If your business has even one employee in India, you are already responsible for calculating EPF, ESI, TDS, professional tax, and disbursing accurate salaries by the 7th of every month. Errors in any of these steps can trigger penalties ranging from Rs 10,000 to Rs 1 lakh - and in severe cases, imprisonment up to 2 years.
Yet most small and mid-sized businesses in Pune and across India still rely on manual spreadsheets or outdated processes that leave gaps in compliance. This guide walks you through every stage of payroll processing - from gathering employee data to filing Form 24Q - with exact due dates, portal names, form numbers, and penalty amounts.
This guide explains what payroll processing covers, who needs it, the step-by-step filing process, statutory deduction rates, common mistakes, and penalties for non-compliance.
What Is Payroll Processing and Why Does It Matter?
Payroll processing is the end-to-end management of employee compensation - from collecting attendance data and calculating gross salary to deducting statutory contributions under the EPF Act 1952, ESI Act 1948, and Income Tax Act 1961, and finally disbursing net pay into employee bank accounts.
Under the Code on Wages 2019 and the Code on Social Security 2020 (effective November 2025), basic wages must constitute at least 50% of total CTC. This single rule restructured salary components for thousands of Indian businesses, directly affecting EPF and gratuity calculations.
For organisations that handle payroll processing and management (know more) in-house or through outsourced partners, understanding every component of the payroll cycle is essential to avoiding penalties and maintaining employee trust.
Key Terms You Should Know
- CTC (Cost to Company): The total annual expenditure an employer incurs on an employee, including basic salary, allowances, and employer contributions to EPF and ESI.
- Gross Salary: CTC minus employer contributions (EPF, ESI, gratuity). This is the amount before employee-side deductions.
- Net Salary (Take-Home Pay): Gross salary minus employee deductions (EPF, ESI, TDS, Professional Tax). This is the amount credited to the employee's bank account.
- TDS (Tax Deducted at Source): Income tax deducted by the employer from employee salary under Section 192 of the Income Tax Act 1961 and deposited with the government monthly.
- UAN (Universal Account Number): A 12-digit number allotted by EPFO to every EPF member. It remains the same throughout the employee's career, even when changing employers.
- Form 16: An annual TDS certificate issued by the employer to employees, summarising total salary paid and tax deducted during the financial year. Due by 15 June.
- Form 24Q: A quarterly TDS return filed by employers with the Income Tax Department, detailing salary payments and tax deducted for all employees.
Who Needs to Process Payroll Under Indian Labour Laws?
Every entity that employs one or more persons in India must comply with payroll-related statutory obligations. The scope varies based on the number of employees and monthly wages.
- Private limited companies, LLPs, and partnership firms with any number of salaried employees
- Establishments with 20 or more employees - mandatory EPF registration under the EPF Act 1952
- Establishments with 10 or more employees - mandatory ESI registration under the ESI Act 1948 (in most states)
- Organisations requiring PF registration (know more) for employees earning up to Rs 15,000 basic salary per month
- Startups, NGOs, and societies with even a single full-time employee receiving regular salary
- Any employer deducting TDS on salary under Section 192 - requires TAN registration with the Income Tax Department
If your business crosses the EPF threshold of 20 employees or the ESI threshold of 10 employees, you must register within 30 days. Even entities that fall below these thresholds can voluntarily register.
Legal Framework: Old Labour Laws vs New Labour Codes
India's payroll compliance landscape underwent a major overhaul with the enactment of four Labour Codes, consolidating 29 existing laws. The Codes on Wages and Social Security became effective from November 2025.
| Aspect | Old Framework | New Labour Codes (2025) |
|---|---|---|
| Governing Laws | 29 separate labour laws (EPF Act, ESI Act, Payment of Wages Act, etc.) | 4 Labour Codes - Wages, Social Security, Industrial Relations, OSH |
| Basic Wage Rule | No statutory minimum percentage of CTC | Basic wages must be at least 50% of CTC |
| EPF Applicability | 20+ employees | 20+ employees (unchanged, but wage ceiling revised) |
| ESI Coverage | 10+ employees, Rs 21,000 wage limit | 10+ employees, Rs 21,000 wage limit (universal coverage) |
| Gratuity Eligibility | 5 years continuous service | 1 year for fixed-term employees, 5 years for permanent |
| Record Keeping | Physical registers acceptable | Mandatory digital records for 7 years |
The 50% basic wage rule is the most impactful change - it increases employer PF and gratuity contributions for companies that previously structured salaries with low basic pay.
How to Process Payroll in India: Step-by-Step Process
1. Register with statutory authorities. Before processing the first payroll, obtain PAN and TAN from the Income Tax Department, register with EPFO (if 20+ employees), register with ESIC (if 10+ employees), and register for Professional Tax with the state commercial tax department. In Maharashtra, PT registration is mandatory for employers and employees.
2. Collect and verify employee data. Gather PAN, Aadhaar, bank account details, Form 12BB (investment declarations), UAN (for existing PF members), and ESIC IP number. Verify all documents within the first month of employment. Upload employee details on the EPFO Unified Portal and ESIC portal.
