Payroll Statutory Compliance – The Factors that Drive It

December 6, 2019
Payroll Statutory Compliance – The Factors that Drive It


Payroll is a process central to any organization. It directly affects how an organization does business, how it treats its employees, its growth, and several other ways. Payroll may refer to not just the list of employees and their records but the task of managing them as well.

Payroll processing is indeed a grueling task, one that has no margin for error. The consequences would be detrimental to the organization’s growth. In this regard, most HR managers choose to outsource to payroll and compliance services, which handle the process from end to end. Payroll and compliance services do not simply manage employee records and ensure that salaries are paid on time. They also handle compliance-related issues.

While compliance may refer to the tasks that go into the production of the payroll, it also ensures the organization stands by the rules and standards as set by the organization and government. 

The Components of Salary

As of FY 2019-2020, the following are fixed salary components. Salaries are broken into 3 slabs, below and above rupees 5 lakh per annum and 10 lakh and above per annum. The CTC or cost to the company is the term used to denote the total salary package of an employee. Crucial components of an employee’s salary or CTC include:

  • Basic: Basic constitutes a major chunk of the CTC, almost 40%. As is the case with companies in India, the EPF (Employees Provident Fund) and ESIC (Employees State Insurance Corporation), as well as gratuity, greatly influence the amount taxed. 
  • DA: Or dearness allowance is about 5% of the CTC, created to ease the pinch of inflation on the organization’s employees. This also influences the amount that the EPF and ESIC tax.
  • HRA: House rent allowance is given to employees who do not own and reside in the property of their own. HRA is typically a percentage of the basic salary. However, the metro and non-metro have different percentages of HRA. In most metro cities, HRA is 50% of the basic salary but 40% in non-metro cities. 
  • Reimbursement: This refers to the claiming of expenses allowed by an organization when an employee has paid money out of their own pockets for the job. An employee can claim the amount if they have records. 
  • Conveyance: In organizations that may be slightly inaccessible to some employees or those that do not offer transportation for employees, conveyance allowance is given. However, as of 2018, this has been replaced by the standard deduction. Employees needed to submit proof but do not need to now initially.
  • Others: Medical allowance and LTA also fall under salary components and influence how much is paid to an employee.

The above components greatly influence how organizations set regulations and are, at times, aided by payroll and compliance services.

Factors Influencing Compliance in Payroll

Monitoring compliance in payroll is a difficult process for any organization. Below are some factors that the payroll compliance services in India must take note of: 

  • Cost efficiency is one of the biggest influencers of payroll compliance. The decisions taken by employers and organizations will have to ensure that they are compliant according to standards. One method an employer use to cut down costs is by outsourcing to payroll statutory compliance services.
  • Tax efficiency is another way an organization stays compliant. By carefully structuring salaries and investing in tax saving options, investments are saved. This can be found in chapter VI-A of the Income-tax act of 1961, reducing tax liability for an employee. 
  • The employee provident fund and minimum wages act to relieve the aspect of the tax burden on most employers. Employers get a tax benefit for contributing to the provident fund and stay compliant. The percentage of contribution is 12% of basic salary

Prevailing market conditions, as well as labour conditions, are driving forces for organizations to make decisions regarding payroll and payroll compliance. For instance, during times of economic slowdown, there may be very little hiring which affects payroll decisions.


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