Has your company’s payroll process ever been determined as fully compliant, or has it simply been assumed to be so?
The compliance aspect of payroll does not only concern how much an employee makes and where to distribute pay stubs anymore; all of these are updated over time with new employee laws, taxation rules, and the need for digital payments, so organizations should treat payroll compliance not just as one task completed every month, but as ongoing support.
Companies based in India have to keep payroll compliance in mind when accounting for their financial records, ensuring that they are creating trust with employees by maintaining compliance with governmental law, and maintaining a positive relationship with their company’s reputation. A small error can lead to a fine from a government entity, an IRS audit, or damage to the reputation of an organization.
This complete payroll compliance checklist is intended to equip all companies operating in India, as well as their HR personnel and payroll employees, with the clarity, organization, and confidence they will require to operate in 2026.
What is Payroll Compliance and Why Does It Matter for Payroll Accuracy?
Payroll Compliance is the adherence to the statutory laws, regulations, and labor laws associated with the payment of wages to employees. It provides the employee with accurate payment of wages and ensures that the employee’s statutory repayments are completed on time.
The Importance of Payroll Compliance
- Payroll compliance provides accurate employee payroll calculations in accordance with laws and regulations.
- Prevents penalties, interest, and lawsuits from being filed against the employer by employees.
- Creates employee trust by providing transparent payroll processes.
- Protects the integrity of the employer’s financial records and provides a clear audit record of payroll transactions.
Effects of Compliance on Payroll Accuracy
- Payroll compliance minimizes the likelihood of manual errors with payroll deductions and payroll tax amounts.
- Ensures that the payroll department, finance department, and employer’s statutory reporting requirements are aligned.
- Ensures that the same salary structure, benefits, and reimbursements for the same occupation are consistently applied.
Who Should Use the Payroll Compliance Checklist?
1. Head and Managers of Human Resources
Human Resources (HR) leaders keep track of compliance with Labour Laws, company policy, and any changes made to the statutory framework in respect of payroll processes for employees within the organization, providing assurance that they are consistent with all government policy.
2. Administrators of Payroll
Payroll Administrators refer to the checklist to confirm salary payments and deduction processes, as well as statutory filing and depositing processes, so that they can ensure the timeliness, accuracy, and labour readiness at the end of each payroll process cycle.
3. Financial and Accounting Teams
Finance teams have used the payroll compliance checklists to resolve payroll expense reporting, statutory liabilities, and tax payment issues that are reflected on the company’s financial and bank statements.
4. Founders and Owners
Founders refer to payroll compliance checklists for the purpose of minimising the risk of an employee-related legal matter, ensuring governance, and providing assurance of compliance for payroll operations without having to be extremely directive to payroll administrators.
5. Compliance & Legal Teams
Compliance teams will refer to the payroll compliance checklists to ensure that they are adhering to all labour-related statutes, prepare for government audits, and mitigate any potential risks associated with non-compliance or regulatory change.
6. Human Resource Staff of Startups
Startups typically utilize payroll compliance frameworks to help establish structured payroll processes for their start-up workforce in order to help avoid potential penalties as the size of their workforce continues to grow.
7. Consultants and Auditors
Consultants and auditors of payroll utilise payroll compliance checklists as a reference for assisting them with assessing the integrity of the organisation’s payroll processes and statutory compliance status.
What Are the Payroll Rules & Regulations Every Organization Must Know in 2026?
1. Income Tax
Rules:
- Employers must deduct Tax Deducted at Source (TDS) on employee salaries as per the applicable income tax laws.
- TDS must be calculated considering exceptions, deductions, and the chosen tax rule(old or new).
- Salary processing must align with income tax provisions to avoid short deductions.
Regulations:
- Monthly TDS must be deposited within the prescribed due dates.
- Quarterly TDS returns must be filed using Form 24Q.
- Form 16 must be issued to employees within the statutory timeline.
- Employers must comply with updates issued by the Income Tax Department, including digital verification and reporting requirements.
2. Provident Fund (PF) Laws
Rules:
- Employers must register eligible employees under the Employees’ Provident Fund (EPF).
- PF contributions must be calculated based on applicable wage components as defined under law.
- Both employer and employee contributions must be deducted accurately during every payroll cycle.
Regulations:
- PF contributions must be deposited on or before the statutory due date.
- Monthly Electronic Challan-cum-Return (ECR) filings are mandatory.
- Employers must ensure correct UAN mapping and KYC compliance.
- Digital record maintenance and timely correction of errors are required.