3. Define salary structure and company policies. Structure CTC into basic salary (minimum 50% under new Labour Codes), HRA, special allowance, and employer contributions. Define leave policy, attendance rules, overtime policy, and reimbursement guidelines. Ensure the salary structure complies with minimum wage notifications for your state and industry.
4. Collect monthly attendance and input data. Before each payroll cycle, collect attendance records, approved leave data, overtime hours, salary revisions, new joinee details, and exit/final settlement data. Cross-verify with department heads. Lock the attendance register by the 1st of the payment month.
5. Calculate gross salary and statutory deductions. Compute gross salary based on days worked. Deduct employee EPF (12% of basic + DA), employee ESI (0.75% of gross if applicable), TDS (based on declared tax regime and Form 12BB), Professional Tax (as per state slab), and any loan/advance recoveries. Add employer EPF (12%) and employer ESI (3.25%) separately.
6. Disburse net salary and generate payslips. Transfer net salary to employee bank accounts by the 7th of the following month (for establishments with fewer than 1,000 employees) or by the 10th (for 1,000+ employees) under the Payment of Wages Act. Generate itemised payslips showing earnings, deductions, and net pay. Distribute payslips electronically or through the employee self-service portal.
7. Deposit statutory contributions and file returns. Deposit TDS by the 7th of the following month via the Income Tax e-filing portal. Remit EPF and ESI contributions by the 15th. File quarterly TDS return filing (know more) in Form 24Q by 31 July, 31 October, 31 January, and 31 May. Issue Form 16 to all employees by 15 June after the financial year ends.
Documents and Records Needed for Payroll Processing
- PAN card of each employee (mandatory for TDS computation and Form 16)
- Aadhaar card linked with UAN for EPF and ESIC e-KYC
- Bank account details with IFSC code for salary disbursement
- Form 12BB - employee investment declaration for TDS calculation under Section 192
- Appointment letter and employment contract specifying CTC structure
- Attendance and leave records - digital records mandatory under new Labour Codes
- Previous employer Form 16 (for mid-year joiners - to avoid double taxation)
- ESIC IP number and nomination Form 1 (for ESI-eligible employees)
- PF nomination Form 2 and UAN activation confirmation
- Professional Tax enrolment certificate (Maharashtra Form III)
- Salary register and wage register as prescribed under Payment of Wages Act
- Form 24Q filing acknowledgement and Form 16 distribution records
Payroll Deductions in India: EPF, ESI, TDS and Professional Tax Rates
The following table summarises the key statutory deduction rates applicable for FY 2025-26 and FY 2026-27.
| Deduction | Employee Share | Employer Share | Due Date |
|---|---|---|---|
| EPF | 12% of basic + DA | 12% of basic + DA (3.67% EPF + 8.33% EPS) | 15th of next month |
| ESI | 0.75% of gross (if salary ≤ Rs 21,000/month) | 3.25% of gross | 15th of next month |
| TDS | As per income tax slab (5%-30%) | N/A (employer deducts and deposits) | 7th of next month |
| Professional Tax (Maharashtra) | Up to Rs 2,500/year (slab-based) | N/A (deducted from employee salary) | Monthly/quarterly per state rules |
| Labour Welfare Fund (Maharashtra) | Rs 12/half-year | Rs 36/half-year | 30 June and 31 December |
Note: EPF is mandatory for employees earning up to Rs 15,000 basic salary per month. Employees earning above this threshold can voluntarily opt in. ESI applies only to employees with gross wages up to Rs 21,000 per month. Professional Tax rates and slabs vary by state - Maharashtra charges Rs 200/month for most salary brackets and Rs 300 in February (total Rs 2,500/year). States like Delhi and Haryana do not levy Professional Tax.
Common Mistakes to Avoid in Payroll Processing
Mistake 1: Structuring basic salary below 50% of CTC. Under the Code on Wages 2019, basic wages must be at least 50% of total remuneration. Companies that still structure basic at 30-40% of CTC face compliance risk during labour inspections. Restructure salary components before the next payroll cycle.
Mistake 2: Missing TDS deposit deadlines. TDS deducted from March salaries must reach the government by 7 April. Late payment attracts 1.5% monthly interest under Section 201(1A) plus a penalty of Rs 200 per day under Section 234E (capped at TDS amount). Many businesses miss this because of month-end cash flow pressure.
Mistake 3: Not registering for ESI when employee count crosses 10. Organisations must complete ESIC registration (know more) within 15 days of crossing the threshold. Failure attracts penalties under Section 85 of the ESI Act - imprisonment up to 2 years or fine up to Rs 5,000 or both.
Mistake 4: Ignoring Maharashtra Professional Tax registration. Pune-based employers must register for PT within 30 days of hiring the first employee. Non-registration attracts a penalty of Rs 5 per day of default. Many startups overlook this until a surprise inspection by the Commercial Tax Department.
