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Statutory Compliance in Payroll Components – Determining Factors

Posted by: on 24 January 2019 in Business Strategies, Compliance, Finance, HR, Human Capital Management, Payroll, PF

This post is part of the Coffee Break Guide to Compliance by Anandan Subramaniam. Please subscribe to the blog updates if you’d like to be notified of these posts. Please comment below with your doubts and queries.

The Coffee Break Guide to Compliance – Vol. 28 {Statutory Compliance in Payroll Components – Determining Factors}

Is your Payroll Compliant?

It’s a significant process which is sensitive in keeping your internal customer (your employees) delighted.  Besides, there is a legislative requirement to comply with provisions of various Acts.  A brief on factors which needs to be considered while fixing the compensation, statutorily.

Compliance under Minimum Wages

Every establishment (both manufacturing and commercial) is covered under the Minimum Wages Act.  The Minimum Wages has to be paid without any deductions other than Statutory Deductions.

 Payment of wages less than minimum wages on the ground of poor performance is illegal.  If the employer could not provide the activities of the job then, the employee is entitled to receive full salary.  But if the employee has not worked due to his unwillingness then, the employee is not entitled to receive full salary.

Dearness allowance is part of Minimum Wages and in few States, it is revised monthly or half-yearly.  This change needs to be effected in the monthly wages without fail.

Payment of wages less than Minimum Wages is an offense.

Statutory deductions and remittances

Apart from Tax deduction at source under Income Tax Act, 1961, it is the employer’s duty to deduct and remit under various Social Security legislation, viz.

(1) Provident Fund (PF/Pension)

(2) Employee State Insurance (ESI)

(3) Labour Welfare Fund (LWF)

One other statutory deduction and remittance, towards Profession Tax too, is the employer’s duty.

Whereas for PF it may be restricted or excluded considering the wages of the employee, ESI can only be excluded on higher wages, as notified by ESIC, from time to time.

PT and LWF are mandatory for those who are earning more than the Minimum Wages.

The periodicity of PF and ESI is monthly.  For LWF it differs from State to State – either monthly or half-yearly or Annual.  In the case of PT, it is either monthly or half-yearly, specific to the State.

Employers are also required to contribute appropriate percentage towards the above statutory remittances, except PT.

An establishment needs to consider all such statutory deductions computed, before processing the payroll.  The right deduction reports from Payroll can ensure correct remittance against various social security legislation. 

Gratuity and Statutory Bonus

Other social welfare statutory provisions are Gratuity and Statutory Bonus, which are mandatory under specific employment legislation. Where Gratuity is payable within 30 days of the separation for eligible employees, the Statutory Bonus is to be paid annually, for the previous financial year.

Wages for Leave

Payment towards leave is a significant factor which needs to be considered while processing payroll.  Different types of leave are made available by each State.  Quantum of leave for each type also differs in each State.

Where the paid leave is not available after it got exhausted for the calendar year, non-payment of salary/wages can be considered for such days, which has a direct effect on Social Security contribution and Statutory Bonus computation.

Maternity Leave

Payment of Maternity benefit for eligible employees is to be rightly captured in the monthly payroll process, which is one of the responsibilities of the employer.  Payment of Medical Bonus for eligible women employees is mandatory under the Maternity Benefit Act.

Salary / Wage for such Paid leave and Maternity leave shall be on the gross wages.

Specific Allowances

Many establishments are providing different allowances for their employees/workers considering the nature of work.  Where such allowances are offered and mentioned in the appointment letter, it shall form part of monthly earnings.

Engaging International workers

Due care needs to be taken while processing payroll for International Workers, as the allowances and provident fund deduction, is not similar to Indian employees.

Allowances and reimbursements

The significant difference between allowance and reimbursement is,

  • Allowances are part of monthly wage/salary structure
  • Reimbursement are payments, towards expenses incurred by the employee

Reimbursements do not attract term “wages/salary” and not attract deductions towards social security benefits.


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