What is statutory compliance?
The word statutory means “rules and regulations,” and compliance means “adherence.” When put together, statutory compliance means adhering to the rules and regulations.
In business, statutory compliance is the legal framework that you must adhere to while dealing with your employees.
“But how do I know which payroll compliance I should adhere to in my business?”
Well, if this question is consuming your time, let’s introduce you to the different payroll compliances that should be part of your payroll system.
What are the different payroll compliances?
Provident Fund (PF)
With a provident fund in place, you can help your employees activate retirement funds for themselves. With this, your employee is expected to contribute towards their retirement through their PF.
If a business has over 20 employees, they are liable to be covered under Provident Fund.
The PF contribution is calculated based on the basic wages and dearness allowance. This excludes food allowance, house rent allowance, overtime allowance, bonus, and commission allowance.
The standard deduction rate for both employers and employees is 12%. However, the government allows employers to limit their contributions to INR 15,000 for employees with a higher paycheck.
Employee State Insurance (ESI)
If your business has over 10 employees who earn less than INR 21,000 per paycheck, you are liable for ESI compliance. To help your employees overcome unforeseen situations like medical problems, maternity leave, and disability situations at the workplace, comply with ESI compliance.
For each paycheck, you contribute 3.25%, and your employees contribute 0.75%. Because ESI applies to those employees who earn less than INR 21,000– always keep a check on the appraisal cycle to know that the employees have not exceeded the earning of INR 21,000.
If the employee earns more than INR 21,000, the contributions towards ESI are made only until the end of each contribution cycle. The contribution cycle for ESI lasts for 6 months from April-September or October-March.
Professional Tax (PT)
Professional Tax applies to every professional. It is collected right from the time your company has its first employee.
The State Government of India levies this tax. Whether you are a small business or a business with multiple branches spread all across the country, stay compliant with the local state regulations. Know that professional tax can be deducted from taxable income. For this, the employer needs to have the professional tax registration certificate to be able to pay the professional tax enrollment certificate on their business and professional tax certificate to be able to deduct tax from their employee’s pay.
Tax Deducted at Source (TDS)
A TDS is a certain percentage that is deducted from the monthly income of each employee. Every employee who exceeds the basic salary of INR 2.5 lakhs is liable to pay the TDS.
A TDS is an indirect tax that is paid by every employee who falls under the category of Income Tax Slab. For this, the employer is liable to deduct a certain percentage from the total salary of employees before issuing the full salary.
According to the Income Tax Act, 1961, every individual or organization is liable to pay TDS if their income exceeds the threshold. To collect the TDS from your employee salary, estimate the total taxable income and the taxes. Then, deduct it over 12 installments. Know that the employee will have to pay the TDS at a rate of 20% on absence on the PAN.
Shops & Employment Act
The Shops & Employment Act regulates the employment condition for workers. This includes work hours, rest hours, overtime, holidays, and termination of services.
Whether you have zero employees or 50, you comply with registering your business under this act.
For this, you need to register within 30 days from the date when you start your business. Apply along with the registration fees and scanned documents online. Your documents get approved within 15 days of submission.
Payment of Wages Act, 1936
The Payment of Wages Act regulates the payment of wages to direct and indirect employees. It ensures that the employees receive their pay on time without any deductions, except the taxable deductions.
According to this Act, if your company has less than 1000 employees, they are liable to receive the monthly salary before the 7th of every month. If the employee count exceeds 1000, they are liable to receive their salary on the 10th of every month.
This act does not comply with the employees who have a monthly salary of INR 10,000.
Minimum Wages Act, 1948
Every employee complies to get a minimum pay for their work under the minimum wages act. Under this act, the Central & State Governments fix the rates. These rates are set differently for different working classes but ensure that the minimum pay helps every employee make a living.
Let’s say the minimum pay set for every employee in your state is INR 300. Your company has two sets of employees — workers and professionals. The minimum pay for each worker is INR 300, and for professionals, it is INR 500. This is the minimum pay below which you shall not pay to your employees.
Payment of Bonus Act
With this compliance act, employers are liable to give an annual bonus to their employees. This applies to businesses with over 20 employees. The bonus is calculated based on the employee’s salary and the business’s profits in the entire year.
Let’s say you have a team of 30 employees where 15 of them receive a salary of INR 21,000 every month, excluding the allowances. If each employee has completed 30 working days in the financial year, they will receive a bonus at the end of the year.
The bonuses paid to the employees range between 8.33% to 20% and need to be paid within 8 months from the close of the accounting year.
Maternity Benefit Act
Maternity Benefit Act regulates women’s employment for a certain period before and after the birth of a child and provides maternity benefits and additional benefits. This compliance act applies to every business that has employees over 10 employees.
Know that maternity benefits do not apply to women employees with the ESI compliance act.
Few things you need to know about the maternity act:
Under the Maternity Benefit Act, women employees are eligible to be paid for maternity leave. For this, the payment is calculated at an average daily pay which equals three calendar months.
- This act applies to women who have worked at least for 80 days in the preceding twelve months from the expected delivery date.
- If any unforeseen case, if the woman employee dies during the time of delivery and the child survives, the employer is liable to pay full maternity benefits to the child.
- If the child dies during delivery or after the delivery, the maternity benefits are counted on for the period, including the child’s date of death.
If the employer does not provide free medical care to the women employee, the employer is liable to pay INR 3,500 to their women employees for the same.
Here’s the final verdict for you:
As a business, you are liable to comply with the foundational compliances — minimum wages, payment of wages and maternity benefits.
While these are the foundational compliances, you must include your legal framework, also include the PF, PT, TDS and ESI in your payroll compliance system to ensure all the taxes on time both for you and your employees.