Payroll Maintenance & Benefits

Payroll Maintenance & Benefits: A Complete Compliance Guide for FY 2026-27

Running compliant Indian payroll in FY 2026-27 means getting six moving parts right simultaneously: a legally defensible salary structure, accurate EPF and ESI contributions, gratuity and bonus provisioning, TDS under Section 192 aligned to each employee's tax-regime choice, professional tax across applicable states, and month-end reconciliations that stand up to scrutiny. Miss any one of these and penalties, interest and employee disputes follow automatically. This guide gives you a practical engine — not theory — to build and run compliant payroll from the first working day of the financial year.

What Goes Into an Indian Salary Structure

A salary structure is not just a payslip label; it determines tax liability, statutory contribution bases and the employer's labour-law exposure. Every component falls into one of four buckets.

Fully taxable components

• Basic pay and Dearness Allowance (DA) — the statutory base for EPF, gratuity and bonus calculations
• Special allowance — the residual that absorbs whatever is left after other components
• Performance bonus, retention bonus, variable pay — taxable as salary income in the year of receipt

Partially exempt components (old-regime employees)

• House Rent Allowance (HRA) — Section 10(13A) exemption: the least of (i) actual HRA received, (ii) rent paid minus 10% of basic+DA, (iii) 50% of basic+DA for metro cities or 40% for non-metros
• Leave Travel Allowance (LTA) — Section 10(5), two journeys in any block of four calendar years; the current block is 2022–2025 and 2026–2029
• Children's education allowance — Rs. 100 per child per month (two children maximum), marginal in practice

Fully exempt components (both regimes)

• Employer's EPF contribution up to 12% of basic+DA (excess over 12% or over Rs. 7.5 lakh annual employer contribution across EPF+NPS+superannuation is taxable from AY 2022-23 onwards)
• Approved gratuity, within the exemption limit

Reimbursements (non-monetary, both regimes)

• Telephone, internet, books and periodicals — requires bills; treated as business expenditure for the employer
• Fuel and driver — requires vehicle ownership proof and log
• Meal vouchers — up to Rs. 50 per meal for two meals a day is exempt; above that, taxable

Practical point on salary structure design: Under the new tax regime (default for FY 2026-27), HRA and LTA exemptions are irrelevant — every rupee of salary is taxable except the Rs. 75,000 standard deduction. This means employees who opt for the new regime gain nothing from a high-HRA, low-basic structure. For new-regime employees, a simpler structure with a higher basic slightly reduces complexity and makes statutory computations cleaner.

Statutory Benefits: What the Law Requires You to Provide

Employees' Provident Fund (EPF)

The EPF applies to every establishment employing 20 or more persons and to voluntarily covered establishments. Once covered, coverage does not lift even if headcount later falls below 20.

Contribution rates: | Contributor | Rate | Base | Ceiling | |---|---|---|---| | Employee | 12% | Basic + DA | None (though 12% of notified wage ceiling applies if employer opts for capped contribution) | | Employer — EPS | 8.33% | Basic + DA | Rs. 1,250/month (8.33% of Rs. 15,000 cap) | | Employer — EPF | 3.67% | Basic + DA | Balance after EPS |

New employees who earn above Rs. 15,000 basic+DA at joining can opt out of EPS — get this declaration in writing on Day 1.

Filing: Submit the Electronic Challan cum Return (ECR) on the EPFO Unified Portal by the 15th of the following month. Generate the UAN for every new joiner before the first payroll. Deactivate exits promptly — EPFO flags dormant UANs with active contribution as mismatches.

Penalty exposure: Section 7Q of the EPF Act charges interest at 12% per annum on delayed contributions. Section 14B damages range from 5% to 25% per annum depending on how long the delay runs:

• Up to 2 months late: 5% p.a.
• 2–4 months late: 10% p.a.
• 4–6 months late: 15% p.a.
• Beyond 6 months: 25% p.a.

Example: Rs. 1,80,000 in unpaid employer EPF for 5 months → 10% damages = Rs. 7,500; plus 12% interest on the outstanding amount. These amounts compound fast and are not deductible as a business expense.

