Payroll compliance rarely goes wrong in a dramatic way. Nobody wakes up and decides to skip PF. What happens is smaller than that. A salary structure gets designed once, in a hurry, and nobody looks at it again for four years. One employee is hired in Pune and nobody registers for PT there. A challan gets paid on the 17th instead of the 15th because the person who approves payments was travelling.
Then two years later there is a notice, and somebody has to explain a decision that was made by a person who has already left the company.
Almost none of the mistakes below are arguments about law. They are habits. Somebody did it a certain way once, nobody checked, and it stayed that way. This is the list that keeps coming up in companies of twenty to five hundred people, starting with the one that gets expensive fastest. If you want the full picture of what you are supposed to be filing in the first place, our Indian payroll compliance guide covers that. This one is about the places companies slip.
One note before you use any number below. Wage limits, slabs and due dates change, and the four labour codes have started coming into force with state rules still being notified in parts. Treat the figures here as the shape of the rule, not as something to hard code into a formula. Check the current position for your state before you file.
Building the Salary Structure to Keep PF Low
Start with the one companies defend hardest.
The structure looks like this. Basic is kept at some small number, sometimes 30 percent of CTC or less, and the rest is pushed into a special allowance. PF gets calculated on basic only. Everybody's take-home goes up, the employer's PF cost goes down, and the employee is usually happy about it.
The problem is that the Supreme Court settled this in February 2019, in the Vivekananda Vidyamandir case. If an allowance is paid to everybody in a grade, at the same rate, and it is not linked to anything the employee actually did, it is part of basic wages for PF. Calling it a special allowance does not change what it is. A conveyance allowance of ₹1,600 that every single person in the company gets is not a conveyance allowance. It is basic salary with a different label.
What makes this expensive is that it does not surface for years. The company keeps calculating on a wrong base every month, and when it does get picked up, the demand covers all those years, with interest and damages on top, and the employee share for people who left long ago comes out of the employer's pocket. Nobody is going back to collect ₹40,000 from someone who resigned in 2022.
The fix is not exciting. Keep basic at a defensible level, usually 40 to 50 percent of gross for people below the ceiling, and make sure any allowance you are excluding is genuinely variable or genuinely reimbursement against a bill. Our guide to salary structure in India goes through the components in detail.
Getting PF Enrolment and the Ceiling Wrong
The twenty employee threshold counts people, not payroll entries. Once you cross it, EPF applies, and contractors and temporary staff working on your premises count towards that number. Many companies count only their own payroll and stay comfortably at "we are seventeen people" while thirty people come to work every day.
The ₹15,000 wage ceiling causes its own confusion. Two things get mixed up. Whether a person has to be covered at all, and what wage you calculate on. Someone earning above ₹15,000 who was already a PF member elsewhere stays a member. You cannot leave them out because their salary is high. You can restrict the contribution to the ceiling, but that is a decision to take deliberately and apply consistently, not something to do differently for each new hire depending on who negotiated harder.
Then there is contractor PF. If your housekeeping or security vendor does not deposit PF for the people working at your office, the liability comes back to you as the principal employer. Asking the vendor for a copy of the ECR and the challan every month takes five minutes. Most companies never do it, and find out the position only when EPFO asks.
The other everyday errors here are boring and constant. UAN not linked, so contributions sit unallocated. Date of exit not marked when someone leaves, which blocks the employee's withdrawal and eventually turns into an angry phone call. Wrong name spelling against the PAN. None of these are penalties, but they are the reason ex-employees keep calling HR for a year after they leave.
ESI, Where the Mid-Period Rule Catches People
ESI applies from ten employees in most states, and covers anyone earning gross wages up to ₹21,000 a month. The rates themselves are small, so nobody worries much about ESI. The trouble sits in the edges.
The one almost everyone gets wrong is what happens when someone crosses the limit mid-year. ESI runs in two contribution periods, April to September and October to March. If an employee's wages go above ₹21,000 in the middle of one of those periods, say because of an increment in July, you do not stop deducting in July. Contributions continue on the higher wages until that contribution period ends in September. Stopping the moment the increment lands is the ESI error we see most often, and it usually surfaces only when somebody reconciles the year.