3. Employee State Insurance (ESI)
Rules:
- Employees earning within the prescribed wage limit must be covered under ESI.
- Employers must correctly identify eligible employees and deduct contributions accordingly.
- Wage definitions must be applied accurately for ESI calculations.
Regulations:
- Employer and employee contributions must be deposited within the defined timelines.
- Monthly ESI returns must be filed through the ESIC portal.
- Employee details such as joining, exit, and salary changes must be updated accordingly.
- Compliance with inspections and digital audits is mandatory.
4. Professional Tax (PT)
Rules:
- Employers must deduct professional tax based on state-specific laws.
- PT deduction must align with the employee’s work location or registered office rules.
- Employers must register under applicable state PT laws.
Regulations:
- PT deductions must be deposited within state-prescribed deadlines.
- Periodic PT returns must be filed as required by the respective state authority.
- Employers must track changes in state PT laws and exception limits.
- Proper maintenance of PT records is required for audits and assessments.
5. Labour Codes Implementation
Rules:
- Employers must align payroll structures with the revised definition of wages.
- Salary components must be restructured to ensure statutory compliance.
- Uniform wage definitions must be applied across PF, ESI, gratuity, and other benefits.
Regulations:
- Increased digital reporting and centralized compliance filings are expected.
- Employers must maintain transparent payroll records and wage registers.
- Non-compliance may attract stricter penalties and enforcement actions.
- Payroll systems must be updated to support harmonized labour code requirements.
What Does the Payroll Compliance Checklist Include?
| Compliance Area | Key Checks | Frequency | Responsible Team |
| Salary Structure | Basic, allowances, and deductions are aligned with the law | Annual | HR & Payroll |
| Income Tax (TDS) | Correct tax calculation and deduction | Monthly | Payroll |
| Provident Fund | Contribution, challan, ECR filing | Monthly | Payroll |
| ESI Compliance | Eligibility, deduction, deposit | Monthly | Payroll |
| Professional Tax | State-wise deduction and payment | Monthly | Payroll |
| Payslips | Accurate and timely issuance | Monthly | HR |
| Statutory Filings | Form 24Q, Form 16 | Quarterly/Annual | Payroll |
| Payroll Records | Data retention and audit trails | Ongoing | HR & Finance |
What Should Be Done Before Running a Payroll Compliance Checklist?
1. Validate Employee Master Data
The Employee Master Data must be accurate to ensure that the employer is complying with payroll tax obligations, statutory employee filings, and salary payments to employees, and the need to redo any payroll-related tasks performed during an audit or grievance process.
2. Review Salary Structures
Formalized salary structures aligned to define statutory wage requirements allow for accurate labour cost management, optimize tax efficiency, and provide a means of maintaining equity among current wage levels of other employees.
3. Update Statutory Rates
The employer should update statutory rates on a regular schedule to ensure that the employee receives the proper amount of PF/EI and the appropriate amounts of tax deductions; the employer will also avoid under-collection of taxes.
4. Verify Attendance and Leave Data
Accurate attendance and leave records must be verified by Human Resources to accurately calculate the appropriate amount of overtime to include in the employee’s pay and any leave deductions.
5. Check Policy Changes
HR should always perform payroll policy change reviews to confirm that proper deductions have been made consistent with company-payroll policies, while also complying with all applicable labour and tax laws.
6. Sync HR and Payroll Systems
By integrating HR and payroll systems within an organization, both the HR and payroll departments can work together to facilitate the transfer of information, eliminating the potential for many manual-entry errors and increasing the accuracy of reporting.
What Are the Mandatory Post-Payroll Compliance Checks Employers Must Follow?
1. Statutory Deductions Reconciliation
The purpose of reconciling PF, ESI, TDS, and professional tax deductions is to ensure that all deductions correspond with statutory rules and employee records. In doing so, any disturbances can be identified prior to the compliance deadline.
2. Timely Statutory Deposits
Statutory Contributions should be deposited with the statutory authorities on or before the due date in order to avoid penalties, interest and regulatory correspondence from the authorities.
3. Payslip Verification
All Payslips must be verified by Payroll to ensure that the correct amount of earnings, deductions, reimbursements, and net pay has been recorded and that employees understand the complete details of how their monthly salary distribution was determined.
4. Payroll, Bank Reconciliations
A Payroll Bank reconciliation allows you to confirm that all salary payments have been credited to the correct employee bank accounts, identify and report failed transactions immediately on a daily basis.
5. Filing Confirmation
Acknowledgement receipts for statutory returns and challans need to be received, filed and verified against the reports prior to submitting each cycle and statutory filing.
