Setting Up Compliant Payroll for Your Startup
PF, ESI, TDS — understand payroll compliance obligations and automate them.
Overview of Payroll Compliance in India
Payroll compliance involves adhering to labor laws governing wages, benefits, and statutory deductions. The key statutes include the Employees' Provident Fund Act (EPF), Employees' State Insurance Act (ESI), Payment of Gratuity Act, Payment of Bonus Act, Professional Tax laws (state-specific), and the Income Tax Act for TDS. Non-compliance can result in heavy penalties, prosecution, and damage to employer reputation.
Provident Fund (PF) Compliance
Applicability: Mandatory for establishments with 20+ employees (can be voluntarily adopted by smaller firms). Contribution: 12% of basic salary + DA by both employer and employee. Employer's 12% is split: 3.67% to EPF and 8.33% to EPS (Pension Scheme). Admin charges: 0.50% of basic salary (minimum ₹500). EDLI charges: 0.50% of basic salary. Due date: 15th of every month. Registration: Apply on unifiedportal-emp.epfindia.gov.in within 30 days of crossing the threshold.
ESI (Employees' State Insurance)
Applicability: Establishments with 10+ employees (in some states, 20+) where employees earn up to ₹21,000/month (₹25,000 for disabled employees). Contribution: Employee — 0.75% of gross salary. Employer — 3.25% of gross salary. Benefits: Medical, sickness, maternity, disability, and dependent benefits. Due date: 15th of every month. Registration: Apply on esic.gov.in within 15 days of applicability.
TDS on Salary
Every employer must deduct tax at source (TDS) from employee salaries based on the applicable income tax slab rates. Steps: Collect investment declarations (Form 12BB) from employees at the start of the financial year. Calculate estimated annual income and applicable tax. Deduct TDS monthly in equal installments. Deposit TDS by the 7th of the following month (use Challan 281). File quarterly TDS returns — Form 24Q. Issue Form 16 to employees by June 15 after the financial year ends.
Professional Tax
A state-level tax applicable in states like Maharashtra, Karnataka, West Bengal, Tamil Nadu, Gujarat, etc. Maximum amount: ₹2,500 per year. Deducted monthly from employee salary by the employer. Employer must register with the state's Professional Tax authority and file returns (typically monthly or half-yearly). Rates vary by state and salary slab.
Gratuity & Bonus
Gratuity: Payable to employees who complete 5+ years of continuous service. Formula: (15 × last drawn salary × years of service) / 26. Maximum: ₹20 lakhs. Applicable to establishments with 10+ employees. Bonus: Minimum bonus of 8.33% of salary (up to a maximum of 20%). Applicable to employees earning up to ₹21,000/month. Payable within 8 months of closing the accounting year.
Setting Up Automated Payroll
Choose a payroll software that handles statutory calculations, compliance filing, and employee self-service. Key features to look for: automatic PF/ESI calculation and challan generation, TDS computation with investment declaration management, payslip generation with all statutory deductions shown, leave and attendance integration, full and final settlement calculation, and integration with accounting software. Udyog360 can automate most of these compliance tasks — reducing manual work and penalty risks.
Monthly Payroll Compliance Calendar
7th of every month: Deposit TDS (Challan 281). 15th of every month: Deposit PF (ECR filing on EPFO portal) and ESI contributions. 25th of every month: File GSTR-3B (if applicable). End of month: Professional tax deposit (varies by state). Quarterly: File TDS returns (Form 24Q) — July 31, October 31, January 31, May 31. Annually: Form 16 by June 15, PF annual return by April 30.
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