Employees' State Insurance (ESI)

ESI applies to establishments with 10 or more employees in most states (20 in some). The wage ceiling for coverage is Rs. 21,000 per month gross (Rs. 25,000 for persons with disability). Once an employee's gross wages exceed this ceiling for two consecutive months, they exit ESI coverage.

Contribution rates (FY 2026-27):

• Employee: 0.75% of gross wages
• Employer: 3.25% of gross wages

ESI contributions are due by the 15th of the following month via the ESIC employer portal. Benefits include medical care (ESIC dispensaries and hospitals), maternity benefit under ESI (which overrides the standalone Maternity Benefit Act for covered employees), disablement benefit, and dependants' benefit on death.

Gratuity Under the Payment of Gratuity Act, 1972

Gratuity is payable on completion of five years of continuous service (death or disablement — four years eleven months is sufficient). The formula:

> Gratuity = (Last drawn basic + DA) × 15 ÷ 26 × Completed years of service

The "15/26" represents 15 days' wages out of 26 working days in a month.

Tax exemption: The least of (i) actual gratuity received, (ii) Rs. 20,00,000 (as notified under Section 10(10)) or (iii) the formula amount is exempt. Amounts above the ceiling are taxable as salary.

Worked Example — Gratuity at resignation:

• Last drawn basic + DA: Rs. 55,000/month
• Completed years: 8
• Gratuity = 55,000 × 15/26 × 8 = Rs. 2,53,846
• Fully exempt (below Rs. 20 lakh ceiling)
• Payable within 30 days of exit; beyond that, interest accrues at the notified rate

Provision this monthly — most finance teams use 4.81% of basic as a monthly gratuity accrual (which equals 15/26 × 1/12 of annual basic), expensed under personnel costs and shown as a provision in the balance sheet.

Bonus Under the Payment of Bonus Act, 1965

The Act applies to establishments with 20 or more employees and to employees drawing wages up to Rs. 21,000 per month. Eligible salary for bonus computation is capped at Rs. 7,000 per month or the applicable state minimum wage, whichever is higher.

• Minimum bonus: 8.33% of the annual eligible wages (equivalent to one month's wages at minimum) — payable even in loss years
• Maximum bonus: 20% of annual eligible wages
• Due date: Within 8 months of the close of the accounting year (so by 30 November for companies with a March year-end)

Maternity Benefit

The Maternity Benefit (Amendment) Act, 2017 gives 26 weeks of paid leave to women who have worked for at least 80 days in the preceding 12 months. Establishments with 50 or more employees must also provide a crèche facility within a prescribed distance. Non-compliance attracts prosecution and fines under the Act.

TDS on Salary Under Section 192: The FY 2026-27 Mechanics

Section 192 requires you to deduct TDS on estimated annual salary at the average rate for the year, computed afresh each month as the remaining income and periods are recalculated.

Step 1 — Collect regime declaration by 1 April. Every employee must submit a fresh declaration annually choosing the new or old regime. Absent a declaration, deduct under the new tax regime (the default).

Step 2 — Compute taxable income under chosen regime.

New regime (default):

• Gross salary minus Rs. 75,000 standard deduction = Net taxable salary
• Add any other income (house property, capital gains) declared by the employee
• Apply current new-regime slab rates (as per Finance Act 2026); tax is reduced by Section 87A rebate for eligible income levels
• Employer contribution to EPF exceeding 12% or exceeding Rs. 7.5 lakh aggregate (EPF+NPS+superannuation combined) is added back

Old regime:

• Deduct HRA under Section 10(13A), LTA under Section 10(5), standard deduction Rs. 75,000
• Allow Section 80C (up to Rs. 1,50,000), 80D (medical insurance), 80CCD(1B) (NPS — Rs. 50,000 additional), 80E (education loan interest)
• Compute tax on balance at old-regime slab rates

Step 3 — Deduct monthly. Annual tax liability ÷ 12 = monthly TDS. Adjust each month if the employee's income changes or additional declarations are received.