6. Audit Trail Maintenance
The maintenance of payroll records, both physical and digital, assists with regulatory and legal compliance, requests from employees for payroll records and inspections and audits of your payroll records.
For Example:
At ABC Tech Solutions, during a routine reconciliation process, the Payroll Manager, Rohit Sharma, identified an inconsistency between the PF deductions for an employee, Anita Verma and the amount deposited to the government. By proactively reconciling the records before an inspection was scheduled, the Payroll Manager successfully resolved the error, eliminating the risk of penalties.
How to Prepare for the Payroll Compliance Checklist for 2026?
Step 1: Keeping Up-To-Date With Legal Changes
Non-profit organisations should regularly review current information regarding tax, labour laws and statutory changes in order to proactively adjust payroll procedures to maintain compliance with legal requirements.
Step 2: Payroll Automation
By using payroll software (HRMS) to automate payroll processes, organizations can reduce the number of errors associated with manual processes, increase processing speed, ensure statutory accuracy, and manage compliance.
Step 3: Payroll Policy Standardization
The development of written payroll policies establishes an organization’s consistency of operations, including the manner in which salaries are processed; Payroll deductions, and Payroll-related benefits.
Step 4: Training Payroll Staff
By conducting regular training to prepare HR and payroll staff with the knowledge of regulations, system training and compliance awareness required to address the complexities of Payroll Issues.
Step 5: Internal Payroll Audits
Performing Internal Payroll Audits on a regular basis assists organizations in identifying potential areas of non-compliance, mistakes in payroll calculation, inefficiencies in payroll processing, prior to completion of either External or Internal audits or inspections.
Step 6: Centralized Payroll Recordkeeping
The importance of storing all payroll Records in one location ensures that all payroll records are easy to access, readily available in preparation for an audit or other governmental inspection, and are stored securely and organised to comply with the applicable record retention requirements.
Step 7: Use HRMS Compliance Dashboards
The use of HRMS compliance dashboards gives organizations real-time visibility of payroll; see when payrolls are due; and view whether payrolls have been delayed, missed, or at risk of being delayed or missed, and provides the organization with the ability to make timely and well-informed decisions.
What Are the Key Payroll Tax Compliance Requirements Employers Must Follow in India?
1. Validation of PAN and Aadhar
Validate all employee PAN details to reduce liability for higher TDS deductions.
2. Timely TDS Deductions
TDS must be deducted for all monthly salary payments
3. Quarterly Filing of TDS Returns
All quarterly 24Q TDS returns must be filed accurately and on time.
4. Issue of Form 16
On an annual basis, Form 16 must be issued to all employees.
5. Deposit of Tax by Due Date
TDS Payments must be made on or before species of due dates to avoid interest penalties.
What Are the Common Payroll Compliance Challenges and How to Avoid Them?
1. Incorrect Salary Structure
Challenge: Salary structures are not aligned with statutory wage definitions, leading to compliance gaps, incorrect deductions, and audit risks.
Solution: Align salary structures with statutory requirements and take annual reviews to ensure continued payroll compliance.
2. Delayed Statutory Deposits
Challenge: Late payment of PF, ESI, or tax dues results in penalties, interest, and regulatory notices.
Solution: Use payroll software with automated alerts and scheduling to ensure timely statutory deposits.
3. Manual Payroll Errors
Challenge: Manual calculations increase the risk of errors in salaries, deductions, and compliance filings.
Solution: Implement HRMS-driven payroll automation to improve accuracy and reduce human disturbances.
4. Outdated Tax Calculations
Challenge: Using old tax slabs or rates causes incorrect TDS deductions and employee dissatisfaction.
Solution: Regularly update tax rules and payroll configurations within the payroll system.
5. Poor Documentation
Challenge: Incomplete or scattered payroll records make audits and compliance checks difficult.
Solution: Maintain centralized, digital payroll documentation for easy access, security, and audit readiness.
Conclusion
In India, Payroll Compliance is gradually moving into a more structured framework, as well as being driven by technological advancements and audits. Use of a Payroll Compliance Framework allows employers to confirm there is accuracy surrounding Payroll calculations, as well as minimising risk while building trust with Employees.
Savvy HRMS provides a simplified Payroll Compliance solution, with automated calculation of Payroll, ongoing updates of Statutory Legislation, real-time dashboards and Audit-ready reports; thus allowing organisations to remain compliant with minimal complexity.
Book your Free Demo with Savvy HRMS and let us show you how Payroll Compliance can be handled without the Stress!