Two more. Coverage is on gross wages, so companies that quietly exclude overtime or an attendance-linked incentive from that calculation end up under-reporting. And contract staff working at a covered establishment need to be covered too, which means checking your vendor's compliance the same way you should be checking their PF.
Our ESI compliance page has the current rates, thresholds and due dates in one place, and ESIC notifies any change to them on esic.gov.in.
Professional Tax: One Rule Per State
Professional tax looks like the least serious item on the payroll. It is a couple of hundred rupees a month. It is also the one that gets missed most often, because it does not follow one national rule.
The state decides everything. Whether PT exists at all, at what salary it starts, how much it is, whether it is monthly or annual, and when the return is due. Karnataka, Maharashtra, West Bengal, Tamil Nadu, Telangana and Gujarat all have PT and none of them agree. Delhi, Haryana and Uttar Pradesh have none. Maharashtra even has a different deduction in February from the rest of the year, which is exactly the kind of thing a spreadsheet formula never accounts for.
Where companies get caught is growth. You hire your first person in Karnataka, or your first fully remote employee in West Bengal, and nobody registers the establishment in that state. PT does not get deducted for eight months. When it is picked up, the deduction was never made from the employee's salary, so the company absorbs it, plus interest and penalty. Our professional tax section breaks it down state by state, including Karnataka and Maharashtra.
There is a second layer people forget. PT has an employer registration as well as an employee one, so the company owes its own PT even in a state where it has one employee.
The Small Ones Nobody Remembers
None of these produce a big demand. They produce a scramble, usually in the worst week of the quarter.
Labour Welfare Fund. Small amounts, deducted once or twice a year depending on the state, and a fair number of companies simply do not know it applies to them. It exists in Maharashtra, Karnataka, Tamil Nadu, Gujarat, Delhi and several others, and each has its own cycle and due date. Our LWF page has the state list.
Statutory bonus. The Payment of Bonus Act covers employees earning up to ₹21,000 a month, at a minimum of 8.33 percent, payable within eight months of the financial year end. Two mistakes here. Companies that pay a Diwali gift and assume it counts, without recording it as statutory bonus anywhere. And companies that keep a "bonus" line inside CTC all year, then argue at exit about whether it was ever payable.
Gratuity. Payable after five years of continuous service, at fifteen days of last drawn salary for each completed year, and it has to be settled within thirty days of the person leaving. Very few companies refuse to pay it. What they do is never provision for it, so a year with four long service exits becomes an unplanned cash outgo, and the thirty day clock runs out while finance arranges the money.
Maternity benefit. Twenty six weeks of paid leave, and the payroll side of it gets handled well in most companies. What gets missed is the part that is not payroll at all, like the creche requirement at fifty employees, and communicating the benefit in writing to every woman at the time of joining.
Treating TDS as a March Problem
Salary TDS is meant to be spread evenly across twelve months, on an estimate you revise as the year goes on. What happens instead is that everyone accepts investment declarations in April, nobody follows up, and in February the payroll team asks for proofs. Half the declared investments never happened. So March salary gets hit with a large recovery, three people complain to the founder, and one person who resigned in January was never taxed correctly at all.
The second half of this is the new regime being the default. If an employee does not choose, you have to compute under the new regime. Companies still running an old spreadsheet that assumes the old regime deduct less than they should for months, and the correction lands on the employee at year end.
Then filing. Form 24Q goes in every quarter, and Form 16 has to reach employees by the middle of June. Late filing carries a daily fee that keeps running until the return is filed, and wrong PAN entries mean a higher deduction rate that you cannot fix afterwards without a correction return. The awkward part is that the employee sees this before you do, when the amount in their 26AS does not match the payslips they have.
Two habits fix most of it. Collect proofs in December, not February. And reconcile what you actually deposited against what your payroll shows every quarter, before the return goes in, not after.
Calling Employees Consultants
This one is usually a cost decision and rarely a considered one. A person is put on a consultant agreement, paid a monthly amount, TDS deducted at 10 percent under section 194J, no PF, no ESI, no gratuity clock, no leave policy.
