Payroll Processing — Post-Registration Compliance Guide
Managing payroll in India requires strict adherence to multiple statutes including the Income-tax Act, 2025 (which replaced the Income Tax Act, 1961 with effect from 1 April 2026), the Employees' Provident Funds and Miscellaneous Provisions Act, the ESIC Act, and applicable state Minimum Wages and Professional Tax Acts. For businesses operating in FY 2026-27, accuracy is not just a best practice but a legal necessity, since delayed statutory deposits and late TDS returns attract both interest and separate late-fee or penalty provisions. This guide walks through your recurring monthly and quarterly obligations, the documentation employees need to submit, and the sequence in which salary computation, statutory deposits, and returns should be handled each cycle. Whether you run a small team in Mumbai or a growing startup in Bangalore, understanding these timelines helps ensure salaries are disbursed correctly while TDS (filed via Form 138, the salary-TDS return that replaced the erstwhile Form 24Q from Tax Year 2026-27 onward), EPF/EDLI contributions, ESI dues, and state Professional Tax are deposited within the applicable windows. PNPC Global draws on decades of accounting and compliance experience across India to help businesses build a payroll process that stays audit-ready, reconciles cleanly with year-end Form 130 (formerly Form 16) issuance, and reduces the manual back-and-forth that often causes deadlines to slip.
Before you start
- Valid PAN and TAN for the business, registered on the Income Tax e-filing and TRACES/TDS portals.
- EPF establishment code and ESI registration number, where the organisation crosses the applicable employee-count thresholds.
- State Professional Tax registration certificate, where the state levies Professional Tax.
- Signed offer letters/appointment letters and CTC breakup for each employee (basic, HRA, allowances, statutory components).
- Employee KYC on file — PAN, Aadhaar, bank account details, and UAN (for existing EPF members).
- Investment declarations and Form 124 (formerly Form 12BB) submissions from employees for tax-saving deductions to be factored into TDS.
- A payroll register or software (spreadsheet or payroll platform) reconciled with the previous month's closing balances.
- Access credentials for the TRACES/TDS portal, EPFO employer portal, ESIC portal, and the relevant state Professional Tax portal.
Step-by-step
Employee data verification and onboarding
Before running each payroll cycle, confirm that employee master data — PAN, bank account, UAN, ESI IP number where applicable, and CTC structure — is current in your payroll system. New joiners should have their Form 124 (formerly Form 12BB) and investment proofs on file before their first salary run, so exemptions like HRA are applied from the correct month rather than adjusted retroactively.
- Cross-check any mid-month salary revisions or increments against signed appointment letters.
- Flag employees crossing ESI or PF wage-ceiling thresholds during the year, since their contribution status can change.
Attendance and variable-pay inputs
Collect attendance, leave, and any variable-pay inputs (overtime, incentives, reimbursements) for the payroll period before running the calculation. Errors at this stage are the single most common cause of off-cycle salary corrections, which in turn complicate TDS and PF reconciliation later in the year.
Salary computation with statutory deductions
Compute gross salary — basic pay, HRA, allowances, and any perquisites — and apply statutory deductions: employee PF contribution (commonly 12% of PF wages, subject to the applicable wage ceiling and any opted-out arrangement), ESI employee contribution where the employee falls within the ESI wage threshold, Professional Tax per the applicable state slab, and TDS estimated for the financial year based on the employee's declared regime and investment declarations.
- Where the employer also bears an EPF/EDLI/EPS contribution, compute and set aside the employer share separately for deposit.
- Keep the TDS computation working file for each employee so the figure can be reconciled at year-end against actual investment proofs submitted.
Net pay calculation and disbursement
Subtract all statutory and voluntary deductions from gross pay to arrive at net salary, and process disbursement via bank transfer on the agreed payroll date. Generate and retain payslips for each employee, since these documents support both employee tax filings and any future compliance audit.
EPF monthly deposit and return
Deposit the combined employee and employer PF/EPS/EDLI contributions through the EPFO Unified Portal (ECR filing) within the statutory window following the wage month — employers should confirm the exact due date on the EPFO portal each cycle, as it is calculated from month-end. Late deposits attract interest and can attract damages under the EPF Act, so this is not a step to batch with other month-end tasks.
- File the Electronic Challan-cum-Return (ECR) before making payment; the challan is generated only after the ECR is validated.
- Reconcile the ECR headcount and wage figures against the payroll register each month.
