India
Payroll Guide

Country Overview

Nestled in South Asia, India is a land of diverse cultures and rich heritage. India shares its borders with Pakistan, China, Nepal, Bhutan, Bangladesh, and Myanmar, and lies along the Indian Ocean to the south. Its diverse landscapes ranging from the Himalayas to tropical coastlines attract global travellers. India’s economic dynamism and transformative reforms are increasingly drawing international attention.

World Economic Outlook report of Jan 2025 by International Monetary Fund (IMF) shows that India’s growth is projected to be at 6.5% in 2025 and 2026. India continues to demonstrate remarkable economic resilience and growth. According to B2B Export Import Academy’s report India’s Economic Overview in 2025, the country’s export performance has been noteworthy, with total exports reaching $778.21 billion in the fiscal year 2023-2024. Major export sectors include petroleum products, gems and jewellery, pharmaceuticals, and textiles. The same report reveals that till January 2025, India’s foreign exchange reserves reached $640.3 billion.

India also addresses climate change and committed to sustainable development, with its initiative the National Action Plan on Climate Change (NAPCC) aiming to promote renewable energy sources and reduce carbon emissions.

With its impressive economic achievements and ongoing commitment to growth and sustainability, India is well on its way to securing a prosperous future for its citizens and becoming a key player in the international arena.

Market Glimpse

India’s economy is marked by robust growth, strategic reforms, and a dynamic investment climate. The Foreign Direct Investment (FDI) in India surged to $42.1 billion during the first half of 2024. The “Make in India” initiative has significantly boosted investment and business in India. It has led to substantial progress in manufacturing, increased investments, and job creation, making India the world’s second-largest mobile phone manufacturer. The initiative’s focus on ease of doing business and targeted sectoral efforts has attracted both domestic and international investments, driving economic growth and expanding the manufacturing sector.

To further attract FDI, India offers numerous incentives and has implemented a range of policies and initiatives, including:

• Tax incentives
• Reduced corporate tax
• Special Economic Zones providing dedicated spaces with tax incentives
• Production Linked Incentive (PLI) Scheme

While India presents numerous advantages, businesses should be mindful of potential challenges:

The success of any company lies not only on the business strategies but also on how well they manage the payroll. Payroll management is a critical aspect that drives operational efficiency smoothly and guarantees compliance. In this guide, we will examine the key components of payroll, providing a thorough understanding of how to manage it effectively within your organisation.

Payroll Compliance Essentials

To start a business in India, the company needs to complete the registration process. Indian companies can be incorporated through the Simplified Proforma for Incorporating Company electronically (SPICe – INC-32), along with eMoA (INC-33) and eAOA (INC-34), which is the default method for most companies. Foreign companies can establish a place of business in India by filing eForm FC-1, which must be digitally signed by an authorized representative. There is no need for Directors of foreign companies to obtain a DIN, but it is mandatory to register the DSC of the authorised representative via the associate Digital Signature Certificate (DSC) service available at the Ministry of Corporate Affairs (MCA) portal.

As the company begins its functions, it should adhere to the relevant employment and social security regulations to ensure that the employees receive accurate compensation, and all statutory dues are deducted and remitted to relevant authorities to avoid non-compliance.

In this guide, the statutory details right from onboarding to offboarding of an employee will be discussed in depth. To start with, the links to relevant official sites are embedded below:

Note 1: These regulations are governed by the State Government, hence please refer to the respective websites to access the regulations.

New Labour Codes:

In 2019, India embarked on an ambitious reform of its labour legislation by introducing the New Labour Code (“Labour Code”). This comprehensive framework consolidates 29 pre-existing laws into 4 codes:

1. The Labour Code on Wages, 2019
2. The Industrial Relations Code, 2020
3. The Occupational Safety, Health and Working Conditions Code, 2020
4. The Code on Social Security, 2020

Designed to streamline compliance, protect workers’ rights, and enhance industrial competitiveness, this unified approach represents a significant evolution in the nation’s labour policy. Although the legislation has been formally passed, its full implementation is still pending as the government works in close coordination with state authorities and labour unions to finalise the necessary rules and ensure a smooth transition.

