Summary
Expanding to India requires strong payroll compliance with laws like EPF, ESI, PT, and Gratuity. This blog explains each act and how EOR partners, especially Remunance, help global businesses stay compliant, avoid legal risks, and focus on business growth in India.
Expanding a business to a new nation always comes with promising endeavors and challenges. Especially when a country has a complex regulatory structure, such as India, the difficulty increases. Payroll compliance in India is a significant aspect that foreign companies need to closely monitor.
India has a wide and complex system of labor laws that govern different areas of employment. It includes minimum pay, working hours, benefits, and termination procedures. To ensure compliance, foreign businesses have to become familiar with the crucial laws. Mainly, the PTA Act, the EPF Act, the ESI Act, and the Payment of Gratuity Act. Before diving into the specifics of payroll compliance in India, let’s understand the importance of an employer of record. But why??? Because it is one of the smoothest processes to avoid penalties and mitigate payroll compliance.
In this contract, the EOR takes on the responsibilities of the hired employees’ legal employer. EOR focuses on complying with Indian employment laws, taxes, and legal requirements. Due to this arrangement, the company can focus on revenue generation.
So, let’s understand the importance of the 4 important acts of Indian payroll compliance.
Understanding Payroll Compliance in India
Before looking at EOR solutions, it’s important to understand India’s rules and regulations. Let us understand the different Indian compliances.
Compliance in India
To comply with Indian laws, one requires a comprehensive knowledge of the complex framework and legal landscape. In India, two types of compliance denote the framework. You must follow both company rules and government laws.
Compliance in India involves following the laws and regulations established by the government. Statutory compliance, such as with regard to labor and tax regulations, is included. Compliance with regulations, such as those set forth by the RBI and SEBI, is also included. These are necessary for businesses to stay out of legal issues, safeguard their reputation, and function properly.
4 Crucial Acts of Payroll Compliance in India
In India, the payroll depends on compliance with a number of laws and rules. All of those are important to protecting employees’ finances and ensuring their overall well-being.
Here is a list of 4 important pieces of legislation that have a significant impact on Indian payroll management
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- The Employee State Insurance Act (1952)
- The Employee Provident Fund Act (1948)
- The Professional Tax Act (1975)
- The Payment of Gratuity Act (1972)
It is essential to know the processes of contribution, acts’ applicability, and the subsequent benefits.
Employee Provident Fund Act 1952:
Applicability:
The EPF Act applies to companies with 20 or more employees. It covers both government and private companies, with some exceptions for certain workers. Most importantly, the salary of the employee must be more than 15000 per month.
Both the employee and employer must contribute 12% of the employee’s basic salary and dearness allowance.
From the employer’s 12% share:
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- 8.33% goes to the Employee Pension Scheme (EPS)
- 3.67% goes to the Employee Provident Fund (EPF)
Benefits
Employees: The EPF Act gives workers the tools they need to build up a retirement fund, providing an assured financial future. It makes the entire corpus available if the candidate leaves or suffers from a certain incident, including unemployment or illness.
Employers: Employers can maintain their legality by adhering to the EPF Act. Additionally, it promotes worker well-being. This creates a team that is driven and loyal.
Retirement Funds
Employee retirement savings are aided by EPF.
Monthly contributions are made to the fund by the company and employee.
Tax Advantages
Section 80C allows for tax deductions for contributions to the EPF.
Typically, both the initial withdrawal and the interest generated are tax-free.
Financial Security
Government support for Financial Security EPF is provided.
It provides constant, safe returns.
A portion of withdrawals
Before retiring, workers may take out a portion of their EPF.
This can be used for things like purchasing a home or meeting medical expenses.
Insurance Protection
EDLI is a life insurance program that is part of EPF.
A lump sum payment can be given to the employee’s family in the event of their death.
Pension Benefits
Once you retire, the EPS plan pays a monthly pension.
The EPF Act governs how it is run.
Employee State Insurance (ESI) Act, 1948:
Applicability: The ESI Act provides medical and financial benefits to insured employees and their families and also includes businesses with ten or more employees.
Contribution: A certain percentage of the employee’s salary must be paid by both the employer and the employee. Employers contribute 4.75% of the gross income, while employees contribute 1.75%, according to my most recent information update.
Benefits
For Employees: If you pass away, the ESI Act guarantees monetary help to your family. In the event of illness, maternity leave, or disability, it also provides you with financial help and medical care.
Employers: Your workforce remains healthy and strong when you comply with social security rules. Furthermore, it demonstrates your concern for the welfare of your staff.
