Payroll Compliance Guide 2026

Payroll in India is not just about paying salaries on time. Every pay run carries statutory obligations: provident fund, employees' state insurance, professional tax, tax deducted at source, labour welfare fund, and more. Each has its own eligibility rules, rates, due dates, and returns, and several vary by state.

This guide explains each obligation in plain terms, gives you a monthly and annual compliance calendar, and lists the mistakes that most often lead to interest, penalties, or unhappy employees. Rates and thresholds change through government notifications, so treat the figures here as a reference point and always check the currently notified rates before you run payroll.

What changed going into 2026

• Labour Codes: the four Labour Codes (Code on Wages, Code on Social Security, Industrial Relations Code, and Occupational Safety, Health and Working Conditions Code) consolidate many older labour laws. Central and state rules are still being notified and transition provisions apply, so check which provisions are in force for your establishment and state.
• Definition of wages: under the Codes, allowances excluded from "wages" are capped (commonly described as the 50% rule). If excluded allowances exceed the cap, the excess is added back to wages, which can increase PF and gratuity contributions. Review salary structures where basic pay is a small share of CTC.
• Income tax law: the Income-tax Act, 2025 replaces the Income-tax Act, 1961 from 1 April 2026. Familiar concepts such as TDS on salary continue, but section and form references are changing. Check the current provisions and forms before filing.
• New tax regime as default: the new regime is the default for salaried employees unless they opt for the old regime. Collect each employee's choice at the start of the year.

Before your first payroll: registrations

Thresholds differ under specific notifications and the Code on Social Security, so confirm what applies to you based on headcount, industry, and location.

Provident Fund (EPF)

Who is covered

Employees earning PF wages (basic plus dearness allowance, plus any amounts treated as wages under current rules) up to the statutory wage ceiling, currently ₹15,000 a month, must be enrolled. Employees above the ceiling may be enrolled on joining if they are not already EPF members; once enrolled, they generally continue.

Contribution

Example: an employee with basic pay of ₹15,000 contributes ₹1,800. The employer also contributes ₹1,800: ₹1,250 to EPS (8.33% of ₹15,000) and ₹550 to EPF. Many employers contribute on the ceiling rather than actual basic for higher earners; decide your policy and state it in the offer letter.

Some establishments are eligible for a reduced 10% rate. Check the current notification if you think it applies.

Deadlines and returns

• Deposit contributions and file the Electronic Challan cum Return (ECR) by the 15th of the following month.
• Generate a UAN for every new joiner and link KYC (Aadhaar, PAN, bank).
• Late payment attracts interest and damages, so treat the 15th as a hard deadline.

Employees' State Insurance (ESI)

Who is covered

Employees with gross monthly wages up to the ESI wage ceiling, currently ₹21,000 (₹25,000 for persons with disability), in covered establishments and areas.

Contribution

• Employee: 0.75% of gross wages
• Employer: 3.25% of gross wages

Example: on gross wages of ₹18,000, the employee contributes ₹135 and the employer ₹585.

Coverage works in contribution periods (April–September and October–March). An employee who is covered at the start of a period stays covered for that whole period even if their salary crosses the ceiling mid-way.

Deadlines

• Deposit contributions by the 15th of the following month.
• Register new employees on the ESIC portal on joining so they can access benefits.

Professional Tax (PT)

Professional Tax is a state levy on employment. Not every state charges it, and those that do set their own slabs, frequencies, and due dates. The Constitution caps PT at ₹2,500 per person per year.

• Deduct PT based on the slab for the state where the employee works.
• Some states have a different amount in one month (for example, a higher deduction in February) to reach the annual total.
• Deposit and file returns as per your state's schedule, which may be monthly, quarterly, or annual depending on the state and the employer's liability.

Keep a state-wise PT table and update it whenever a state revises slabs.

Tax Deducted at Source on salary (TDS)

How it works

The employer estimates each employee's annual taxable salary, calculates tax under the regime the employee has chosen, and deducts it evenly across the remaining months of the financial year. Recalculate whenever salary, declarations, or the regime choice changes.

Steps every year

1. April: collect each employee's regime choice and, for the old regime, investment declarations.
2. Monthly: compute and deduct TDS; deposit by the 7th of the following month (the deadline for March deductions is 30 April).
3. January to March: collect proofs for declared investments and adjust TDS for the final months.
4. Quarterly: file the quarterly TDS return for salaries.
5. By 15 June: issue the annual TDS certificate (Form 16 under the earlier law, or its replacement under the new Act) to every employee.

