliance. The act provides employees with social security, helps them save money in the long run, and is designed to improve employee welfare. When employees start their employment, they start contributing to the provident fund every month, and their employer must consistently make an equal contribution.
Payroll compliance rules and regulations are laid down to protect employers and employees. Additionally, payroll compliance automation saves much time and costs. An effective staff attendance and payroll management application allows businesses to focus on their main operations instead of unnecessarily spending resources and time paying penalties.
The key role played by statutory compliance as part of the HR roles and responsibilities cannot be taken lightly. A robust payroll management system can help a company perform several tasks more quickly and efficiently than ever.
That said, an automated time and attendance payroll system can help you put your statutory compliance in auto-pilot mode while maintaining a spotless compliance record. sumHR is one of the best attendance and payroll software in India that takes care of everything, from tax liabilities to payroll operations. Our robust web-based software allows businesses to manage ESI, professional tax, salaries, TDS, and much more, helping them manage payroll processes effortlessly and efficiently.
Frequently Answered Questions
What does a payroll cycle refer to?
What are the different types of allowances covered under payroll?
- Dearness Allowance
- House Rent Allowance
- Conveyance Allowance
- Medical Allowance
- Travel Allowance