Can payroll compliance services prevent penalties in India?

Key takeaways

• Run four loops every month and quarter, calculate dues, deposit on time, file returns, reconcile and keep records.
• TDS on salary under section 192 uses annual tax computation and the new regime is default unless employees opt out.
• EPF and ESI apply once thresholds are met, include correct wage components, file by the 15th of the next month.
• Professional tax and Labour Welfare Fund are state driven, register, deduct, and pay as per each state’s schedule.
• Bonus and gratuity are statutory, maintain registers, pay within timelines, and manage tax treatment correctly.
• A disciplined payroll calendar, maker checker controls, and a central document repository prevent interest and penalties.
• AI Accountant, a CA led managed service, centralises payroll compliance with dashboards, filings, and AI alerts so founders stay in control.

Payroll compliance in India made simple

Payroll compliance in India can feel heavy, many rules, many due dates, penalties if you miss. This guide breaks it down in plain words, so busy founders and finance teams can act with confidence. Focus on clarity, cadence, and controls.

AI Accountant supports payroll compliance as part of a CA led managed service. Our team handles monthly TDS computation for payroll and helps structure salaries so employees save taxes while staying compliant. Learn more about our payroll compliance support under section 192 at this guide. You still get a clear view through the dashboard.

Payroll compliance in India overview

Payroll compliance means paying people right and paying the government on time. It covers TDS on salary, EPF, ESI, professional tax, labour welfare fund, bonus, gratuity, state registers, and documentation.

• TDS on salary, deduct under section 192, deposit monthly, file Form 24Q quarterly, issue Form 16 annually.
• EPF, register when you cross thresholds, deduct employee share, add employer share, file ECR and pay by due dates.
• ESI, register in covered areas when you cross thresholds, deduct and pay contributions monthly.
• Professional tax, register, deduct, and pay per state rules.
• Labour Welfare Fund, contribute in applicable states as per the state schedule.
• Bonus and gratuity, comply with the acts where applicable.
• Shops and Establishments or Factories, maintain state registers, follow hours, holidays, and notices.
• Documentation, maintain PAN, TAN, salary structure, attendance, payslips, bank advice, investment proofs, and returns.

Think in four repeatable loops, calculate and deduct dues, deposit dues, file returns, reconcile and keep records.

You can use a payroll calendar to stay on track. Or use a managed service like AI Accountant to keep the loop tight while you focus on growth. Explore our India payroll processing approach at this overview.

Helpful sources, Income Tax, EPFO, ESIC, Maharashtra PT.

TDS on salary section 192 compliance and due dates

What to deduct

TDS on salary under section 192 uses annual tax computation, the new regime is the default. Employees can choose the old regime if they opt out in time, get a declaration at the start of the year. Compute total income from salary, consider section 10 exemptions and the chosen regime rules, consider Chapter VI A deductions only if the old regime is chosen, consider relief under section 89 for arrears where applicable.

Key forms and steps

• Collect PAN from every employee and keep written regime choice.
• Use Form 12BB proofs if the old regime is chosen.
• Deposit TDS using Challan ITNS 281 with TAN.
• File quarterly Form 24Q, see our filing support at TDS return services.
• Issue Form 16 after year end through TRACES.

Rates and tax regime

No fixed rate under section 192, compute annual tax per slabs, spread monthly. Apply the default new regime unless the employee opts out, keep opt out proof.

Due dates

• Deposit TDS by the 7th of the next month, for March deposit by 30 April.
• Form 24Q due, Q1 31 July, Q2 31 October, Q3 31 January, Q4 31 May.
• Issue Form 16 by 15 June.

Common errors to avoid

• Defaulting to the old regime without opt out, the new regime is default.
• Missing PAN, causing higher TDS.
• Ignoring perquisites and non cash benefits.
• Incorrect annexures in Form 24Q.
• Late or wrong challans, leading to interest and fees.
• Form 24Q, Form 16, and TRACES mismatches.

