Most businesses in India have to comply with industry standards, laws, and regulations set by the government. Payroll statutory compliances are definitely one of the most important ones. For those who don’t know, they represent legal frameworks within which a company must comport itself not just to protect rights but also for better treatment of its employees.
A lot of entrepreneurs have no idea about various prevalent state and national labor, payroll, and taxation laws. Non-compliance with these protocols can land the business in serious legal trouble including penalties and fines. But don’t worry, Finsmart Accounting is here to help you out!
In this blog, Finsmart Accounting – trusted for outsourced bookkeeping services in India – will share 7 statutory compliances that every business should consider in order to create trust with the authorities. We will also discuss how our payroll and accounting experts can help you meet them.
Are you ready to learn about statutory compliances in payroll? Let’s go!
#1 Payment of Wages Act, 1936
The Payment of Wages Act, as the name itself suggests, governs the direct and indirect payment to employees engaged by a business. It asks employers to make payments of wages on a timely basis and without any slashes except those authorized under the act itself. Passed in 1936, employees should be paid off before the 7th of every month if their strength is less than 1,000 and on the 10th of every month if more than 1,000.
Businesses in India should definitely recognize the importance of this statutory payroll compliance as it requires making payments within one month. The payment has to be made either in cash or by cheque. Digital means can be used only after employees’ consent. The Payment of Wages Act, 1936 is not applicable for employees earning more than ₹10,000 a month.
#2 Minimum Wages Act, 1948
The next statutory compliance in payroll is recognized by provincial and central governments of India and asks businesses to set minimum wage rates in their companies. The Minimum Wages Act, 1948 is defined for all types of occupations, regions, or sectors at sectoral, state, national, and professional levels. Put simply, this act confines the cost of living.
While determining minimum wage rates, consider whether you want to set them for different or same schedule employment. Also, decide whether you want to pay your employees their salary on a monthly or daily basis. By complying with the Minimum Wages Act 1936, business owners will not only be able to dodge fines and penalties but also save operations from damaging claims related to the exploitation of labor.
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#3 Payment of Bonus Act, 1965
We bet you have already guessed what this act is all about. The Payment of Bonus Act, 1965 asks Indian businesses to pay a certain amount as a bonus to their employees based on their salaries, productivity, and profits made within the accounting year.
This statutory payroll compliance was derived from the First World War in 1917 when multiple textile mills provided 10% of wages as a war bonus to their workers. The Payment of Bonus Act is applicable to factories and organizations that employ more than 20 people.
Employees who have worked for more than 30 days and drew ₹21,000 or less every month are in line for receiving a bonus from their respective organization. According to the act, the minimum and maximum bonuses will be 8.33% and 20% of the salary during the accounting year.
#4 Employee State Insurance Act, 1948
This is one of the most important statutory compliances in payroll that every business in India should consider in 2022. Employee State Insurance Act focuses on helping employees get the better of unanticipated circumstances including medical emergencies, maternity leave, or disability incidents that have relevance to the workplace.
Complying with this act is mandatory for businesses that have more than 10 employees earning less than ₹21,000 per paycheck. For each paycheck, the employer is supposed to contribute 3.25% whereas the employee has to contribute 0.75%. According to Employee State Insurance Act (ESI), each contribution cycle lasts 6 months – April to September and October to March.
#5 Employees Provident Fund Act, 1952
Another important statutory compliance in payroll for Indian businesses. Employees Provident Fund Act asks entrepreneurs to provide social security and retirement benefits to workers in their companies. Both employer and employee are supposed to pitch in 12% of the basic and dearness allowance (DA) to his or her retirement treasure chest.
Now some of our readers might think, “Wait, did I read that right? Employees have to contribute as well?” Yes, under section 80C of the Indian Income Tax Act, employees’ handout towards their provident fund is eligible for tax exemption. They are deemed to contribute 3.67% of their provident fund and 8.33% of their pension fund to the retirement chest.
Businesses with more than 20 employees have to adhere to this statutory payroll compliance. Not acting within this regulation may expose your business to severe fines and even imprisonment in extreme scenarios.
#6 Payment of Gratuity Act, 1972
The leading payroll companies in India state that gratuity is crucial to workers’ welfare. That’s the reason why we decided to include this statutory compliance in our list! According to Gratuity Act, a business has to pay a specific amount of money to an employee for the services rendered during employment.
Employees can receive gratuity only if they have been working for 5 years or more with your organization. Wondering how much gratuity you are supposed to pay to your workers? Well, there is no set percentage stipulated by the government. However, you can still act within the Payment of Gratuity law using a formula-based approach.
In order to calculate gratuity, businesses should consider these two factors:
- Employee’s last drawn salary amount
- Total years of service
Once considered, calculate the amount by using the following formula:
Gratuity = 15 x last drawn salary x tenure of working / 26
For example, if your employee’s last drawn salary is ₹30,000 and he has been working at your organization for last the 6 years, his gratuity will be around ₹1,03,846 ( 15 x 30,000 x 6 / 26).
#7 GST compliance
We bet most entrepreneurs running businesses in India are aware of this statutory compliance. For those who aren’t, let’s understand GST first. It is a comprehensive, multi-stage, destination-based tax that is applied to the sales of goods and services. It has curbed the cascading effect of many other indirect taxes in India such as excise duty, VAT, and services tax.
GST compliance, on the other hand, is the performance rating given by the Indian government to show entrepreneurs how compliant are their businesses with existing tax norms. The following steps will help make your business GST complaint:
- File GSTR-1 and GSTR-2: Fill all outward and inward transactions in the GSTR-1 and GSTR-2 forms and file them by the 10th and 15th of every month.
- Pay tax dues: Filing GST returns without contending with dues can make your next return look fallacious. This will not only affect your compliance score but also make it hard for clients to request input tax credits. Therefore, pay all tax dues on time.
- Submit annual return: Prepare and submit a consolidated annual return with the registrar before the 29th of November every year.
#7 Tax Deducted at Source (TDS)
Our list of Indian statutory compliances in payroll will be considered incomplete without discussing Tax Deducted at Source (TDS). Introduced and managed by the Central Board of Direct Taxes (CBDT), this act asks a business that is paying a salary income to its employees to deduct a TDS it if exceeds the exemption limit. The deducted amount should be submitted to the income tax department.
Different employees are taxed at different rates depending on their salary. Some of the salary components that influence Tax Deducted at Source are investments, travel allowance, children’s education allowance, HRA, special allowance, and medical allowance.
How Does Finsmart Accounting Help With Statutory Compliances?
Abiding by so many statutory laws and regulations can get a bit overwhelming and a huge drain for entrepreneurs, especially young ones. Leveraging Finsmart Accounting’s payroll management services will allow you to manage TDS, ESIC, EPF, and all other crucial deductions effectively and efficiently.
With deep domain expertise and experience with ever-changing laws and regulations, our team of payroll experts will not only make certain that your compliance needs are taken care of in time but also safeguard your business from legal complications in the future. In short, we will simplify payroll and help your company stay compliant.
Above are some statutory compliances in payroll that business owners in India should be aware of. Statutory compliance can make or break your company’s reputation. We highly recommend adhering to these rules and regulations as they will help boost employees’ morale and improve business opportunities while keeping a flawless compliance record.
Got any queries to ask? Send them to firstname.lastname@example.org and have them answered by our experts.
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Shalaka Joshi is the founder of Finsmart Accounting and operates in the capacity of Director. A Chartered Accountant passionate about outsourcing and problem-solving, Shalaka has more than 20 years of experience in the field of accounting, payroll and MIS reports.