Onboarding Simplified

In India, streamlining the onboarding process is essential for a smooth transition for both employers and employees. Discover below the best practices and legal requirements to make the onboarding experience compliant:

1. Employee Classification

In India, various regulations govern the classification of employees. These include the Industrial Disputes Act, 1947, Factories Act,1948, Shops and Establishment(‘S&E’) Act and the Minimum Wages Act, 1948 (‘the Minimum Wage Act’) governed at both Central and State level.

2. Employment Contract

An employment contract in India can be either written or oral, though a written contract is highly recommended for legal clarity and enforceability. Governed by the Indian Contract Act, 1872, along with other relevant laws, it protects the rights of both the employer and the employee by clearly outlining their obligations, benefits, and limitations.

3. Minimum Wages

While the Central Government sets a national level minimum wage as governed by Minimum Wages Act, states also fix their own minimum wages, which cannot be lower than the minimum wages set at national level.

Once the Code on Wages Act, 2019 (“Wage Code”), are in effect, The Wages Code shall replace 4 existing labour laws:

• Minimum Wages Act, 1948
• Payment of Wages Act,1936
• Payment of Bonus Act, 1965
• The Equal Remuneration Act, 1976

The Wage Code will mandate that employers cannot pay workers less than the established minimum wage. Additionally, the Central and State Governments will be required to review and revise minimum wages at least every 5 years.

4. Probation Period

In India, probation periods typically vary based on state specific labour law regulations as well as Company policies. The probation period must be agreed upon through the employee contract.

Workplace Protocols

Workplace protocol in India is regulated Factories Act,1948, S&E Act and The Minimum Wages Act, ensuring employee health, working conditions, and equitable compensation.

The following details are based on Factories Act,1948. However, depending on the state and industry, the state specific Shops and Establishment regulations may apply, and the details will vary accordingly.

1. Working Hours

2. Breaks

3. Rest day

Employers are obliged to provide employees 1 rest day each week.

4. Overtime

Any work performed beyond the standard 48-hour workweek must be compensated as overtime, typically at a rate of 200% of the ordinary pay or as stipulated in employment contracts.

Here ‘ordinary pay’ means the basic wages plus allowances, including the cash equivalent of concessional sales of foodgrains and other articles, as the worker is entitled to, but excludes bonuses and overtime wages.

5. Night Work Pay

Any work performed beyond midnight must be considered as overtime and compensated as at a rate of 200% of the ordinary pay.

6. Leaves Entitlement

In India, the employees are entitled to get paid gazetted holidays mentioned below. However, it should be noted that the specific gazetted holidays vary from state to state.

Apart from these statutory holidays, the employees of India are entitled to several other paid statutory leaves as provided below:

* This is also known as Earned/Privilege leave.
Holiday Pay
If employees work on official holidays, they are entitled to compensatory holidays of equal number to the holidays lost in the same month or within the 2 months immediately following that month or 200% of the ordinary pay.

7. Event-based Compensation

The Employee’s Compensation Act, 1923 (this Act) provides financial compensation and benefits to employees or their dependents in case of employment-related injuries, accidents, or occupational diseases. This Act ensures protection against loss of income and covers medical expenses arising from work-related incidents.

*‘Monthly wages’ mean the amount payable for a month’s service, whether paid monthly, by another period, or at piece rates.

• For continuous service of at least 12 months before the accident, monthly wages are one-twelfth of the total wages due in the last 12 months.
• For service less than 1-month, monthly wages are the average monthly amount earned by a similar employee in the last 12 months.
• In other cases, monthly wages are thirty times the total wages earned in the last continuous service period, divided by the number of days in that period.

8. Other Benefits

Another important benefit in India is the annual bonus. Governed by the Payment of Bonus Act 1965, this bonus is applicable to employees (excluding apprentices) earning a salary or wage not exceeding INR 21,000 per month. Here the meaning of salary includes all remuneration (excluding overtime) payable to an employee, including dearness allowance, but subject to certain exceptions. Eligible employees must have worked at least 30 days in the accounting year.

Employees are entitled to a minimum bonus of 8.33% of their annual salary or INR 100, whichever is higher, regardless of the employer’s allocable surplus. If the allocable surplus exceeds the minimum bonus, the maximum bonus can be up to 20% of the annual salary. The bonus must be paid within 8 months from the end of the accounting year (April to March).

