Payroll Is the One Compliance Area You Can't Get Wrong
Miss a GST filing and you pay a fine. Miss payroll compliance — PF deposits, TDS, ESI — and you expose founders to personal liability, employee trust breakdown, and potential criminal proceedings.
For growing startups that hire their first employees, payroll compliance is often the compliance area that gets set up last and reviewed least carefully. This guide covers what you need to know before processing your first payroll.
Table of Contents
- 1. Provident Fund (PF) Compliance
- 2. ESI (Employee State Insurance)
- 3. Professional Tax
- 4. TDS on Salary (Section 192)
- 5. Payroll Structure for Tax Efficiency
- 6. Payroll Software Options
- 7. Common Mistakes and Penalties
- FAQ
- Conclusion
1. Provident Fund (PF) Compliance
When it applies: Any establishment with 20 or more employees must register under EPFO. Voluntary registration is available for smaller employers.
Contribution rates:
- Employer: 12% of Basic + DA (Employee Provident Fund)
- Employee: 12% of Basic + DA (deducted from salary)
- Plus employer contributions to EPS (8.33% of Basic, up to ₹1,250/month)
Due date: PF contributions must be deposited by the 15th of the following month. Delay incurs interest at 12% p.a. plus damages.
Key compliance tasks:
- Monthly ECR (Electronic Challan cum Return) filing
- Annual KYC update for all employees
- Form 5A registration update on change of management
2. ESI (Employee State Insurance)
When it applies: Establishments with 10+ employees (in most states) where any employee earns up to ₹21,000/month gross.
Contribution rates:
- Employer: 3.25% of gross wages
- Employee: 0.75% of gross wages (deducted from salary)
Employees covered under ESI get access to medical benefits, maternity benefits, disablement benefits, and dependent benefits.
Due date: ESI contributions must be deposited by the 15th of the following month.
3. Professional Tax
Professional tax is a state-level tax. Not all states have it, and rates and applicability vary. States with professional tax include Maharashtra, Karnataka, Tamil Nadu, West Bengal, and Andhra Pradesh.
In Karnataka (for example):
- Monthly salary ₹15,000–24,999: PT ₹150/month
- Monthly salary ₹25,000+: PT ₹200/month
Deduct from employee salary and remit to the state government on the specified due date.
4. TDS on Salary (Section 192)
All employers must deduct TDS from employee salaries based on the applicable income tax slab rates after considering:
- Declared investments and deductions (Form 12BB from each employee)
- Exemptions (HRA, LTA, standard deduction of ₹50,000)
- The regime elected by the employee (old vs. new tax regime)
Monthly TDS: Divide estimated annual tax by 12 and deduct monthly
Due dates:
- TDS deducted: deposit by 7th of the following month (except March: 30th April)
- Form 24Q filing: Quarterly (31 Jul, 31 Oct, 31 Jan, 31 May)
- Form 16 to employees: By 15th June for the preceding financial year
Common mistake: Failing to collect Form 12BB declarations from employees in April and recalculating TDS accordingly. This results in either over-deduction (employee frustration) or under-deduction (year-end tax shock for employee and potential disallowance for employer).
5. Payroll Structure for Tax Efficiency
A well-structured CTC can significantly reduce employee tax without changing the employer's cost. Key components:
- Basic salary: Keep at 40–50% of CTC (impacts PF contribution)
- HRA: Standard formula is 40% of Basic (50% in metro cities) — exempt up to the minimum of: HRA received, actual rent paid minus 10% of Basic, or 40/50% of Basic
- LTA (Leave Travel Allowance): Exempt for two journeys in a 4-year block
- Mobile/Internet reimbursement: Exempt with actual bills
- Professional development: Exempt against actual expenses with documentation
- NPS employer contribution: Up to 10% of Basic — tax-free to employee, deductible for employer
A CTC structured thoughtfully can result in 15–25% lower income tax for the employee at no additional cost to the employer — a genuine benefit to offer candidates.
6. Payroll Software Options
- Zoho Payroll: Excellent for India. Integrated with Zoho Books. Handles PF, ESI, PT, TDS automatically. ₹40–60/employee/month.
- Razorpay Payroll: Strong UX, built-in compliance automation, good for tech-first startups
- greytHR: More comprehensive HRMS features; better for 50+ employees
- Keka: Mid-market option with strong workflows
For startups under 20 employees, Zoho Payroll integrated with Zoho Books is our most common recommendation.
7. Common Mistakes and Penalties
| Mistake | Consequence |
|---|---|
| PF deposit delay | 12% p.a. interest + damages up to 100% of dues |
| Not deducting TDS correctly | Disallowance of salary expense + interest |
| ESI non-registration when applicable | ₹10,000 fine + criminal prosecution possible |
| Not filing Form 24Q on time | ₹200/day late fee |
| Incorrect Form 16 | Employee's ITR issues, potential penalty |
Conclusion
Payroll compliance is non-negotiable — the personal liability exposure to founders for PF and TDS defaults is real and significant. If your payroll process is currently ad-hoc, getting it structured correctly is one of the highest-priority finance fixes available.
Our team at FinanceBridge helps startups set up compliant payroll processes, choose and configure the right software, and handle monthly compliance filings so founders never have to think about it.