ESI monthly deposit and return
For establishments covered under the ESI Act, deposit employee and employer ESI contributions through the ESIC portal by the statutory due date for the contribution month (confirm the current due date on the ESIC portal, as this is periodically revisited by the authority). File the monthly contribution return alongside the payment.
Professional Tax filing
Where the state levies Professional Tax, deduct it from employee salaries per the state's slab structure and remit it along with any employer-level Professional Tax liability by the state's prescribed due date — these vary by state and by monthly/quarterly/annual filing frequency, so confirm the applicable schedule for each state you operate in rather than assuming a single national deadline.
TDS deposit (monthly) and Form 138 filing (quarterly)
Deposit TDS on salary to the government by the 7th of the following month (the due date for March deductions is extended to 30 April for non-government deductors — this timeline carries over unchanged under the Income-tax Act, 2025 and its 2026 Rules; confirm the current-year date on the TRACES portal). Separately, file the quarterly salary-TDS return — Form 138, which replaced the erstwhile Form 24Q from Tax Year 2026-27 onward — by the statutory due date for each quarter; the fourth-quarter return, which includes annual salary and tax details for Form 130 (formerly Form 16) generation, typically carries a later due date than the other three quarters.
- Reconcile challan payments against the return using the CIN before filing.
- A shortfall or delay in TDS deposit attracts interest under the Income Tax Act in addition to any late-filing fee for the return itself.
Quarterly and half-yearly reconciliation
At the end of each quarter, reconcile total payroll disbursed, PF/ESI contributions deposited, Professional Tax remitted, and TDS deposited against the payroll register. This catches data-entry errors, missed deposits, or employees who were onboarded/exited mid-quarter and whose statutory contributions may have been missed.
Annual Form 130 (formerly Form 16) generation and employee reconciliation
After the fourth-quarter TDS return is filed and processed on the TRACES portal, download and issue Form 130 (Part A and Part B) — the salary TDS certificate that replaced the erstwhile Form 16 under the Income-tax Act, 2025 — to every employee from whose salary tax was deducted during the financial year. Reconcile the annual TDS reflected in Form 130 against each employee's Form 26AS/AIS to catch mismatches before the employee files their personal return.
Annual PF and ESI compliance review
Review the year's ECR filings and ESI contribution history for consistency — headcount, wage base, and contribution amounts should tie out across all twelve months. Address any gaps (missed months, wrong wage ceiling applied) proactively, since correcting a prior-period statutory filing is more time-consuming than a current-period one.
Statutory audit and record retention
Retain payroll registers, payslips, Form 12BB declarations, PF/ESI challans, and TDS challans for the retention period applicable under the respective statutes, as these are the primary documents requested during an EPFO inspection, ESIC inspection, or income-tax scrutiny of TDS compliance.
Common mistakes to avoid
- Depositing PF or ESI contributions after the statutory due date, which triggers interest and can attract further consequences under the respective Acts — treat these as fixed dates, not flexible ones.
- Applying HRA, LTA, or other exemptions without a valid Form 124 (formerly Form 12BB) declaration and supporting proof on file, which can trigger a TDS shortfall discovered only at year-end.
- Assuming Professional Tax rules are uniform across states — slabs, exemption thresholds, and filing frequency all vary by state and must be confirmed locally.
- Filing Form 138 (the salary-TDS return that replaced Form 24Q) with challan details that don't reconcile to the actual TDS deposited, causing defaults to show up in the TRACES portal that then require correction statements.
- Missing the wage-ceiling recheck when an employee's salary crosses the PF or ESI threshold mid-year, leading to incorrect contribution amounts for several months before it's caught.
- Treating the March TDS deposit deadline the same as other months without confirming the extended date, or missing the distinct due date structure for the fourth-quarter Form 138 (formerly Form 24Q) return.
- Not retaining signed payslips, challans, and declarations long enough to satisfy statutory retention requirements, leaving gaps during an EPFO or income-tax audit.
- Running off-cycle salary corrections without updating the PF, ESI, and TDS working files, so the correction never gets reflected in the statutory deposits for that period.
Frequently asked questions
By when must EPF contributions be deposited each month?
Employers must file the Electronic Challan-cum-Return (ECR) and deposit combined employee and employer EPF, EPS, and EDLI contributions within the statutory window following the end of the wage month, as prescribed under the EPF Act. Because the exact number of days is set out in EPFO circulars and can be revisited by the authority, confirm the current due date on the EPFO employer portal each cycle rather than relying on a fixed date carried over from a prior year.