Practical tips

• Lock salary structure in April, freeze regime choice early.
• Collect Form 12BB proofs by January, reconcile payroll with bank advice monthly.
• Check TRACES status and maintain an audit trail.

Official references, Form 24Q help, due dates, TRACES, e-payment, Circular 4/2023, Notification 31/2023, Form 12BB notification.

EPF compliance India essentials

Who must register

Register when you cross the headcount threshold under the EPF Act, once covered, always covered. Many startups provide PF from day one for consistency.

Wage base and coverage

Statutory wage ceiling for mandatory coverage is fifteen thousand per month for basic plus dearness allowance, senior staff above the ceiling can be enrolled on consent.

Contribution rates

• Employee 12 percent of PF wages.
• Employer 12 percent, split into 3.67 percent to EPF and 8.33 percent to EPS subject to caps.
• EDLI and admin charges as notified.

Due dates and filings

• Deposit and file ECR by the 15th of next month.
• Generate UAN, seed KYC, update exits, process transfers or settlements.

Special allowance and PF wages

Supreme Court view, regular allowances that are not variable or performance linked are part of PF wages. Include such allowances when computing PF.

Records, checks, penalties

• Maintain appointment letters, salary structure, UAN, KYC, attendance.
• Track wage ceiling status, document consent choices, reconcile ECR with payroll monthly.
• EPFO levies interest and damages for delays, costs add up fast.

Official references, EPFO, Employer portal, For employers, EPS circular.

ESI compliance India essentials

Who must register

ESI applies to factories and many shops and establishments in notified areas, often at ten employees. Register within 15 days of becoming coverable.

Wage ceiling and rates

• Applies up to wages of twenty one thousand per month, higher for persons with disability.
• Employer 3.25 percent, employee 0.75 percent.
• Wages include regular pay components, exclude items like annual bonus and gratuity.

Contribution cycle, due dates

Two contribution periods, April to September and October to March. Deposit and file by the 15th of the following month. Generate insurance numbers, issue temporary identity cards.

Special notes and pitfalls

• If wages cross the ceiling mid period, continue contributions till period end.
• Update joiners and leavers promptly, use the correct wage definition, avoid late payments.

Official references, ESIC, contribution, employee.

Professional tax payroll compliance and state rules

What is professional tax, registrations

Professional tax is a state tax on professions and employment. Employers need PTRC to deduct for employees and often PTEC for the entity. Rules and portals are state specific.

Due dates and multi state operations

Due dates vary, some states require monthly, some quarterly, some annually. If you have staff in multiple states, register in each liable state, apply state slab rates based on place of work, maintain state wise registers.

References, Maharashtra, Karnataka.

Labour Welfare Fund, bonus, and gratuity compliance

Labour Welfare Fund

Some states collect small contributions from employer and employee, schedules differ by state, for example, Maharashtra collects half yearly in June and December.

Payment of Bonus

Applies to many establishments and eligible employees by salary limits, minimum 8.33 percent and maximum 20 percent of wages. Keep a bonus register, pay within eight months of year end unless extended.

Payment of Gratuity

Payable after five years of continuous service subject to conditions, the current ceiling is twenty lakh for private sector employees, keep nomination forms, compute accurately on exit, gratuity is exempt up to the notified ceiling, leave encashment exemption limits have increased per CBDT notifications.

References, MLWB, Bonus Act, Gratuity Act, CBDT notification.

Payroll compliance calendar, India due dates at a glance

Monthly

• TDS deposit by the 7th of the next month, for March by 30 April.
• PF ECR and payment by the 15th.
• ESI return and payment by the 15th.
• Professional tax as per each state’s cycle.

Quarterly

• Form 24Q by 31 July, 31 October, 31 January, 31 May.

Half yearly and annual

• Labour Welfare Fund as per state schedule.
• Issue Form 16 by 15 June.
• Bonus payment within eight months of year end.
• Gratuity on exit as per the act.