If that person works fixed hours, reports to a manager, uses your systems, sits in your office and does the same work as the employee at the next desk, then the paperwork says consultant and everything else says employee. Departments look at how the work is actually done, not what the contract is called.
The bill, when it comes, has several parts. PF and ESI for the whole period, with the employer share and often the employee share too, plus interest and damages. Gratuity if the person crossed five years. And the individual can raise a claim of their own at exit, which is when most of these cases surface. A genuine consultant with their own GST registration, multiple clients, and control over their own working hours is a normal arrangement. Put a full time employee on a consultant agreement and you have not saved that money. You have postponed it, with interest running the whole time.
Paying on Time but Filing Late
Payment and filing are two different obligations, and companies routinely do one and not the other.
The dates are not complicated. PF and ESI contributions are due by the 15th of the following month. Form 24Q is quarterly. PT and LWF follow state calendars. What breaks is ownership. The payment sits with finance, the return sits with HR, and each side assumes the other has closed it. Add a long weekend and an approver who is out of office, and you get a two day delay on PF that costs more than people expect.
Late PF is worth understanding properly, because the cost is not a small fixed fine. EPFO sets out the interest and damages provisions on epfindia.gov.in, and they get revised from time to time. There is interest for the delay, and separately there are damages, which are calculated on how long you were late and can run well into double digits as an annual rate. Both are on the employer. Neither can be recovered from employees. A single late month is a nuisance. Two years of small delays adds up to a number nobody has budgeted for.
It follows you around too. Delayed PF deposits show up in the books during due diligence, and buyers read a run of late challans as a comment on how the rest of the company is run.
No Registers, No Payslips, Nothing to Show
Most companies can eventually produce the numbers. What they cannot produce is the record in the form somebody asks for it.
Payslips are not optional, and a WhatsApp message saying "₹42,300 credited" is not a payslip. It needs the components, the deductions and the period. Wage registers, attendance registers, muster rolls and leave records are all prescribed under one law or another, and the format matters. If your attendance lives in a biometric machine that overwrites data after ninety days, and your leave approvals live in a manager's inbox, then in practice you have no record at all. This is one of the reasons attendance management is usually the first thing companies fix once they take compliance seriously.
Retention is the other half. Payroll records, challans, filing acknowledgements and Form 16s need to survive longer than the software subscription you generated them on. Companies switch payroll vendors, stop paying, lose access, and then get an assessment notice for a year they can no longer produce documents for. Export the acknowledgements every quarter and keep them somewhere that is not one person's laptop. Our note on moving HR off spreadsheets covers what to keep when you migrate.
And the one that surprises people. Under POSH, an Internal Committee is mandatory from ten employees, along with an annual report. It is not payroll, but it comes up in the same audits, and plenty of companies have a policy PDF and no constituted committee.
Full and Final Done by Feel
Exit settlements are where all the earlier shortcuts come due at once.
The recurring errors are the same everywhere. Leave encashment calculated on a different base than the policy says. Notice period recovery deducted from the wrong component. Gratuity forgotten because nobody checked the joining date against five years. TDS on the settlement not computed for the part year, so the person gets a demand from the income tax department months later. And the exit date not marked in EPFO, which the ex-employee discovers when they try to withdraw.
The delay itself is a compliance issue too. Wages on exit are supposed to be settled quickly, and the timeline under the wage code is tighter than the six to eight weeks many companies still take. A slow settlement is also one of the most common reasons an ex-employee walks into the labour office, and once they are there, the officer looks at everything, not only that person's dues.
Hiring in a New State Without Registering There
Remote hiring made this common. One employee in Kolkata, one in Chennai, and payroll continues to run as though everyone still sits in the Gurgaon office.
Each state brings its own set. Shops and establishments registration, professional tax registration for both the employer and the employee, LWF where it applies, its own holiday list, its own minimum wages, and in some cases its own leave rules. Minimum wage in particular gets ignored, because most companies pay well above it for their own staff and never check that the housekeeping and security people on their site are at or above the notified rate for that state and skill category.