Currently workplace protocols in India were governed by multiple labour laws, each addressing distinct aspects of employment conditions, industrial relations, and occupational safety. However, to create a more cohesive and efficient regulatory framework, The Industrial Relations Code, 2020 and The Occupational Safety, Health and Working Conditions Code, 2020 have subsumed various existing laws as under:

Once The Industrial Relations Code, 2020 is into in effect it replaces 3 existing labour laws:

• Industrial Disputes Act, 1947
• The Trade Unions Act, 1926
• Industrial Employment (Standing Orders) Act, 1946

Similarly, once The Occupational Safety, Health and Working Conditions Code, 2020

is into in effect it replaces 13 existing labour laws:

• Factories Act,1948
• The Mines Act, 1952
• The Dock Workers (Safety, Health And Welfare) ACT, 1986
• The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996
• The Plantations Labour Act, 1951
• The Contract Labour (Regulation and Abolition) Act, 1970
• The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979
• The Working Journalists and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955
• The Working Journalists (Fixation of Rates of Wages) Act, 1958
• The Motor Transport Workers Act, 1961
• The Sales Promotion Employees (Conditions of Service) Act, 1976
• The Beedi and Cigar Workers (Conditions of Employment) Act, 1966
• The Cine Workers and Cinema Theatre Workers (Regulation of Employment) Act, 1981

Salary Essentials

1. Salary Components

2. Payslip Components

In India, there is no explicit law mandating the exact format of a payslip, however various laws prescribe the essential components that must be included such as Wages Act, Minimum Wages Act, Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) and Income Tax Act, 1961 (“ITA”) and it is as follows:

• Employee’s name, ID, designation, department, PAN or Aadhaar number
• Company name, address, employer identification number
• Payment Period and Date
• Basic salary
• Allowances
• Deductions
• Net salary

According to Rule 52 of The Code on Wages (Central) Rules, 2020, the format and details to be included in a payslip are specified to ensure transparency and compliance. The following outlines the required information that must be provided in the payslip:

• Date of issue
• Name and address of the of the company
• Name of employees and their father’s /Spouse name
• Designation
• UAN
• Bank account number
• Wage period
• Rate of wages payable (Basic, DA & other allowances)
• Total attendance/unit of work done
• Overtime wages
• Gross wages payable
• Total deductions (PF, ESI etc)
• Net wages paid
• Signature of the employer

Decoding Deductions

1. Withholding Taxes

India’s taxation framework operates on a Financial Year (FY) from April 1 to March 31, with the Income Tax Department, under the Ministry of Finance, overseeing tax administration and regulatory compliance as mandated by the Income Tax Act, 1961 (“ITA”).

A significant requirement in India’s tax system is the tax deduction mechanism, ensuring timely tax collection and compliance. Employers are legally required to deduct Tax Deducted at Source (TDS) on employee salaries under Section 192 of the ITA.

Additionally, Professional Tax (PT), a state-imposed statutory levy, applies in certain regions, with rates, contribution slabs, and remittance schedules varying by state regulations. While TDS falls under the purview of central tax laws, PT compliance is governed at the state level, adding another layer of payroll complexity. Together, these deductions form the backbone of India’s structured payroll tax system, ensuring efficient revenue collection and adherence to statutory obligations.

The withholding tax process for salaried individuals is structured as follows:

a. Tax Deducted at Source (TDS)

In India, tax liability is determined by an individual’s residential status as defined under Section 6 of ITA. This status is classified into three categories namely Resident and Ordinary Resident (ROR), Resident but Not Ordinary Resident (RNOR), and Non-Resident based on specified duration of stay and other prescribed conditions.

The ITA prescribes a progressive tax structure, wherein applicable tax rates are determined based on the individual’s total taxable income, age, and the tax regime chosen. The applicable tax slabs and rates are outlined in the table below:

Tax rates for the person opting for Old Tax Regime:

For individuals below 60 years of Age:

For individuals between 60-80 years of Age:

For individuals more than 80 years of Age:

Find the Surcharge Rates below:

Heath and Education Cess: 4% on Tax on Total taxable income.

