Payroll in India is not just salary calculation-it’s a multi-authority compliance function governed simultaneously by the CBDT (income tax and TDS), MCA (Companies Act director remuneration and corporate compliance), GST Council (reverse charge on director fees and ITC on employee benefits), EPFO, ESIC, and state-level professional tax authorities. Missing a single deadline or misclassifying a single component can trigger penalties, interest, and notices from multiple regulators.
Under the Income Tax Act, 2025 (effective 1 April 2026) and the Income Tax Rules, 2026, the payroll landscape shifts significantly: new form numbers, updated perquisite valuations, stricter HRA documentation, and the default new tax regime. For businesses managing professional accounting services (know more) that include payroll, understanding these cross-regulatory requirements is essential for error-free compliance.
CBDT Guidelines: TDS on Salary & IT Rules 2026
Section 192: TDS on Salary - The Foundation
Every employer paying salary must deduct TDS under Section 192 at the employee’s average tax rate. The process:
- Estimate annual income. Include basic salary, allowances (HRA, LTA, special allowance), bonuses, commissions, perquisites, and profits in lieu of salary.
- Apply the employee’s chosen tax regime. New regime is default. Employee must actively opt out to use old regime. If no intimation: default to new regime.
- Deduct applicable exemptions. Standard deduction: Rs 75,000 (new regime) or Rs 50,000 (old regime). HRA, LTA, 80C, 80D, etc. (old regime only).
- Compute tax on net taxable income. Apply slab rates for the chosen regime. Add 4% health and education cess.
- Calculate average monthly TDS. Annual tax / 12 (or remaining months if mid-year joiner) = monthly TDS deduction.
- Deposit by 7th of next month. Use Challan 281 (income tax TDS). March TDS due by 30th April.
Form 24Q: Quarterly TDS Return
| Quarter | Period | Due Date | Key Content |
|---|---|---|---|
| Q1 | April-June | 31 July | Annexure I: deductee-wise details |
| Q2 | July-September | 31 October | Annexure I |
| Q3 | October-December | 31 January | Annexure I |
| Q4 | January-March | 31 May | Annexure I + Annexure II (annual salary details) + Form 16 generation |
Form 16: Must be issued to all employees by 15 June every year. It is the certificate of TDS deduction and is the primary document employees use for income tax return filing (know more).
IT Rules 2026: What Changed for Payroll
| Change | Old Position | New Position (April 2026) |
|---|---|---|
| Standard deduction | Rs 50,000 (old regime); Rs 75,000 (new regime from FY 2024-25) | Rs 75,000 (new regime, confirmed) |
| Perquisite: company car (small, with driver) | Rs 2,700/month | Rs 8,000/month |
| HRA documentation | Rent receipt + PAN of landlord (>Rs 1 lakh/year) | Rent receipt + PAN + bank transfer proof + landlord’s ITR reference recommended |
| Form numbers | Old form numbering (Form 16, Form 24Q, etc.) | Renumbered under IT Rules 2026. Payroll software must update before April payroll. |
| Tax Year concept | Assessment Year (AY) referenced in forms | Tax Year replaces AY. E.g., TY 2026-27 instead of AY 2027-28. |
| Employer PF/ESI deposit deadline | PF/ESI due by 15th of next month; late deposit disallowed as deduction under Section 36(1)(va) | Budget 2026 relaxed: deposit by due date of ITR filing (31 October for companies) is now acceptable for employer’s contribution deduction |
For entities using tax audit services (know more), the Form 24Q reconciliation with Form 16 and Form 26AS/AIS is a critical audit procedure under the new rules.
EPF & ESI: Statutory Deductions and Deposit Rules
| Parameter | EPF (Employees’ Provident Fund) | ESI (Employees’ State Insurance) |
|---|---|---|
| Applicability | Establishments with 20+ employees (voluntary for smaller) | Establishments with 10+ employees (wages ≤ Rs 21,000/month) |
| Employee contribution | 12% of basic + DA | 0.75% of gross wages |
| Employer contribution | 12% of basic + DA (8.33% to EPS, 3.67% to EPF) | 3.25% of gross wages |
| Deposit deadline | 15th of the following month | 15th of the following month |
| Late deposit consequence | Interest at 12% p.a. + damages up to 100% of arrears | Interest at 12% p.a. + damages |
| Annual return | Online monthly ECR filing on EPFO portal | Half-yearly return on ESIC portal |
50% wage rule (pending): Under the Code on Wages, 2019 (notification pending), basic salary must be at least 50% of total compensation. This will significantly increase EPF/ESI contributions for companies that currently structure salary with high allowances and low basic. While the notification is pending, companies should model the impact and prepare for restructuring.
GST Council Guidelines: Where GST Meets Payroll
The employer-employee relationship is specifically excluded from the definition of “supply” under GST (Schedule III of the CGST Act). Salaries paid to employees are not subject to GST. However, GST intersects with payroll in three important ways:
1. Director Sitting Fees / Commission: Reverse Charge
Fees paid to directors (sitting fees, commission, professional fees) by a company are subject to GST under reverse charge mechanism (Section 9(3), Notification 13/2017). The company must pay GST at 18% on such fees and can claim ITC if the company is registered and the service is used for business purposes. For companies registered through company registration (know more), this is a frequently missed compliance-especially for small companies with non-executive directors.
2. Manpower Supply Services
If a company engages manpower supply agencies (staffing firms, contract labour suppliers), the agency charges GST at 18% on the supply of manpower services. The company claims ITC on this GST. However, if the contract is structured as a “pure agency” arrangement, the GST treatment differs.