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- Medical Benefits: The ESI plan offers insured individuals (workers) and their families complete medical care, including care for illnesses, injuries, and maternity-related conditions.
Access to ESI clinics, hospitals, and dispensaries—which provide affordable and free medical care—is part of this.
Medical coverage covers both new and pre-existing conditions.
- Medical Benefits: The ESI plan offers insured individuals (workers) and their families complete medical care, including care for illnesses, injuries, and maternity-related conditions.
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- Sickness Benefit: To make up for lost income during an absence, cash benefits are given to workers who are unable to work because of illness or accident.
In a continuous period of 365 days, this compensation can be as much as 70% of the worker’s average daily income for a maximum of 91 days, according to Navi.
- Sickness Benefit: To make up for lost income during an absence, cash benefits are given to workers who are unable to work because of illness or accident.
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- Maternity Benefit: Female workers are eligible for maternity benefits, which include 100% of their pay during the leave term and up to 26 weeks of extended leave.
Professional Tax (PT) Act, 1975:
Applicability: Professional tax is a levy imposed by the state, and geographical differences may affect its rates and applicable characteristics. Generally speaking, it refers to people and organizations engaged in trades, professions, or paid jobs.
Contribution: Employers pay the majority of professional tax at the employee’s source, with rates based on the worker’s income and the state-specific laws.
Benefits
For Employees: The money collected from professional taxes is used to fund state-specific programs that may include healthcare, education, and infrastructure development.
For Employers: Adherence to state tax rules not only satisfies legal requirements but also demonstrates a dedication to regional development and regulatory compliance.
Payment of Gratuity Act, 1972:
Applicability: The Payment of Gratuity Act applies to companies with 10 or more employees. It gives workers a monetary benefit when they leave the job, retire, or in case of death or disability.
Only the employer must set aside this money. Employees don’t have to pay into it.
Advantages
For Workers: For each year of service, this act offers workers financial security in the form of a lump-sum payout, usually equal to 15 days of their most recent wage.
For employers: It is a powerful motivator for retaining personnel and emphasizes the dedication of employers to those who have faithfully served them.
Eligibility
Gratuities are given to employees who have worked for at least five years straight.
Payments
In the event of an employee’s retirement, resignation, death, or disability, they receive gratuity payment.
Calculation
The basis for calculating gratuity is 15 days’ pay for each year of employment completed.
₹20 lakh is the upper limit.
Not contributing
Employee gratuities are not paid. The employer covers the entire cost.
Recognizing Long Service
Employees are rewarded with gratuities for their steadfast commitment and extended tenure.
In conclusion, the EPF, ESI, PT, and Gratuity Acts are important for payroll compliance in India. Companies guarantee legal compliance and help with protecting employees’ funds. To completely comply with the law, executives in businesses have to stay updated on any changes to the laws.
What is the solution to payroll compliance in India?
Payroll compliance management in India is a challenging yet crucial task. Important laws, including professional tax, ESI, EPF, and gratuity, require careful consideration. It’s important to pick the correct EOR partner. It will help you comply with all employment and tax regulations. Mainly, simplify your growth in India.
When making your selection, consider the track record, expertise, and global presence of EOR firms such as Remuanance, Velocity Global, ADP, Shield GEO, and Globalization Partners. With the right EOR partner, your company can confidently navigate Indian payroll compliance, unlocking the vast opportunities that the Indian market has to offer.
How will Remunance help navigate compliance for payroll?
Payroll management in India can be complex. Remunance simplifies it.
Remunance helps you hire people in India without the need to establish a local business. We handle all of your payroll compliance requirements as your Employer of Record (EOR).
We make sure your payroll complies with Indian tax and legal regulations. You don’t have to be concerned about deadlines or changing restrictions.
Remunance helps you stay in compliance and avoid penalties. We have already assisted more than 85 companies from 16 different countries in efficiently managing their Indian payroll.
More than 800 workers have been employed by us for our international clients in 34 Indian locations.
Remunance takes care of everything when you work with us, from government filings and employee perks to tax deductions and wage computations.
FAQs
What is payroll compliance in India?
In India, payroll compliance means complying with all applicable laws regarding employee pay. Tax deductions, provident funds, employee state insurance, professional tax, and labor rules are all included in this. To stay out of trouble, businesses must abide by these regulations.
What is the payroll cycle in India?
India typically has a monthly payroll cycle. Salary payments are typically made at the end of each month. Depending on corporate policy, some might also adhere to a weekly or mid-month pattern.
How frequently do payroll laws change in India?
India’s payroll regulations may change annually. Usually, modifications to labor laws or the Union Budget bring about changes. Updates are necessary for businesses to remain compliant.