Tax rates under Section 115 BAC (1) (New Tax Regime):

Steps for TDS Calculation on Salaries:

1. Compute gross salary:Includes basic salary, value of perquisites, profits in lieu of salary.
2. Reduce exemptions as available under Section 10 of ITA, some of the common ones are provided below:
   • Travel concession or assistance under Section 10(5) of ITA
   • Death-cum-retirement gratuity under Section 10(10) of ITA
   • Commuted value of pension under Section 10(10A) of ITA
   • Cash equivalent of leave salary encashment under Section 10 (10AA) of ITA
   • House rent allowance under Section 10(13A) of ITA
   • Amount of any other exemption under Section 10 of ITA
3. Calculate the total amount of deductions under Section 16 of ITA: The components of these deductions are as follows:
   • Standard deduction under Section 16(ia) of ITA
   • Entertainment allowance under Section 16(ii) of ITA
   • Tax on employment under Section 16(iii) of ITA
4. Calculate income taxable under the head salary:
   
   To calculate the taxable salary, subtract the total amount of exemption claimed under Section 10 of ITA from the total gross salary.
5. Add any other income reported by the employee: The included components are as follows:
   • Income (or admissible loss) from house property reported by employee offered for TDS
   • Income under the head Other Sources offered for TDS
6. Calculate the gross total income: Add the amount of Taxable salary and total amount of other income reported by the employee to reach at the gross total income.
7. Deductions under Chapter VI A of ITA: Some of the available deductions are as follows:
• Deduction in respect of life insurance premia, contributions to provident fund etc. under Section 80C of ITA
• Deduction in respect of contribution to certain pension funds under Section 80CCC of ITA
• Deduction in respect of contribution by taxpayer to pension scheme under Section 80CCD (1) of ITA
• Calculate total deduction amount under Section 80C, 80CCC and 80CCD (1)of ITA subject to maximum qualifying limit of INR 1,50,000
• Deductions in respect of amount paid/deposited to notified pension scheme under Section 80CCD (1B) of ITA
• Deduction in respect of contribution by Employer to pension scheme under Section 80CCD (2) of ITA
• Deduction in respect of health insurance premia under Section 80Dof ITA
• Deduction in respect of donations made to approved funds under Section 80G of ITA

Note: The list of deductions is not exhaustive.

8. Aggregate of deductible amount under Chapter VI A of ITA: Add all the amounts under the deduction components mentioned in point 7.
9. Calculate total taxable income: To get the amount of total taxable income, take the aggregate of deductible amount under Chapter VI A of ITA and subtract it from the gross total income.

   Taxable Income = Gross Salary – Exemptions under Section 10+ Other Income – Chapter VIA Deductions

10. Tax on total income: Use progressive rates based on the taxable income to get the amount of tax on total income
11. Subtract rebates: Apply the rebate under Section 87A of ITA If applicable.
12. Add surcharge & cess: Apply surcharge wherever applicable along with health and education cess
13. Calculate the tax payable: To calculate the amount of tax payable follow this formula:

    Tax payable = (Tax on total income– Rebate under Section 87A of ITA) + Surcharge + Health and education cess

14. Relief under Section 89 of ITA: Apply relief under Section 89 of ITA if applicable
15. Net tax payable: Calculate the net tax payable by subtracting the amount of relief under Section 89 of ITA from the amount of tax payable.
    
    Note: Under New Tax Regime below exemptions and deductions are not allowed 115(BAC)
    • Exemption under Section 10 of ITA except few exemptions like Gratuity, NPS, Leave Encashment etc.
    • Deduction under Section 16 (ii) and Section 16 (iii)
    • Chapter VIA deductions except Employer’s contribution to National Pension System (NPS) under Section 80CCD (2), Agnipath Scheme deduction under Section 80CCH and Deduction in respect of employment of new employees under Section 80 JJAA.

Income-Tax Bill, 2025:

On February 13, 2025, the Income-Tax Bill, 2025 was introduced in the Lok Sabha, marking a significant step towards overhauling India’s tax framework. This landmark legislation aims to replace the decades-old Income-Tax Act, 1961, bringing in a modernized and streamlined tax regime to align with the evolving economic landscape.