Working tip, build a calendar with buffer days, close payroll on a fixed cut off, reconcile payslips, bank advice, and statutory challans every month. AI Accountant provides a dashboard and repository so filings and challans are always at hand.

References, TDS due dates, EPFO, ESIC, Maharashtra PT.

Payroll process documentation and Form 12BB proofs

Set up a clean payroll master

• Employee master with name, PAN, Aadhaar if collected, UAN, ESIC number, bank, address.
• Offer letter and appointment letter, salary structure with clear breakup.
• Declarations for tax regime choice and investments.

Run a tight documentation loop

• Form 12BB for old regime investments and deductions.
• Rent receipts, landlord PAN if annual rent crosses threshold.
• LTA declarations and travel evidence per policy.
• Medical insurance receipts for section 80D under old regime.
• Home loan interest proofs where eligible.
• Perquisite valuation records for cars, stock options, and other benefits.

Keep statutory registers and retention

• Attendance, leave, overtime, bonus and gratuity registers.
• PF, ESI joiner and leaver records.
• Challans, returns, Form 24Q acknowledgments, TRACES communication, Form 16.
• Retain payroll and tax records for at least eight years, follow PF and ESI rules for their records.

AI Accountant advantage, the dashboard gives a document repository and compliance status, the CA team coordinates collection of Form 12BB proofs and validates claims.

References, Form 12BB, Income Tax, State portal.

Common payroll compliance mistakes in India and how to avoid them

TDS mistakes

• Delaying TDS for new joiners who are under threshold initially, always forecast full year.
• Wrong regime default, the new regime is default, keep opt out proof.
• Late deposit, interest is 1.5 percent per month from deduction to deposit, failure to deduct attracts 1 percent per month till deduction, late filing fee under section 234E is 200 per day capped at TDS, section 271H penalty may apply.
• PAN errors cause TRACES notices.

EPF mistakes

• Excluding regular allowances that should be part of PF wages.
• Not enrolling eligible employees or missing UAN seeding.
• Delayed ECR filings, not updating exits or transfers.

ESI mistakes

• Missing registration when thresholds are crossed.
• Stopping ESI mid period after ceiling is crossed, contributions must continue till period end.
• Late payments and filings lead to interest and damages.

Professional tax mistakes

• Not registering in states where employees work.
• Applying wrong slabs or wrong place of work logic.
• Missing diverse state due dates.

Controls that help

• Unified payroll checklist for TDS, PF, ESI, PT, LWF.
• Maker checker review before payments and filings.
• Month end reconciliation of gross pay, net pay, and all statutory totals.
• Quarterly review of Form 24Q data before submission.
• Dashboard with alerts and due date tracking, AI Accountant provides AI generated alerts and compliance status.

References, Income Tax Act, TRACES, EPFO damages, ESIC.

Payroll compliance for startups and multi state operations

When you hire across states

Define place of work for each employee, register for PT and Shops in each liable state, maintain state wise registers, follow state holidays and leave rules.

Remote and hybrid work

If staff work remotely in another state, check registration requirements in that state, use a clear policy for remote locations and treat it as place of work for PT and Shops.

Contractors and gig workers

Contractors who place people at your site may be coverable under principal employer rules, collect contractor registrations, ECR and ESI challans, and deployment lists monthly, ensure contracts define employer responsibilities clearly.

Fast growth controls

Register promptly when PF or ESI thresholds are crossed, update bonus and gratuity policies as headcount grows, review salary structures twice a year to keep PF and ESI correct.

Scaling with a managed service

A CA led service like AI Accountant centralises compliance while HR focuses on people, the dashboard gives live financials, filings, due dates, and documents.

References, EPFO for employers, ESIC, Maharashtra PT.

Payroll automation and tools, India

Choose tools for accuracy, timely law updates, clean reports, and integration with accounting, banking, and HR. Consider these options that Indian teams use today.