Step 4 — Deposit TDS by the 7th of the following month (31 March TDS — by 30 April). File Form 24Q quarterly:

Issue Form 16 (Part A from TRACES, Part B employer-generated) by 15 June 2027.

Late filing fee (Section 234E): Rs. 200 per day of delay, capped at the TDS amount. A 79-day delay on a Form 24Q with Rs. 50,000 TDS = Rs. 15,800 late fee — non-negotiable and not waivable.

Worked Example: Monthly Payroll for a Senior Engineer in Bengaluru

Profile: Aakash, Senior Engineer, CTC Rs. 18,00,000 per annum, has chosen the new tax regime, rented accommodation.

Employer-side costs:

• Employer EPF (3.67% of basic up to wage ceiling, or 12% if basic > Rs. 15,000 and employer opts for full contribution): Rs. 6,300
• EPS: Rs. 1,250 (capped)
• Gratuity provision: 4.81% × Rs. 52,500 = Rs. 2,525
• Total employer cost (approximate CTC): Rs. 1,26,950

Deductions from Aakash's gross:

• EPF employee: 12% × Rs. 52,500 = Rs. 6,300
• Professional tax (Karnataka): Rs. 200/month
• TDS (Section 192): computed below

Annual TDS computation (new regime):

• Annual gross: Rs. 14,02,500 (excluding LTA, which does not get old-regime exemption under new regime)
• Less standard deduction: Rs. 75,000
• Net taxable income: Rs. 13,27,500
• Tax at new-regime rates (per Finance Act applicable for FY 2026-27 — verify against Finance Act 2026):
• Slab up to Rs. 4 lakh: Nil
• Rs. 4–8 lakh at 5%: Rs. 20,000
• Rs. 8–12 lakh at 10%: Rs. 40,000
• Rs. 12–13.27 lakh at 15%: Rs. 19,125
• Tax before cess: Rs. 79,125
• Health and Education Cess at 4%: Rs. 3,165
• Annual tax: Rs. 82,290
• Monthly TDS: Rs. 6,858

Aakash's monthly take-home: Rs. 1,16,875 − Rs. 6,300 (EPF) − Rs. 200 (PT) − Rs. 6,858 (TDS) = Rs. 1,03,517

This reconciles to his CTC after adding employer-side statutory costs and provisions.

Common Payroll Mistakes — and How to Fix Them

1. Using CTC basic to compute EPF instead of the actual salary slip basic. The EPF contribution base is the statutory wage as per the ECR. If the CTC sheet says basic is Rs. 30,000 but the offer letter says Rs. 25,000, the ECR should reflect the actual amount. Mismatches trigger EPFO audit queries during inspection.

2. Not refreshing tax-regime declarations every April. If you carry forward last year's declaration, employees who want to switch regimes mid-year face TDS mismatches and higher self-assessment liability. Automate a declaration workflow on your payroll software as part of the annual payroll opening task.

3. Treating ESI applicability as a one-time check at joining. An employee who joins at Rs. 19,000 gross is covered under ESI. If they receive an increment to Rs. 22,000 in September, they exit ESI coverage — but only from the beginning of the contribution period following the excess (October in this case). Miss this and you over-deduct and over-contribute, creating refund headaches.

4. Paying gratuity without verifying five-year service, or on resignation before completion. Gratuity is not payable on resignation before five years (except death or disablement). Some employers accidentally include it in full and final settlement templates without the service-year check. This is an unnecessary outflow; reverse it with proper documentation.

5. Late bonus payment. The Payment of Bonus Act requires bonus payment within eight months of the accounting year-end. Companies routinely miss 30 November for March year-ends. The remedy is a formal notice plus payment with statutory interest — but prevention is simpler: calendar it in September for October payment.

6. Ignoring professional tax for multi-state employees. A Bengaluru-based employee who shifts to Mumbai mid-year requires Karnataka PT for part of the year and Maharashtra PT for the rest. Many payroll teams apply only one state's slab for the full year. Cross-state cases need a state-of-employment determination each month.

