Specialised practice
Payroll & Human Capital Compliance
Payroll is the one process a business cannot get wrong twice. It runs to a fixed date, it touches every employee personally, and it carries statutory obligations under half a dozen separate laws — each with its own return, its own due date and its own penalty.
Getting salaries out is the visible part. Behind it sit tax deducted at source and its quarterly returns, provident fund and pension contributions, employees’ state insurance, professional tax in each state where you have employees, and the accruing liabilities for gratuity, leave encashment and bonus. Each has a due date, and most attach interest or damages to a default rather than a fixed penalty — so the cost of an error grows for as long as it goes unnoticed.
The errors that cause real trouble are rarely dramatic. A component of salary treated as outside the wage definition for contribution purposes. A perquisite valued incorrectly, discovered years later in an assessment. Contributions deposited late by a few days each month. An employee moved between states without the professional tax registration following. Each repeats every cycle until someone looks.
The proprietor ran the payroll and long-term benefits function of a large public sector manufacturer for several years, for a workforce of about 18,500 — including the statutory compliances attached to it, the accounting for benefit plans, coordination of actuarial valuation, and the implementation of payroll on an ERP system. The obligations are the same at any scale; only the volume changes.
Payroll processing
- Monthly payroll processing, and issue of payslips
- Salary structuring, and the tax consequences of how components are defined
- Valuation of perquisites and taxation of allowances
- Collection and verification of employee declarations and investment proofs
- Election between tax regimes, and the computation that follows from it
- Full and final settlement on separation
- Payroll accounting entries, and reconciliation to the books
- Arrears, revisions and performance-linked payouts
Statutory compliance
- Tax deducted at source on salaries — computation, deposit, and quarterly returns in Form 138 (Form 24Q)
- Annual salary TDS certificates in Form 130 (Form 16)
- Employee investment and HRA declarations in Form 124 (Form 12BB), which now require the landlord relationship to be stated for HRA
- Statement of perquisites provided by the employer in Form 123 (Form 12BA), issued alongside Form 130
- Relief for salary arrears in Form 39 (Form 10E)
- Provident fund and pension — monthly ECR filing, UAN administration and member records
- Employees’ State Insurance — registration, contributions and monthly filing
- Profession tax registration, deduction and returns in each state of operation
- Payment of Bonus Act — eligibility, computation and the register
- Payment of Gratuity Act — eligibility, computation and payment on separation
- Statutory registers and records required to be maintained
- Responses to inspections, notices and demands from the authorities
Employee benefits and provisioning
- Gratuity, leave encashment and other long-term employee benefits
- Coordination of actuarial valuation, and review of the actuary’s assumptions
- Accounting for defined benefit and defined contribution plans
- Provisioning in the books, and the disclosures that go with it
- Superannuation and other funded arrangements
- Wage revision workings, and their effect on accrued liabilities
When this applies
Situations this covers
Headcount has crossed a registration threshold
Provident fund and employees’ state insurance become compulsory once the count crosses the applicable threshold. Profession tax registration as an employer is triggered earlier still — from the first employee liable to it, rather than at any headcount. Registering on time is straightforward; registering after an inspection is not.
You are hiring in a second state
Profession tax is a state levy with its own registration, rates and returns. Employees in a new state usually mean a new registration before the first salary is paid.
A contribution has been short-paid or paid late
Provident fund defaults attract interest and damages that run until the default is made good, and they are computed on the period of delay. Voluntary correction is materially better than waiting.
An assessment has questioned perquisites or allowances
Salary components valued incorrectly usually affect every employee and every year, which is why these matters escalate quickly once raised.
The auditors want a gratuity valuation
Long-term benefit liabilities have to be provided on an actuarial basis, and the assumptions the actuary uses are worth reviewing rather than accepting as given.
Payroll depends entirely on one person
Where the process lives in one spreadsheet and one person’s knowledge, a single absence at month end becomes a crisis. Documenting and structuring it removes that exposure.