• AI Accountant https://aiaccountant.com
  A CA led managed accounting and compliance service with a centralised dashboard, covers payroll TDS calculation, TDS filings, PF and ESI coordination, compliance calendars, AI insights, and a secure document repository.
• QuickBooks https://www.quickbooks.intuit.com
• Xero https://www.xero.com
• Zoho Payroll https://www.zoho.com/payroll
• greytHR https://www.greythr.com
• Keka https://www.keka.com
• RazorpayX Payroll https://x.razorpay.com/payroll

Selection tips, confirm India compliance updates like the default new regime and leave encashment limits, check multi state PT and Shops registers, test reports like salary and statutory registers, Form 24Q extracts, PF ECR, ESI files, ensure maker checker and secure storage for Form 12BB proofs, if you want end to end service, choose a managed model like AI Accountant.

How to structure salary to stay compliant and tax efficient

Salary structure basics

Keep a simple mix of basic pay, HRA, and allowances. Basic drives PF, keep it steady for predictable cost. HRA can be exempt if rent is paid and the chosen regime allows. Avoid too many vague allowances, the Supreme Court view on special allowance means regular allowances may be part of PF wages.

Perquisites, bonus, and variable pay

Value perquisites like cars, meal cards, subsidised loans, and ESOPs as per rules, show them in payslips and Form 16. Pay statutory bonus where applicable, include performance bonus in income for TDS in the month of payment, plan payouts before year end to avoid large TDS spikes.

New versus old regime

Default to the new regime unless the employee opts out. Communicate what deductions and exemptions apply under each regime, collect Form 12BB proofs for old regime claims. Example, if an employee chooses the old regime and pays rent, HRA can be exempt subject to section 10 conditions.

AI Accountant angle, the CA team advises on structure and perquisite valuation, keeping Form 24Q and Form 16 aligned.

References, Income Tax, Circular 4/2023.

Quarter end and year end payroll close checklist

Quarter end

• Match TDS deducted with challans, validate PAN and names, reconcile Form 24Q annexures, file by due date.

Year end

• Freeze final payroll and bonuses, compute final tax for each employee, adjust in last months, issue Form 16 by 15 June, update PF and ESI joiners and leavers, prepare bonus and gratuity records, archive all challans, returns, and proofs.

Audit readiness

• Keep a payroll summary tied to the general ledger, bank proofs for salary and statutory payments, sample calculations for TDS, PF, ESI, prepare audit schedules if under tax audit. AI Accountant supports tax audit preparation for payroll components.

References, TRACES, Form 24Q help, EPFO, ESIC.

How AI Accountant fits into payroll compliance operations

What you get

• CA led execution, monthly TDS, PF, ESI, and timely filings.
• A centralised dashboard with live financials, due dates, filing status, and a complete document repository.
• AI insights and alerts, reminders for due dates, mismatch flags, and law change updates.
• End to end scope, bookkeeping, TDS filings, PF and ESI coordination, Form 24Q and Form 16, and audit support.

How work flows

Your team shares payroll inputs through the dashboard, the CA team processes TDS, PF, ESI, PT, and uploads returns, you review challans and filings, everything is searchable, no more scattered email.

Why it matters

You reduce risk of interest and penalties, you save founder time, you build a clean data trail that auditors and investors trust.

Learn more at https://aiaccountant.com.

Putting it all together

Payroll compliance becomes simple when you run a clear playbook, know what to deduct, know when to pay, file on time, keep records. A simple calendar and tight checklist prevent most errors, for multi state or fast growing teams, a CA led managed service with a centralised dashboard brings speed, accuracy, and control.

FAQ

Do we need a TAN to deduct TDS on salary under section 192, or can we use the company PAN

You must obtain TAN for TDS deductions and filings, PAN is not a substitute. TAN is used for Challan ITNS 281 and Form 24Q, and it links your challans and statements on TRACES.