The primary objective of the New Income Tax Bill, 2025 (“this Bill”) is to make the ITA “concise, lucid, easy to read and understand.” This initiative aims to eliminate redundant provisions, simplify the language, and make the Bill more accessible to taxpayers. Following are the key changes that have been proposed:

• All definitions continue to be in alphabetical order while the language has been simplified without altering the meaning. Terms defined in multiple places in the ITA are now consolidated in section 2. For example, the definition of ‘senior citizen’ is now centralised.
• The term ‘tax year’ replaces ‘previous year’ and ‘assessment year’. This change aims to reduce confusion by aligning the terminology with common practices in comparable tax jurisdictions.
• The charging section has been simplified from two sub-sections and one proviso to five sub-sections with shorter, clearer sentences. This change makes the provisions easier to understand and apply.
• Section 10 of the ITA, had complex clauses and numerous provisos, making it difficult to comprehend. The new Bill drafts all exemption provisions into 6 different schedules by organising information into tables for clarity and removing redundant provisions.
• All applicable exemptions under the head salary have been brought along with other provisions for Salary.
• Chapter VIA has been simplified by integrating existing provisos and explanations into the main sections.
• Detailed sections like Section 80C have been streamlined, with detailed provisions moved to Schedule XV. This transforms the arrangement of eligible savings instruments into a simplified format.
• Section 80G which provides deductions for donations has been revised to clearly segregate deductions based on the percentage of eligible deductions 100% and 50%.
• Sections 80TTA and 80TTB have been merged into a single proposed section with clearly defined sub-sections. The eligibility criteria and deduction limits for different categories of assesses are now explicit, reducing the need to refer to multiple sections.
• There is no policy changes in the provisions related to special rates for domestic taxpayers. However, the provisions have been simplified by dedicating a separate part for the New Tax Regime, removing redundant provisions, and providing tables to eliminate multiple explanations and provisos.

This simplification addresses common grievances and practical issues by eliminating redundant provisions and integrating existing provisos and explanations into the main provisions.

This improves readability and reduces the length of the chapters, making the language simpler and minimising legal and technical jargon. All the rights and duties of taxpayers will remain unchanged, ensuring a seamless transition.

The necessary administrative measures for implementation will follow as per the provisions of this Bill. Further details will be provided in due course.

Reporting and Remittance:

Employers in India have specific obligations regarding the deduction and remittance of taxes on employee salary. These obligations include the timely deduction of TDS, issuing necessary certificates, and filing required statements. The key forms involved in this process are detailed below:

• Form 24 Q: Employers are obliged to deduct Tax Deducted at Source (TDS) on Salary under Section 192 of ITA on payment of salary and remit the same within 7^thof the following month. Report to Income Tax Department through the TRACES (TDS Reconciliation Analysis and Correction Enabling System) on a quarterly basis i.e., by 31^st of the following month of every quarter and for the last quarter from January to March, to be filed by 31^st
• Form 16:Employers are obliged to issue Form 16 certificate as Withholding evidence to the employees by 15^th of June the details of Tax deducted on total salary paid during the Financial Year.
• Form 12 BA:Employers are obliged to provide statement showing the perquisites, other benefits, and amenities provided to the employee together with Form 16 by 15^th of June.

Non-compliance:

b. Professional Tax (PT)

PT is a state-level tax levied on salaried individuals and professionals, governed by state-specific legislation under Shop and Establishment Act. Employers are required to deduct PT from employees’ monthly salaries based on predefined income slabs depending on the state.

PT is basically levied to generate revenue for the state governments to fund various employment and skill development programs. The average rate of PT can differ significantly across states, with some states having a fixed rate and others implementing a progressive rate based on income levels but the yearly amount doesn’t exceed INR 2,500.

Employers must ensure compliance with the state-specific PT regulations, including timely deduction and remittance of the tax to the respective state authorities.

Reporting:

Employers must remit PT monthly or quarterly, as per state deadlines.

Non-compliance:

PT is governed by state-specific regulation. Therefore, the consequences for non-deduction or non-remittance of PT vary from state to state.

Implementation of Labour codes will not impact Professional Tax provisions as the Shops and Establishments Act at state level are not being subsumed in the Labour Codes.

2. Social Security

India’s social security framework is designed to ensure financial stability, healthcare access, and retirement benefits for employees through mandatory contributions governed by statutory bodies. The system is administered by two key authorities:

• Employees’ Provident Fund Organisation(EPFO) – Manages retirement savings and pension schemes governed by the Employees’ Provident Fund Act 1952.
• Employees’ State Insurance Corporation(ESIC) – Provides health insurance, disability, and maternity benefits governed by Employees’ State Insurance Act 1948.
• Labour Welfare Fund(state specific)

These schemes apply to eligible employees based on wage thresholds and employment type, with contributions shared between employers and employees. Below are the key components:

a. Employees’ Provident Fund (EPF)

EPF, governed by the EPF Act, is a mandatory savings scheme for retirement. It includes:

• EPF: Tax-deferred savings account with compound interest.
• Employees’ Pension Scheme (EPS): Monthly pension post-retirement.
• Employees’ Deposit Linked Insurance (EDLI): Life insurance cover up to INR 7 lakh.