How is TDS on salary calculated and deposited?
TDS on salary is estimated for the full financial year based on the employee's projected income and chosen tax regime, then deducted proportionately each month and deposited to the government by the 7th of the following month under the standard schedule (the March deduction has a later due date — confirm on TRACES). Exemptions such as HRA are factored in only once a valid Form 124 (formerly Form 12BB) declaration with supporting proof is on file.
What is Form 138 (formerly Form 24Q) and how often must it be filed?
Form 138 is the quarterly salary-TDS return, filed with the Income Tax Department via the TRACES portal; it replaced the erstwhile Form 24Q for Tax Year 2026-27 onward under the Income-tax Act, 2025 (older filings for prior years remain accessible as Form 24Q on TRACES). Each of the four quarters has its own due date, with the fourth quarter's return (which includes the annual salary summary used to generate Form 130, formerly Form 16) typically due later than the other three — check the current-year schedule on the TRACES portal before each filing.
Is Professional Tax mandatory for every employee?
Professional Tax applies only in states that levy it, and only above the wage threshold set by that state — thresholds, slab rates, and filing frequency (monthly, quarterly, or annual) all differ by state. If an employee's salary falls below the applicable state's threshold, no deduction is required for that employee in that state.
When should Form 124 (formerly Form 12BB) be collected from employees?
Form 124 (the investment/exemption declaration that replaced Form 12BB under the Income-tax Act, 2025) should ideally be collected at the start of the financial year for provisional exemption planning, with final investment proofs collected before the last payroll cycle of the year so the final TDS deduction and Form 130 (formerly Form 16) reflect actual, verified deductions rather than estimates.
What happens if a TDS or PF deposit is delayed?
A delayed TDS deposit attracts interest under the Income-tax Act, 2025 (the successor to the Income Tax Act, 1961, in force from 1 April 2026), in addition to a possible late fee on the quarterly return if it is filed late. A delayed EPF deposit similarly attracts interest under the EPF Act and can expose the employer to further scrutiny from EPFO. Both are treated as compliance defaults, so building a buffer of a few days before each due date is good practice.
Does every business need ESI registration for payroll?
ESI applies to establishments that cross the employee-count threshold prescribed under the ESI Act and to employees whose wages fall within the notified ESI wage ceiling. Businesses below the threshold, or paying all employees above the ceiling, are generally outside ESI's mandatory ambit — confirm applicability against the current notified figures rather than assuming based on a prior employer's setup.
How does an employer generate Form 130 (formerly Form 16) for employees?
Form 130 — the salary TDS certificate that replaced Form 16 under the Income-tax Act, 2025 — is generated from the TRACES portal only after the fourth-quarter Form 138 (formerly Form 24Q) return has been filed and processed successfully. Part A (TDS summary) is downloaded directly from TRACES; Part B (salary breakup and deduction detail) is typically prepared alongside it and issued together to each employee for their personal income-tax filing.
What records should a business retain for payroll compliance?
At minimum, retain monthly payroll registers, employee payslips, PF ECR filings and challans, ESI contribution filings and challans, TDS challans, Form 138 (formerly Form 24Q) acknowledgements, and employee investment declarations (Form 124, formerly Form 12BB) — these are the documents most commonly requested during an EPFO inspection, ESIC inspection, or income-tax scrutiny.
Can payroll processing be outsourced, and does that reduce compliance risk?
Yes — many businesses outsource monthly payroll processing to a compliance-experienced accounting firm to reduce the risk of missed statutory dates. Outsourcing shifts the operational burden but the employer remains the legal deductor/depositor of record, so it's worth confirming the provider's process for reconciling deposits and returns each cycle rather than treating it as a fully hands-off arrangement.
What should happen when an employee exits mid-month?
Full and final settlement should include the pro-rated salary through the last working day, any leave encashment per company policy, and correct pro-rated PF/ESI contributions for the exit month. The employee's EPF and ESI records should be updated to reflect the exit date so subsequent months don't show erroneous contributions against that employee.
How are statutory wage ceilings for PF and ESI applied when an employee gets a raise?
When an employee's revised salary crosses the notified PF or ESI wage ceiling mid-year, the contribution basis and, in the case of ESI, coverage itself, may change from the effective date of the revision. Payroll should be updated in the same cycle as the increment takes effect, since retroactive corrections to statutory filings are more involved than a same-month adjustment.
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