Statutory Compliance in Payroll – A Complete Guide

By Savithri Subramanian
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Statutory Compliance means adhering to rules and regulations of the state in which the business is established.  All the labor and taxation laws of the state come under statutory compliance.  Every company in India has to mandatorily abide by both national and state-level laws. Hence dealing with statutory compliance requires companies to be well-versed with the various labor regulations in India.

Non-compliant with the regulations amounts to facing legal troubles like

  • Heavy fines, penalties or even complete shutdown in extreme cases.
  • Civil or criminal liabilities.
  • Loss of the company’s integrity.
  • Distrust amongst stakeholders.
  • Loss of company’s loyalty among employees, clients etc.

Deep knowledge of statutory compliances is required to minimize the risk associated with the non-compliance of statutory requirements.

The various laws of the country take necessary precautions to ensure that the employees are given fair treatment, minimum wage rate, a fair chance is given to both men and women, working hours and conditions, maternity leave for both male and female workers to ensure exploitation.

Statutory compliance is advantageous to the organizations by saving the organizations from undue penalties and fines when the complaint, protects them from unreasonable wage or benefit demands from trade unions.

The Following image would enumerate the various acts enforcing rules and regulations to ensure both the employee and the employer conduct fairly to each other.

Labour Laws Of India 2

The Statutory Compliance Required for Indian Payroll

Statutory Requirements for Minimum Wages:

The Minimum Wages Act 1948 is an Act of Parliament giving both the Central government and State government jurisdiction in fixing wages, concerning Indian labor law that sets the minimum wages that must be paid to skilled and unskilled labors. The Indian Constitution has defined a ‘ living wage ‘ that is the level of income for a worker which will ensure a basic standard of living including good health, dignity, comfort, education and provide for any contingency. The act is legally non-binding but statutory. Payment of wages below the minimum wage rate amounts to forced labor.

TDS Deduction:

Under Section 192 of the Income Tax Act, every employer who is paying a salary income to his employee is required to deduct TDS from the salary income if it exceeds the basic exemption limit. Since TDS deduction is compulsory, it is important to understand the rate of such deduction and how such deduction happens. The average rate can be defined as the total tax liability divided by the total income of an employee. To arrive at total tax liability for deducting tax on salary, the employer will take into account the tax-saving investments made by him.

Individuals must remember that while deducting TDS on income other than salary like interest income, professional income etc. TDS is deducted at a flat rate and calculation of cess is not considered.

Payment of Bonus Act, 1965:

The Payment of Bonus Act, 1965 aims to regulate the amount of bonus to be paid to the persons employed in establishments based on its profit and productivity to incentivize employees. Applicability of Bonus is as under:

  • It applies to any factory or establishment which had twenty or more workers employed on any day during the year.
  • The act does not apply to non-profit making organizations.
  • The employee receiving salary or wages up to Rs.21,000 per month
  • The employee engaged in any work whether skilled, unskilled, managerial, supervisory etc.
  • The employee who have worked not less than 30 working days in the same year.

The act provides the below on how much of a bonus to be paid during the year.

  • The minimum bonus will be 8.33% of the salary during the year.
  • The maximum bonus is 20% of the salary during the accounting year.

Statutory Compliances for ESI Fund and PF Deduction:

Employees’ State Insurance (abbreviated as ESI) is a self-financing social security and health insurance scheme for Indian workers. The fund is managed by the Employees’ State Insurance Corporation (ESIC) according to rules and regulations stipulated in the ESI Act 1948. The act was initially intended for factory workers but later became applicable to all establishments having 10 or more workers. As of 31 March 2016, the total beneficiaries are 82.8 million.

For all employees earning ₹21,000 (US$290) or less per month as wages, the employer contributes 3.25% and the employee contributes 0.75%, total share 4%. ESI fund is applicable to employees’ earning Rs 21,000 or less per month to provide the cash and medical benefits to them and their families.