3. ITC on Employee Benefits
GST paid on certain employee benefits may or may not be eligible for ITC:
- Group health insurance: ITC is blocked under Section 17(5)(b) of the CGST Act for health insurance unless it is obligatory under any law (ESI). If the company provides group health insurance voluntarily, no ITC.
- Company vehicles: ITC on motor vehicles is blocked unless the company is in the business of transportation or further supply of vehicles.
- Canteen/food services: ITC is blocked for food and beverages under Section 17(5)(b)(i).
- Training and conferences: ITC is available if the service is used for business purposes.
For companies managing GST registration (know more) alongside payroll, the reverse charge on director fees and ITC eligibility on employee benefits must be tracked separately.
MCA Requirements: Corporate Payroll Compliance
The Ministry of Corporate Affairs governs payroll-adjacent compliance for companies and LLPs:
- Director remuneration limits: Under Section 197 and Schedule V of the Companies Act, 2013, managerial remuneration (MD, WTD, Manager) is capped at 11% of net profits (5% for one, 10% for all). If profits are inadequate, minimum remuneration limits from Schedule V apply.
- Board resolution: Any change to salary structure, bonus policy, or ESOP scheme requires a board resolution. Shareholder approval (ordinary/special resolution) is required for certain remuneration levels.
- Annual return disclosure: Form MGT-7/7A requires disclosure of remuneration paid to directors and key managerial personnel. This must reconcile with Form 16 and the company’s books.
- CARO 2020: For applicable companies, the auditor must report on whether director remuneration complies with Section 197 limits. Non-compliance is a qualification in the audit report.
- Secretarial audit: For listed companies and certain other companies, the secretarial auditor reviews remuneration compliance under the Companies Act.
Monthly Payroll Compliance Calendar
| Due Date | Compliance | Authority / Form |
|---|---|---|
| 7th | Deposit TDS on salary (Section 192) for previous month | CBDT / Challan 281 |
| 7th-10th | Pay salary to employees (state-specific deadline) | Code on Wages / state rules |
| 15th | Deposit EPF contribution (employee + employer) via ECR | EPFO / ECR portal |
| 15th | Deposit ESI contribution (employee + employer) | ESIC / ESIC portal |
| 15th-21st | Deposit Professional Tax (varies by state) | State PT authority |
| End of quarter | File Form 24Q (quarterly TDS return on salary) | CBDT / TRACES portal |
| 15 June | Issue Form 16 to all employees | CBDT / employer obligation |
| 30 Sept | DIR-3 KYC for all directors | MCA / MCA portal |
| 31 Oct | Company ITR filing (includes salary disclosure) | CBDT / IT Department |
Common Mistakes to Avoid
Mistake 1: Not collecting tax regime intimation from employees. If the employee does not inform the employer, TDS must be deducted under the new regime by default. But if the employee later files under the old regime, TDS may be short or excess-creating reconciliation issues.
Mistake 2: Depositing EPF/ESI after the 15th. Late EPF deposit attracts interest at 12% p.a. and damages up to 100% of arrears. ESIC similarly charges interest and damages. These penalties compound quickly.
Mistake 3: Missing reverse charge GST on director fees. Companies paying sitting fees or commission to directors must self-assess and pay GST at 18% under reverse charge. Many small companies miss this entirely, leading to GST audit findings.
Mistake 4: Not updating payroll software for IT Rules 2026 form numbers. From April 2026, all statutory forms (Form 24Q, Form 16, etc.) are renumbered under the new IT Rules. Payroll software generating old form numbers will file non-compliant returns.
Mistake 5: Ignoring the 50% basic salary rule (Code on Wages). While the Code on Wages notification is pending, companies structuring salary with basic pay below 50% of CTC will face significant EPF/ESI liability increases when the code is notified. Model the impact now.
Key Takeaways
Payroll in India is a multi-authority compliance function spanning CBDT (TDS under Section 192, Form 24Q/16, IT Rules 2026), EPFO/ESIC (12%+12% PF, 0.75%+3.25% ESI by 15th), GST Council (reverse charge on director fees, ITC on employee benefits), MCA (director remuneration limits, board resolutions, annual return disclosures), and state authorities (Professional Tax, Labour Welfare Fund).
The IT Rules, 2026 introduce the most significant payroll changes: updated perquisite valuations (company car perquisite nearly tripled), stricter HRA documentation, form renumbering (all payroll software must update before April 2026), and the Tax Year concept replacing Assessment Year. The new tax regime remains default-employers must collect regime intimation from employees or default to new regime TDS.
For compliant payroll management, businesses need an integrated approach: automated payroll systems with built-in tax logic, a monthly compliance calendar covering all authorities, periodic payroll audits to catch misclassifications, and professional oversight for complex areas like ESOP perquisites, expatriate compensation, and cross-border employment.
Streamline Your Payroll Compliance
Payroll compliance spans CBDT, MCA, GST, EPFO, ESIC, and state authorities-each with different deadlines, forms, and penalty structures. Whether you need end-to-end payroll processing, quarterly Form 24Q filing, annual Form 16 generation, or payroll audit to verify statutory compliance, professional management eliminates the risk of missed deadlines and penalty notices.
Explore our professional accounting services (know more) for payroll processing, TDS compliance, EPF/ESI administration, director fee GST reconciliation, and MCA remuneration disclosure.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