Things to check

• Current tax slabs, standard deduction, and rebate limits for the financial year under each regime.
• Income from previous employers for mid-year joiners.
• Correct PAN for every employee; a missing PAN can require a higher deduction rate.
• Tax treatment of perquisites, reimbursements, and allowances.

Late deposit attracts interest and late returns attract fees, so automate reminders for the 7th and the quarterly due dates.

Labour Welfare Fund (LWF)

LWF is a small contribution from both employer and employee in states that have an LWF law. Amounts and frequency (monthly, half-yearly, or annual) vary by state. Check whether each state where you have employees levies LWF, and add the due dates to your calendar.

Gratuity

Gratuity is paid on separation to employees who have completed the qualifying period of continuous service, traditionally five years. The Code on Social Security provides for a shorter qualifying period for fixed-term employees; check current rules for how it applies to you.

The standard formula is:

Gratuity = last drawn wages (basic + DA) × 15 ÷ 26 × completed years of service

Example: last drawn basic of ₹40,000 and 7 completed years gives ₹40,000 × 15 ÷ 26 × 7 = ₹1,61,538 (rounded). Tax exemption limits and the statutory ceiling are notified by the government; check the current figures.

Many employers show a gratuity provision as part of CTC. Make sure the amount you accrue matches your actual liability.

Statutory bonus

Under the Payment of Bonus law (now part of the Code on Wages), eligible employees earning up to the notified wage limit, currently ₹21,000 a month, are entitled to a bonus of at least 8.33% and up to 20% of wages, calculated on wages subject to the notified calculation ceiling or the applicable minimum wage, whichever is higher. Bonus is generally payable within eight months of the close of the accounting year. Check current limits before calculating.

Minimum wages and wage payment

• Minimum wages: states notify minimum wages by skill level and zone, and revise variable dearness allowance periodically. Check that every employee's wages meet the current rate for their state and category.
• Timely payment: wages must be paid within the time limits set by law. Most organisations pay by the last working day of the month or the first few days of the next.
• Deductions: only authorised deductions are permitted, and total deductions are capped as a share of wages.
• Full and final settlement: pay final dues within the time limit specified under current law after separation.

Monthly compliance calendar

Annual and quarterly calendar

Records you must keep

• Salary register and payslips
• Attendance and leave records
• PF, ESI, PT, LWF challans and returns
• TDS challans, returns, and certificates
• Employee declarations and investment proofs
• Overtime, bonus, and deduction registers as required under applicable law

Keep records for the period required by each law, and in a form you can produce quickly during an inspection or audit.

Common payroll compliance mistakes

• Late deposits: missing the 7th or 15th by a day still attracts interest. Set reminders a few days earlier.
• Wrong PF wage base: structuring salaries with a very low basic and high allowances can conflict with the wage definition under the Codes.
• Ignoring state differences: applying one state's PT slab to employees in another state.
• Missing mid-year joiner income: under-deducting TDS because previous employment income was not collected.
• Not tracking ESI periods: stopping ESI deductions mid-period when salary crosses the ceiling.
• Manual errors in inputs: attendance and leave data entered by hand into payroll is the most common source of wrong pay.
• Delayed full and final settlement: leaving exit dues pending for months.

How software helps

Most payroll errors start upstream, in attendance, leave, and salary changes that do not reach payroll correctly. Running payroll on the same system as attendance and leave removes the re-keying step. Qrew HR's Payroll & Compliance handles salary calculations, payslips, and statutory deductions for PF, ESI, Professional Tax, and TDS, using attendance and leave data from the same platform. You still own the decisions and the filings; the software takes care of the arithmetic and keeps records in one place.

Payroll compliance checklist

• TAN, PF, ESI, PT, LWF, and Shops and Establishments registrations in place as applicable
• Current PF and ESI rates and ceilings confirmed
• State-wise PT and LWF tables updated
• Minimum wage rates checked for every state and category
• Salary structures reviewed against the wage definition under the Labour Codes
• Tax regime choice collected from every employee
• Reminders set for the 7th, the 15th, and quarterly TDS returns
• Payslips issued every month
• Records stored and retrievable