Should the employer default employees to the new tax regime, what documentation must we keep

Yes, the new regime is the default, collect a written opt out from employees who choose the old regime at the start of the year, preserve declarations and any Form 12BB proofs for old regime claims.

How do we handle a mid year joiner for TDS, especially if prior employer data is missing

Compute tax on estimated full year income, request previous employer Form 16 or salary and TDS details, if not provided, deduct based on your payroll alone, adjust later when documents arrive to prevent shortfall by year end.

What is the correct PF wage definition after the Supreme Court view on special allowance

Include regular allowances that are part of normal pay in PF wages, exclude only variable, performance linked, or truly occasional allowances, add basic and dearness allowance, and any regular special allowances that are not variable.

Can we cap PF wages at fifteen thousand for high earners, what consent or documentation is needed

For employees above the statutory ceiling, you may restrict employer contribution to the ceiling, document the approach in policy and get employee consent where you enroll above the ceiling or where you cap contributions for cost predictability.

When does ESI applicability start for a startup, do paid interns count toward the threshold

ESI applies once you meet the employee threshold in a notified area, treatment of interns depends on the nature of engagement and state guidance, many paid trainees who are on payroll are coverable, assess role wise and document your position.

How do we manage professional tax for a remote first team across states, which state’s slab applies

Apply professional tax based on the place of work, if employees work from another state on a sustained basis, register in that state where you have a liable presence and deduct as per that state’s slabs, maintain state wise registers.

What are the consequences of late Form 24Q filing and wrong challan mapping, how do we rectify

Late filing attracts a fee under section 234E at 200 per day capped at TDS, and penalties under section 271H may apply, wrong challan mapping causes TRACES mismatches, use TRACES correction statements to map challans, and pay interest where due.

As a principal employer, how do we manage PF and ESI compliance for contractors deployed on site

Obtain contractor registration details, monthly ECR and ESI challans, and site wise deployment lists, include compliance clauses in contracts, conduct periodic checks, and retain proof, if the contractor fails, the principal employer may still face exposure.

How should we structure salaries to balance PF cost and tax efficiency without running afoul of law

Keep a simple structure with a steady basic, reasonable HRA, and limited allowances, avoid splitting pay into many small regular allowances to sidestep PF, that invites risk, document the policy, and evaluate perquisites and reimbursements properly.

What reconciliations should finance run monthly and quarterly to stay audit ready

Monthly, reconcile payroll register to bank advice and statutory totals for TDS, PF, ESI, PT, match challans to ledgers, quarterly, reconcile Form 24Q annexures to payroll reports, validate PAN names, and tie TRACES acknowledgments to your books.

How do we handle arrears, variable pay, and relief under section 89 at year end

Include arrears and variable pay in the month of payment, compute relief under section 89 where spread over earlier years applies, collect required details from employees, and reflect relief in Form 16 and in the final TDS adjustment.

What is a pragmatic documentation retention period for payroll and TDS, and what should we store

Retain for at least eight years, keep employee masters, regime choices, Form 12BB and proofs, payslips, bank advice, PF and ESI joiner leaver records, challans, returns, Form 24Q acknowledgments, TRACES communications, and Form 16.

How does an AI enabled Virtual Accounting service like AI Accountant integrate with HRMS and banking

AI Accountant ingests payroll inputs from HRMS, runs TDS, PF, ESI computations, prepares filings, and reconciles with bank advice, the dashboard shows live compliance status, due dates, and documents, with AI alerts for anomalies and upcoming deadlines.

If an employee crosses the ESI wage ceiling during the period, do contributions stop immediately

No, continue ESI till the end of the contribution period, update wages in the ESI portal, and stop only in the next period if the employee remains above the ceiling.

When should Form 16 be issued, and what checks ensure it agrees with payroll and Form 24Q

Issue by 15 June, run a control tie, gross salary, exemptions, and deductions must match Form 24Q annexures, verify TAN details, PAN names, and challan mapping on TRACES before issuing.