The moment to sort this out is your first hire in a state. Most companies get to it around the tenth, by which time eight months of returns are missing. Decide who owns those registrations as well, because work with nobody's name against it does not get done. Our HR compliance software guide covers what a system should handle for you here and what it will not.
What These Payroll Compliance Mistakes Actually Cost
| Mistake | How it usually happens | What it ends up costing |
|---|---|---|
| PF on a low basic | Special allowance kept large to reduce PF | Arrears for all past years, with interest and damages, and the employee share becomes yours for people who have left |
| Not covering contract staff | Vendor compliance never verified | Principal employer liability for their PF and ESI |
| Stopping ESI mid-period | Deduction stopped in the month of increment | Short payment for the rest of the contribution period, found at reconciliation |
| PT missed in a new state | No registration when the first employee is hired there | Company absorbs the past deduction, plus interest and penalty |
| Late PF challan | Payment and filing owned by different people | Interest plus damages on the employer, not recoverable from employees |
| Late or wrong 24Q | Proofs collected in February, PAN errors not checked | Daily late fee until filed, higher deduction rate on wrong PANs, employee 26AS mismatch |
| Employee on consultant papers | Cost decision made at hiring | PF, ESI and gratuity for the full period, usually claimed at exit |
| No registers or payslips | Data spread across a biometric machine, mail and sheets | Nothing to produce during an inspection or an assessment |
| Delayed full and final | No fixed process or owner | Labour office complaint, and the officer then reviews everything else |
Questions People Ask
What is the most common payroll compliance mistake in India?
Keeping basic salary artificially low and pushing the rest into a special allowance so that PF is calculated on a smaller base. It is common because it reduces cost for both sides and stays invisible for years. The 2019 Supreme Court position is that allowances paid uniformly to everyone form part of basic wages for PF, so the exposure builds quietly with interest running on it.
Are we covered by PF and ESI if we are under twenty people?
EPF applies from twenty employees and ESI from ten in most states, but contract and temporary staff working at your premises count towards those numbers, not just people on your own payroll. Companies that count only their direct employees often cross the threshold without realising it. Voluntary coverage is also possible, and once you are covered you stay covered even if headcount falls later.
Why do we have to keep deducting ESI after an employee crosses ₹21,000?
Because ESI works in two fixed contribution periods, April to September and October to March. If wages cross the limit in the middle of one of them, contributions continue on the higher wages until that period ends. Stopping in the month of the increment leaves a short payment that shows up at reconciliation.
What happens if we deposit PF a few days late?
Interest runs for the delay, and damages are charged separately based on how long the payment was delayed. Both are the employer's cost and cannot be deducted from employees. One late month is manageable. A repeated pattern turns into a meaningful amount, and it also gets flagged during any due diligence.
Do we need professional tax registration for one remote employee in another state?
If that state levies PT, generally yes. Most PT states require an employer registration as well as deduction and payment for the employee, along with a return on the state's own schedule. The safest habit is to check registrations at your first hire in a new state rather than waiting until you have a team there.
Can HR software make us compliant on its own?
It removes the mistakes that come from manual work: wrong slabs, missed due dates, deductions that stop when they should not, records that cannot be produced later. It cannot fix a salary structure that was designed wrong, an employee misclassified as a consultant, or a vendor whose PF you never verified. Those are decisions somebody has to take. Once taken, software will apply them the same way every month, but it will not take them for you.
Where to Start
Do not try to fix everything this quarter. Start with a short review that fits in one afternoon.
Pull your last three months of PF and ESI challans and match them against payroll. Check what percentage of gross your basic actually is. List every state you have an employee in, and next to each one write down which registrations you hold. Check whether anybody who has been with you five years is being provisioned for gratuity. Ask your contract vendors for last month's challans.
Whatever comes out of that is your list, and it will be shorter than you fear. Most of it is process rather than money: someone named as the owner of each due date, and payroll running on data that can actually be produced later.
If you want to see what that looks like when it runs in one place, book a demo and bring your actual salary structure and the list of states you employ in. Watching your own numbers go through PF, ESI, PT and TDS tells you more than any checklist, including this one. You can also see how the deductions come together on a single payslip using our payslip generator.
