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What is Statutory compliance in Payroll?

Statutory compliance refers to the legal framework that the Government comes up with in order to regulate various business aspects, from how a company treats its employees to the overall financial activities it undertakes. Companies need to comply with central and state laws to avoid having strict actions being taken against them. 

Statutory compliance in the context of payroll refers to the legal framework concerning the payrolls which must be strictly adhered to by all the corporate entities, regardless of their size. By adhering to the statutory requirements, the companies are viewed as more credible, trustworthy and transparent, enhancing their overall reputation and performance.

What is a Payroll?

Payroll is often viewed as one of the most crucial functions of any business. The primary reason and motivation why employees work under their employer is to earn money to make their ends meet. Therefore, it is easy to imagine what would happen if a company fails to deliver accurate payroll in a timely manner.

Why is a Payroll Important?

If employees do not get any salary, they would begin quitting their jobs. As the businesses are typically dependent on their employees for revenue generation, it wouldn’t be long before the business shuts down. The only things which protect a company from losing its most valuable asset aka workforce are accurate and timely payroll processes and flawless management of payrolls. To ensure compliance with tax laws, processing payroll correctly is crucial. When employees are paid correctly and in a timely manner, their loyalty is increased towards the company. This is why a payroll is of great importance.

Why Is Statutory Compliance Important in Payroll?

Statutory compliance in payroll refers to the legal framework which concerns the payrolls. This legal framework must be complied with by all employers. Statutory holds a major significance from the perspectives of both employers and employees.

For the employees many labor laws are created such as the Minimum Wages Act, the Payment of Bonus Act, and the Payment of Gratuity rules. Non-compliance with any of these laws will result in strict actions being taken against the company. It is the legal responsibility of the employers and the HR department to ensure legal compliance with labor laws. This is why statutory audits are conducted by the Government of India to ensure and cross-check such compliance. Companies must ensure their complete compliance to maintain their corporate existence and avoid legal repercussions.

What Statutory Compliances are Required for Payroll in India?

Now that we have discussed the importance of statutory compliance for payroll, let’s discuss in detail what statutory compliances are required for the payroll in India.

Minimum Wages Act, 1948

The Minimum Wages Act of 1948 is an act of parliament concerning Indian labor law for setting the minimum wages which must be paid to laborers who are skilled and unskilled. 

The term ‘living wage’ has been described by the Indian Constitution as the level of income of a worker which ensures for him a basic living standard including good health, comfort, education, dignity and provide for any contingency. 

The constitution, however, has defined a ‘fair wage’ to keep in mind an industry’s capacity to pay. Fair wage refers to the wage level that not only maintains a level of employment but also seeks to increase it keeping the industry’s capacity to pay in perspective. The fair wage is more than minimum wage but less than living wage. Payment of wages below the minimum wage rate is equivalent to forced labor.

The primary goal of Minimum Wages Act, 1948, is to make sure that every worker is paid the minimum amount of wage prescribed for the particular job. This reduces work exploitation. 

The Payment of Gratuity Rules, 1972

The Payment of Gratuity Rules of 1972 guarantees gratuity and incentives to the employees working for a particular organization. According to this act, all establishments having more than 10 employees must pay gratuity to their employees.

Gratuity refers to the amount which is deducted from the employee’s monthly wages and provided once the employee has completed 5 years of service in the organization for the services rendered by him during their employment.

TDS Deduction

Every employer, under Section 192 of Income Tax Act, must deduct TDS from the salary income he is paying to the employee if the salary income exceeds the basic exemption limit. It is compulsory to deduct TDS and understanding the rate of TDS deduction and how it takes place is necessary. 

The total tax liability divided by the employee’s total income is the average rate. The employer will take into accounts the investments he made to save taxes to arrive at total tax liability for deducting tax on salary. Employees must keep in mind that while deducting TDS on income other than salary such as interest income, professional income etc, the TDS is deducted at a flat rate. Calculation of cess is not considered.

Payment of Bonus Act, 1965

The Payment of Bonus Act 1965 came into force with the intention of regulating the bonus amount paid to the persons employed in establishment based on its gains and productivity in order to incentivize employees.

Let’s take at the look at the applicability for bonus:

  • Any factory or establishment with 20 or more workers employed on any day during the year.
  • Payment of Bonus Act is not applicable to NGOs.
  • Employees receiving salary/wages upto Rs. 21,000 every month.
  • Employees performing any type of work, whether it is managerial, supervisory, skilled, or unskilled.
  • Employees who put in at least thirty days of work in a single year.

The amount of the bonus to be paid during the year is stated below according to the Act. 

  • During the accounting year, the minimum bonus will be 8.33% of the salary 
  • During the accounting year, the maximum bonus will be 20% of the salary.

What are the Benefits of Statutory Compliance in Payroll?

Statutory compliance in payroll is a legal requirement and is crucial for both employers and employees. It makes sure everyone abides by the rules set by the government. Here are a few benefits of statutory compliance in payroll:

  • Compliance guarantees that employees get the minimum wage they deserve, receive overtime pay and have proper salary deduction (through TDS).
  • By complying with the statutory requirements, companies save themselves from heavy fines, legal trouble and can maintain their brand reputation.
  • Due to statutory compliance in payroll, a sense of trust between employees and employees is created, knowing that everyone’s rights are protected and upheld.

Conclusion

It is the responsibility of the employers to maintain statutory compliance for their company’s smooth functioning. The employees must get their salary/wage in a timely manner along with accuracy. Along with this, employees who are eligible for gratuity and bonuses must also be paid on time. 

When employees are paid correctly and in a timely manner, their loyalty is increased towards the company. Companies must ensure their complete compliance to maintain their corporate existence and avoid legal repercussions. Statutory compliance in payroll helps to maintain a company’s brand reputation and ensures its transparency and credibility. If you liked this blog post, make sure to browse through the rest of our blog posts as well.

By Kashish

Content writer with a diverse portfolio spanning various subjects. With a seasoned background, I have been crafting professional content since 2019.

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