Method
How the work runs
- 01
Establish what applies to you
Headcount, states of operation, the nature of engagement and the registrations already held determine which obligations attach. This is settled before anything else.
- 02
Review the salary structure
How components are defined drives both the tax outcome and the contribution base. Getting the structure right is cheaper than correcting the consequences monthly.
- 03
Set the cycle and the calendar
Processing dates, deposit dates and return due dates are fixed as a calendar, so obligations are met in sequence rather than remembered individually.
- 04
Process, deposit and file
Payroll is run, deductions computed, contributions and tax deposited within their due dates, and returns filed — with the payroll reconciled to the books each month.
- 05
Provide for what is accruing
Gratuity, leave encashment and bonus accrue whether or not they are recorded. Valuation and provisioning are scheduled rather than left to year end.
- 06
Answer what comes back
Inspections, notices and demands from the tax, provident fund and insurance authorities are dealt with as they arise, with the records already in a state to support the position.
Questions
Commonly asked
General information on procedure. It is not advice on any particular matter.
At what point do provident fund and ESI registration become compulsory?
Both are triggered by employee count, but the thresholds differ and they are not counted the same way — contract and casual workers may be included, and employees’ state insurance also depends on the area being a notified one and on the wage ceiling. The practical answer is that the position should be checked as headcount approaches the thresholds rather than after, because registration is retrospective to the date liability arose.
What are the new Labour Codes, and do they affect us?
Four Codes — on wages, industrial relations, social security, and occupational safety and health — consolidate a large number of earlier central labour laws. They were notified in late 2025 and the final central rules followed in May 2026. Each state, however, frames its own rules, and they are arriving at different speeds. Telangana is still in the drafting stage: the State Government constituted committees on 1 June 2026 to finalise the state rules, and the Commissioner of Labour held consultation meetings with employers’ associations and trade unions on the draft rules between 11 and 16 June 2026. Final state rules have not been notified as at the date shown at the foot of this page. The change that matters most for payroll is the statutory definition of wages, which affects the base on which provident fund and gratuity are computed — which makes the period before the rules are settled the sensible time to review a salary structure, rather than after.
What happens if contributions are deposited late?
Late deposit of provident fund attracts both interest and damages, computed by reference to the period of delay, and they continue to accrue until the default is made good. Late deposit of tax deducted at source carries interest and can attract a fee for late filing of the return, and in some circumstances the deduction of the expenditure itself is affected. Because these are time-based rather than fixed, correcting a default voluntarily costs materially less than having it found.
Can payroll be outsourced entirely?
The processing can be. The obligation cannot — liability for deduction, deposit and filing remains with the employer regardless of who performs the work. What outsourcing should deliver is that the calendar is kept, the returns are filed, and someone competent answers when a notice arrives.
Do we need an actuarial valuation for gratuity?
Where gratuity is a defined benefit obligation, the liability has to be measured actuarially rather than estimated, and provided in the accounts. The applicable standard depends on the framework the entity reports under. Small entities sometimes assume a rough provision will do; it will not survive audit, and it understates a liability that grows with every year of service and, because it is computed on last drawn salary, with every pay revision as well.
What does it cost?
Professional fees depend on headcount, the number of states involved, the state of the existing records, and whether the engagement is monthly processing, compliance only, or a one-time review. Scope and the basis of fees are agreed in writing before work begins. Fee rates are not published on this website.
Is payroll running on someone’s spreadsheet?
Payroll errors compound quietly — a wrong contribution or a missed deduction repeats every month until someone checks. A review establishes where you stand before an inspection does.
Related services
- MIS / EIS & Budgetary ControlDesign, implementation and maintenance of management and executive information systems, and of budgetary control frameworks.
- Accounting & BookkeepingBooks of account maintained to statutory standards, with periodic financial statements.
- Income TaxTax planning, advisory and return filing for individuals, firms and companies.
- AuditStatutory audit, tax audit and internal audit conducted under the applicable Standards on Auditing.