Payroll Compliance Checklist for Indian Startups

Why Payroll Compliance Cannot Be Delayed

Many early-stage founders treat payroll compliance as something they will 'sort out later' : once the team grows, once they raise their next round, once they hire an HR person. This is a dangerous assumption. Indian labour law imposes strict penalties for non-compliance with Provident Fund, ESI, and TDS obligations, including personal liability on directors, criminal prosecution under the Employees' Provident Funds and Miscellaneous Provisions Act, and orders to pay arrears with interest.

The good news: once you understand the framework, payroll compliance is highly predictable and manageable. The obligations follow the salary cycle. Miss the deadlines and it gets expensive. Meet them consistently and it becomes routine.

Team of employees in a startup office — Payroll compliance protects both your employees and your company from regulatory action.

Provident Fund (PF): The Basics

The Employees' Provident Fund (EPF) scheme is mandatory for all establishments with 20 or more employees. Once an establishment is covered, coverage continues even if the headcount drops below 20. Both the employer and employee contribute 12% of the employee's basic salary plus dearness allowance.

The employer's 12% is split: 8.33% goes into the Employees' Pension Scheme (EPS) : capped at ₹15,000 basic salary, so the maximum EPS contribution is ₹1,250 : and the remaining 3.67% goes into the EPF account. Additionally, employers contribute 0.5% to EDLI (Employee Deposit Linked Insurance) and 0.5% to administrative charges, making the total employer cost approximately 13% on capped salary.

Registration: ECR (Electronic Challan cum Return) registration with EPFO before hiring the 20th employee.
Monthly due date: ECR filing and challan payment by the 15th of the following month.
KYC seeding: link Aadhaar, bank account, and PAN for all employees on the EPFO portal.
Exit formalities: submit Form 10C (pension withdrawal) and Form 19 (PF withdrawal) or Form 31 (advance) promptly.
International workers: employees from countries with bilateral social security agreements have different PF obligations.
Contractors: if you engage contract labour, ensure the contractor's PF compliance or you become liable as the principal employer.

Payroll processing and salary slips — Salary slips with all statutory deductions clearly shown are not just good practice : they are legally required.

ESIC (Employees' State Insurance): Health Cover for Your Team

ESIC provides medical and cash benefits to employees earning up to ₹21,000 per month (₹25,000 for persons with disabilities). The scheme is mandatory for establishments with 10 or more employees (20 in some states) in notified areas. Employee contribution is 0.75% of gross wages; employer contribution is 3.25% : a total of 4% on gross wages.

The ESIC card gives covered employees and their dependents access to ESIC dispensaries and hospitals. For employers, ESIC also covers workmen's compensation for employment injuries, reducing the risk of civil suits.

Registration: ESIC employer registration before the 10th employee joins (in covered areas).
Half-yearly contribution periods: April–September (contribution due by 21st of the following month); October–March (same).
Monthly ESIC challans: due by the 21st of the following month.
Accident reporting: any workplace injury must be reported to ESIC within 24 hours.
Exemption: establishments providing superior medical benefits through a company scheme can apply for ESIC exemption.

TDS on Salary: Section 192

Tax Deducted at Source on salary is governed by Section 192 of the Income Tax Act. As an employer, you are responsible for computing the estimated annual taxable income of each employee, deducting TDS proportionately each month, depositing it to the government by the 7th of the following month, and issuing Form 16 (annual TDS certificate) by June 15.

The computation must account for declared investments under Section 80C, HRA exemption, LTA, and other deductions the employee has submitted in their investment declaration. Employees who have not submitted declarations are taxed at the default slab rates without any deductions, which can create a year-end adjustment burden.

Collect investment declarations at the beginning of the financial year (April).
Collect proof of investments in January/February for final adjustment.
TDS challan (Challan 281) due by the 7th of every month (30th April for March).
Quarterly TDS returns (Form 24Q) due: July 31, October 31, January 31, May 31.
Form 16 issued to employees by June 15 of the following financial year.
New Tax Regime vs. Old Tax Regime: employees must declare which regime they opt for : apply accordingly.