Applicability:

• Mandatory:Employees earning INR 15,000 or less per month in establishments with 20 or more workers.
• Voluntary:Employees earning more than INR 15,000/month can opt in with employer consent.
• Exclusions:Apprentices, casual workers, and certain international workers under bilateral agreements.

The EPF requires contributions from both employees and employers based on the employee’s salary**. The contribution rates are as follows:

*Total employer contribution of 13% is split and deposit to EPF and EPS and are subject to certain exceptions.

** Employee’s salary includes Basic wages with DA (including retaining allowance (if any) and cash value of any food concession) but excluding overtime, housing rent allowance and bonus.

Remittance and Reporting:

Monthly EPF contributions must be remitted and filed through Electronic Challan Cum Return (ECR) online by 15^th of the following month.

Non-compliance:

b. Employees’ State Insurance (ESI)

ESI Scheme, governed by the Employee’s State Insurance Act, 1948 (“ESI Act”), provides comprehensive healthcare and disability coverage. It includes:

• Free treatment at ESIC hospitals/empanelled clinics.
• Sickness benefit of 70% of wages for up to 91 days/year.
• Maternity benefit 100% of wages for 26 weeks.
• Disability allowance for work-related injuries

Applicability:

• Mandatory: Employees earning INR 21,000 or less per month in seasonal establishments with 10 or more workers.
• Exclusions: Employees in seasonal factories or earning more than INR 21,000/month.

The ESI contributions rate depends on the salary of the employee. The salary here includes all cash remuneration paid or payable to an employee under the terms of employment, including payments for authorised leave, non-illegal strikes, lockouts, lay-offs, and additional remuneration (paid at intervals not exceeding two months).

However, wages do not include employer contributions to pension or provident funds, travelling allowances or concessions, special expenses related to the nature of employment, or gratuity payable on discharge.

The contribution rates are as follows:

Remittance and Reporting:

Monthly ESI contributions must be remitted by the 15^th of the following month. Additionally, half-yearly returns must be submitted via the ESIC portal by November 11 for the period from April 1 to September 30, and by May 12 for the period from October 1 to March 31.

Non-compliance

c. Labour Welfare Fund (LWF)

LWF is a state-managed contribution scheme aimed at improving the welfare of workers through various initiatives, including healthcare, education, and housing. This scheme is applicable in select states only and requires contributions from both employers and employees. This fund provides financial assistance and support to workers, enhancing their quality of life and ensuring their well-being, on happening of specified event.

The average rate of LWF contributions is managed by individual state authorities, and its rates and regulations vary across states. Each state determines the amount, frequency, and basis of LWF contributions.

Employers are responsible for deducting the LWF contributions from employees’ salaries and remitting the same to the respective state authorities.

Reporting:

Employers must remit LWF monthly, quarterly or annually as per state deadlines.

Non-compliance:

The LWF is governed by state-specific Labour Welfare Fund Acts and rules, as it is a state-level legislation. Therefore, the consequences for non-deduction or non-remittance of LWF vary from state to state.

The Code on Social Security:

For decades, India’s social security landscape was fragmented across nine laws, but this framework is set to be streamlined under The Code on Social Security, 2020 (“the Code”) which consolidates these laws into a unified system to expand coverage, simplify compliance, and enhance protections for both organised and unorganised workers.

• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948
• The Employees’ Compensation Act, 1923
• The Maternity Benefit Act, 1961
• The Payment of Gratuity Act, 1972
• The Cine Workers Welfare Fund Act, 1981
• The Building and Other Construction Workers’ Welfare Cess Act, 1996
• The Unorganized Workers’ Social Security Act, 2008
• The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959

The Key reforms under the Code include:

• Establishing a common wage definition that includes basic pay, DA, and retaining allowance, while excluding bonus or commission, HRA, overtime allowance, conveyance allowance, employer contributions to social security or pension funds, gratuity, retrenchment compensation or retirement benefits, and ex-gratia payments.
• Extending benefits like pensions, maternity support, and accident insurance to 40 crores unorganised, gig, and platform workers.
• Mandating ESIC health coverage in all districts and allowing smaller establishments (even with 1 employee in hazardous sectors) to join EPFO/ESIC.
• A national online portal for self-certified registration of unorganized workers to ensure seamless access to benefits.