Provident Fund (PF) is a self-financed, compulsory contributory fund for the future of employees after their retirement or for their dependents in case of their early death. PF works as a corpus fund that is generated through monthly or regular contributions from the employee and the employer contribution. From the employee’s salary, a minimum of 12% gets deducted and contributed to the PF. If the employer is registered to EPFO, all employees who are working in that organization with a basic wage of up to Rs.15,000 must join the Employees Provident Fund (EPF) as well The cumulative contribution of the employee and employer gets added to the PF of the employee, and that can be enchased for future use. The organizations are required to register to EPFO once they reach the limit of 20 employees under a company name.

Penalty charges for ESI & PF:

The ESI payment interest is 12% for each day of delay in payment. The person who fails to complete the payment within the given deadline shall be responsible for paying 12% per year interest for each day he has delayed. The EPFO has mentioned some charges that will apply to the late payment of the Provident Fund deposit.

Statutory Compliance in Payroll 2

Professional Taxes:

Professional tax or employment tax is a state-based tax. It is one of the statutory deductions from the gross income before computing the tax.

Gratuity:

The Payment of Gratuity Act, 1972 has divided non-government employees into two categories. Gratuity is given by the employer to his/her employee for the services rendered by him/her during the period of employment. It is usually paid at the time of retirement but can be paid earlier, provided certain conditions are met. Some of the gratuity rules in India are:

  • 5 Years Continuous Service.
  • Gratuity Only After Leaving Job.
  • Death or Disablement Relaxation.
  • Gratuity is Non-Taxable.
  • Employer Can give Excess Gratuity.
  • Gratuity Rules Applicable If Employees Are More than 10.

Gratuity in India is calculated using the formula:

Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service

(where Last drawn salary = Basic Salary + Dearness Allowance and the ratio 15/26 represents 15 days out of 26 working days in a month.)

Is your Payroll Statutory Compliant?

The payroll module of PulseHRM automates payroll processing by fetching the data from time and attendance module and leaves modules for the total payable days in a month after taking care of statutory compliances. Generates pay sheet, bank statement and statutory compliances reports. This module is also integrated with accounts management systems.

The employer shall arrange to pay the amount of gratuity within 30 days from the date it is billed to the person to whom the gratuity is allocated. Gratuity should be paid in cash, or if so desired by the payee, by demand draft or bank check to the eligible employee, nominee, or legal heir.

Maternity Benefits Act, 1961

An Act to regulate the employment of women whether directly or through any agency grants her full paid absence from work in any establishment for a certain period before and after child-birth (includes a still-born child) and to provide for maternity benefit and certain other benefits.

  • Maternity leave available to working women has been increased from 12 weeks to 26 weeks for the first two children. This maternity benefit should not be availed before eight weeks from the date of expected delivery.
  • Maternity leave for the third child onwards will continue to be 12 weeks.
  • Maternity leave of 12 weeks is required to be made available to mothers adopting a child below the age of three months as well as to the commissioning mother’.
  • The employer may permit a woman to work from home if the nature of work permits them to do so.
  • Every establishment will be required to intimate all the benefits available under the Act, in writing and electronically, to all women at the time of their initial appointment.

EDLI:

The EDLI (Employees’ Deposit Linked Insurance Scheme) provides assurance benefit (death insurance cover) to employees along with PF benefit. The employees do not contribute anything towards EDLI. The employers contribute 0.5% of the total wages of employees subject to a maximum of Rs 6500/-. EDLI applies to all the organizations where the EPF Scheme applies.

Labor Welfare Fund Act, 1965:

The labor welfare fund is a statutory contribution maintained by individual state authorities. Frequency and amount of contribution are decided by the state labor board and this differs from state to state.  It is social security legislation that is used to improve the conditions of the laborers. The contribution to this fund is made by employees, employers and in some states by the government annually or monthly. This Act has been implemented only in 15 states which also includes Union territories. This Act is not applicable to all categories of the employees, the application may depend on the designation and wages earned by the employees and may differ from state to state.

The money from the Labor Fund may be utilized for the following purposes-
a)   Vocational training.
b)   Educational facilities for the children of the workers.
c)   Medical facilities for their workers and their families.
d)   Housing facilities etc.

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