Professional Tax (PT)

Professional Tax is a state-level tax levied on employment income. It is not applicable in all states : Delhi and Uttar Pradesh do not levy PT, while Maharashtra, Karnataka, Tamil Nadu, West Bengal, and others do. The maximum PT in any state is ₹2,500 per year per employee.

Employers deduct PT from employees' salaries and remit it to the state government. The deduction is also a valid deduction from the employee's gross income for income tax purposes under Section 16(iii). Register for PT with the state's commercial tax department when you hire your first employee in a PT-applicable state.

Gratuity: Planning for Long-Term Obligations

Gratuity is a statutory retirement benefit payable to employees who have completed at least 5 years of continuous service (4 years and 240 days for some categories). The formula is: Last drawn basic salary × 15/26 × Number of years of service. Under the Payment of Gratuity Act, 1972, this is mandatory for establishments with 10 or more employees.

Startups often underestimate gratuity as a balance sheet liability. If you have 50 employees with an average basic salary of ₹40,000 and average tenure of 4 years, your contingent gratuity liability is significant. Consider setting up a Group Gratuity Scheme with LIC or a private insurer to fund this liability tax-efficiently.

Monthly Payroll Compliance Calendar

By 7th: Deposit TDS on salary (Challan 281) for the previous month.
By 15th: File EPF ECR and deposit PF challan for the previous month.
By 21st: Deposit ESIC challan for the previous month.
By 25th (PT states): Deposit Professional Tax for the previous month.
By month-end: Issue salary slips to all employees with gross, deductions, and net breakup.
Quarterly (July 31, Oct 31, Jan 31, May 31): File Form 24Q (TDS return on salary).
Annual (June 15): Issue Form 16 to all employees.
Annual (September 30): File Annual PF Return (Form 3A, 6A) : now largely automated via ECR.
Annual: File ESI annual return (Form 01A) if applicable in your state.

Consequences of Non-Compliance

PF default: Interest at 12% p.a. plus damages ranging from 5% to 25% of arrears depending on delay period.
PF wilful default: Criminal prosecution, imprisonment up to 3 years, and fine up to ₹10,000.
TDS non-deduction or non-deposit: Interest at 1–1.5% per month, plus penalty up to 100% of TDS amount.
ESIC default: Interest at 12% p.a. plus damages up to 25% of arrears.
Gratuity non-payment: Fine up to ₹20,000 and/or imprisonment up to 1 year.
Labour law violations can disqualify a company from government contracts and tenders.

Frequently Asked Questions

Is PF registration mandatory for a company with fewer than 20 employees?

PF registration is mandatory once you have 20 or more employees. However, you can voluntarily register earlier, which many startups do to offer the benefit as part of a competitive compensation package. Once registered, coverage is permanent regardless of subsequent headcount.

Can startup founders exclude themselves from PF?

Directors who are not employees (e.g., non-executive directors drawing only sitting fees) are not covered by EPF. Working directors drawing a regular salary are employees and must be covered if the establishment is registered. There is no exemption based on the employee's salary level : even high-salary employees must contribute on the statutory salary ceiling (₹15,000 basic).

What is the new UAN-based system and how does it work?

The Universal Account Number (UAN) is a 12-digit number allotted to each EPF member that remains constant across jobs. Employers must activate the UAN of every new joiner and link their Aadhaar, PAN, and bank account before filing the first ECR. UAN enables employees to transfer and withdraw PF balances digitally without employer intervention for many transactions.

Are contract workers and gig workers covered under PF and ESIC?

If you engage workers through a contractor, the principal employer is responsible for PF and ESIC coverage if the contractor fails to comply. Gig workers and platform workers are currently outside the EPF/ESIC framework but this is under active legislative consideration under the Code on Social Security, 2020.