The Code aims to create an inclusive, modernised social security ecosystem while reducing administrative complexity for employers. However, still there are quite a few ambiguities which needs to be clarified especially around the Basic Wage and also its implementation for payment of Gratuity.

3. Minimum Take Home Pay

The Payment of Wages Act, 1936 (“Wage Act”) stipulates that total deductions from an employee’s wages in any wage period should not exceed 50% of the wages. Deductions can only be made as per the Wage Act, including the following:

• Fines
• Absence from duty
• Damage or loss of goods/money due to employee’s neglect
• House accommodation provided by employer/government
• Authorised amenities and services
• Recovery of advances and interest
• Income tax
• Court-ordered deductions
• Provident fund contributions
• Payments to approved co-operative societies or insurance schemes
• Life insurance premiums with employee’s authorisation
• Insurance premiums on Fidelity Guarantee Bonds
• Losses due to counterfeit currency or forged notes
• Losses from failure to invoice or collect charges
• Incorrect rebates or refunds granted by the employee
• Contributions to the Prime Minister’s National Relief Fund with employee’s authorisation
• Contributions to government-framed insurance schemes

Seamless Offboarding

Ensuring compliance during the offboarding process is essential and must not be overlooked. When separating employees, it is important to adhere to various legal requirements, including the Payment of Gratuity Act, 1972 (“the Gratuity Act”), EPF Act, and the Industrial Disputes Act, 1947. The specific regulations depend on whether the employee is retiring, resigning, or being dismissed. Proper adherence to these laws ensures a smooth and legally compliant offboarding process.

Gratuity is one of the important benefits during offboarding. Governed by the Gratuity Act, employees with at least 5 years of continuous service are eligible for a gratuity benefit. This benefit amounts to 15 days’ salary for each completed year of service, calculated as:

(Last drawn salary× 15 ×years of service) ÷ 26

The above may vary if the employer is not governed by the Gratuity Act.

1. Retirement

When an employee retires, several benefits and compensations are applicable, including:

• Salary for the balance period worked
• Gratuity if eligible
• Leave encashment
• Accumulated EPF balance
• Applicable in case of Voluntary Retirement Scheme (VRS). Compensation is up to 3 months’ salary for each completed year of service or last drawn salary × remaining months of service, whichever is lower. Average pay refers to the average of wages earned in the three calendar months preceding the date of retrenchment.
• Based on company policy, additional ex gratia payments may be provided.

2. Resignation

Employees may choose to resign, provided they adhere to the notice period. If the employee resigns without serving notice period, the employer can deduct salary in lieu of notice from their Full and Final (F&F) settlement.

To calculate the payment in lieu of notice, follow the below mentioned formula:

Last Drawn Salary× Notice Period days unserved ÷ Actual days worked in a month

Upon resignation, employees are eligible for the following benefits:

• F&F settlement, that is any unpaid salary pertaining to termination month
• Annual bonus
• Gratuity if eligible
• Leave encashment
• Withdrawal of EPF balance if they remain unemployed for 2 months from resignation
• Employees covered under ESI subject to covered period and certain conditions continue to get medical, sickness and maternity benefit.

3. Dismissal

If the employer terminates the employee without providing 1 month notice, then 1 month salary in lieu of notice to be provided as compensation for employees. Dismissed employees are entitled to the following benefits:

• Gratuity if eligible
• Leave encashment
• Withdrawal of EPF balance if they remain unemployed for 2 months from dismissal

Employees covered under ESI receive financial and medical benefits, including sickness and unemployment allowances, and medical care for their families, under certain conditions.

Conclusion

India presents a unique and complex landscape for payroll compliance, driven by diverse regulations and statutory requirements. Employers must navigate various deductions and contributions, including provident fund, gratuity, and professional tax, which vary by state and employee classification. Ensuring timely and accurate payroll processing is critical to maintaining compliance and employee trust.

To manage these challenges effectively, investing in advanced payroll software that can handle the intricacies of Indian payroll regulations is essential. Regular updates on legislative changes and periodic audits are crucial to staying compliant and avoiding penalties. This proactive approach helps businesses streamline their payroll processes and focus on growth.