Mistake 5: Not issuing Form 16 by the 15 June deadline. Employers who fail to issue Form 16 on time face a penalty of Rs 100 per day per employee under Section 272A(2)(g) of the Income Tax Act. For a company with 50 employees, a 30-day delay means Rs 1.5 lakh in penalties alone.
Penalties for Non-Compliance with Payroll Laws
Non-compliance with payroll statutes in India carries both financial and criminal consequences.
Under Section 14B of the EPF Act 1952, delayed deposit of EPF contributions attracts interest at 12% per annum on the outstanding amount. Additionally, damages ranging from 5% to 25% of the arrears may be imposed depending on the period of default. An employer delaying a Rs 50,000 PF payment by 6 months could face Rs 3,000 in interest plus Rs 12,500 in damages.
Under Section 85 of the ESI Act 1948, failure to pay ESI contributions can result in imprisonment up to 2 years and a fine up to Rs 5,000. For repeated offences, imprisonment may extend to 5 years. ESIC also charges 12% annual interest on delayed contributions.
Under Section 271H of the Income Tax Act 1961, failure to file Form 24Q (quarterly TDS return) by the due date attracts a penalty between Rs 10,000 and Rs 1,00,000. Section 234E imposes a late filing fee of Rs 200 per day until the return is filed, capped at the total TDS amount. Section 201(1A) charges 1.5% monthly interest on TDS not deposited after deduction.
Additionally, under the Payment of Wages Act 1936, employers who fail to pay wages by the 7th/10th of the month can face a fine up to Rs 7,500 for first offence and Rs 22,500 for subsequent offences. Habitual offenders face imprisonment up to 3 months.
How Payroll Connects with Other Provisions
Payroll processing sits at the intersection of multiple compliance obligations. The salary structure defined during payroll directly determines EPF contributions under the EPF Act 1952, ESI contributions under the ESI Act 1948, TDS liability under Section 192 of the Income Tax Act 1961, and Professional Tax under respective state enactments. A change in any one component - say, a salary revision - cascades into recalculation of all four deductions.
When a payroll error is detected - for example, under-deduction of EPF - the employer must file a supplementary challan with EPFO, pay the differential with interest, and update the employee's UAN passbook. If the EPFO detects the shortfall during an inspection, it issues a notice under Section 7A demanding recovery. This notice triggers a separate compliance process that involves the regional PF Commissioner and can lead to attachment of employer's bank accounts. Organisations that handle ESIC calculation and compliance (know more) professionally avoid such cascading issues.
Payroll data also feeds into annual income tax filings (ITR) for employees, gratuity provisioning under the Payment of Gratuity Act 1972, and bonus calculations under the Payment of Bonus Act 1965. The Form 16 generated from payroll serves as the primary document for employee ITR filing. Accurate payroll is therefore the foundation of the entire employer-employee tax and benefits ecosystem.
In-House vs Outsourced Payroll: Key Differences
| Parameter | In-House Payroll | Outsourced Payroll |
|---|---|---|
| Setup Cost | Rs 50,000-Rs 2 lakh (software + training) | Rs 1,500-Rs 5,000 per employee per month |
| Compliance Updates | Employer must track law changes independently | Provider updates rates, forms, and deadlines automatically |
| Accuracy Risk | Higher - depends on internal team expertise | Lower - dedicated payroll specialists handle calculations |
| Data Security | Full control but requires internal IT safeguards | Provider must have ISO/SOC certifications |
| Scalability | Complex - requires software upgrades and additional staff | Seamless - provider scales with headcount |
| Best For | Companies with dedicated HR/finance teams (50+ employees) | Startups, SMEs, and companies without in-house payroll expertise |
Key Takeaways
Payroll processing in India involves calculating gross salary, deducting EPF (12%), ESI (0.75%), TDS (per income tax slab), and Professional Tax, then disbursing net pay by the 7th of the following month under the Payment of Wages Act 1936.
Under the Code on Wages 2019 (effective November 2025), basic salary must be at least 50% of CTC - restructuring salary components is mandatory for every employer.
TDS must be deposited by the 7th, and EPF/ESI by the 15th of the following month. Missing these deadlines attracts interest of 1.5% per month (TDS) and 12% per annum plus damages up to 25% (EPF).
Every employer must file Form 24Q quarterly and issue Form 16 to all employees by 15 June. Failure to comply attracts penalties of Rs 200/day (Form 24Q) and Rs 100/day per employee (Form 16).
Outsourcing payroll to a qualified CA firm reduces compliance risk, eliminates manual errors, and ensures that all statutory contributions are deposited on time with the correct form filings.
Need Help with Payroll Processing?
Processing payroll correctly requires expertise in EPF calculations, ESI thresholds, TDS slabs, Professional Tax rules, and multiple filing deadlines each month. A single missed deadline or miscalculation can cascade into penalties, interest charges, and employee dissatisfaction.
Explore our payroll services (know more) for end-to-end payroll compliance support - from salary structuring to Form 16 issuance.
For queries, reach out at +91 945 945 6700 or WhatsApp us directly.