7. Filing Form 24Q with incorrect PAN-wise challan mapping. A common TRACES mismatch: TDS is deposited correctly but the challan details in Form 24Q do not match the challan identification number (CIN) exactly. Result: Form 26AS of the employee does not reflect the TDS, and they face demand at assessment. Always reconcile the challan details in the TDS return against your bank payment confirmation before filing.

Labour Codes: What Forward-Looking Employers Are Doing in 2026

The four consolidated Labour Codes — Wages (2019), Industrial Relations (2020), Social Security (2020), and Occupational Safety, Health and Working Conditions (2020) — are central legislation. Their full commencement depends on individual states framing and notifying rules, and this process is ongoing across states in 2026.

What will change when codes are effective for your state:

• Definition of wages will become uniform across codes, directly affecting EPF base, gratuity base, and bonus base. The codes define wages to exclude allowances exceeding 50% of total remuneration — in effect, basic+DA must constitute at least 50% of total pay. This will force restructuring of salary structures that currently keep basic low.
• Gratuity may become payable on a proportionate basis for fixed-term contract employees from Day 1 of service, not after five years.
• Social security for gig and platform workers will come under the Social Security Code — employers using contractor and gig workforce need to monitor notifications closely.
• Overtime cap changes under the OSH Code could affect how night differential and overtime are structured in manufacturing and logistics payrolls.

Action now: Map your current salary structure against the 50% wage definition. If basic is currently below 50% of gross, model the EPF and gratuity cost increase that would result. If the cost is material, this is a CTC renegotiation trigger — build it into your next salary review cycle rather than absorbing it as a sudden cost.

Building Month-End Payroll Controls

A payroll with no variance analysis is a liability waiting to surface. Build these controls into your monthly close:

1. Headcount reconciliation — compare payroll headcount against HR records (joiners, exits, transfers). Any mismatch is a control failure.
2. Gross payroll variance report — flag any employee whose gross pay moves by more than 20% month-on-month without an approved increment or variable-pay letter.
3. Statutory contribution reconciliation — EPF payable per payroll register vs. ECR total vs. bank payment challan: all three must agree.
4. TDS ledger reconciliation — TDS deducted per payslip vs. challan deposited vs. Form 26AS pull (via AIS/TIS on the income tax portal): reconcile quarterly before the 24Q filing.
5. Full and final settlement log — every separated employee's F&F must be approved by HR, Finance and Legal before payment. Maintain a separate F&F register showing gratuity, leave encashment, notice pay recovery, bonus proration, and last salary.
6. Audit trail on salary structure changes — every change to an employee's salary structure must be logged with a timestamp, changed-by user, and approving authority. Modern payroll software maintains this automatically; if you are on spreadsheets, maintain a manual change log signed by the authorised signatory.

These controls are what your statutory auditor, cost auditor, or EPFO inspection officer will ask for first. Having them ready reduces audit cycle time from weeks to days.

Key Takeaways

• Salary structure design has direct compliance consequences — basic+DA drives EPF, gratuity, and bonus bases; under the emerging labour-code definition, it must equal at least 50% of gross.
• Collect new tax-regime declarations every April — the default is new regime; employees who want old-regime benefits must opt in affirmatively and submit supporting proofs before the TDS computation is finalised.
• EPF is due on the 15th, TDS on the 7th — these are hard deadlines; interest under Section 7Q (12% p.a.) and Section 234A/B/C penalties on delayed TDS are automatic and non-deductible.
• Gratuity provisions must be booked monthly at 4.81% of basic — surprises at separation are avoidable with disciplined provisioning; the payment window is 30 days from exit.
• ESI coverage is wage-ceiling-triggered every contribution period — re-verify at each increment cycle; do not assume year-one coverage status carries forever.
• Form 16 must be issued by 15 June 2027 — late issue affects employee ITR filing and triggers employee complaints and Section 272A penalties.
• Labour-code readiness is a 2026 priority, not a future task — model your cost exposure under the 50% wage definition now, and build the payroll system flexibility to adapt without rebuilding from scratch.