How to Set Up Payroll for a New Business in India: Complete Checklist 2026
Starting a business in India is exciting, but one of the most critical operational decisions you will make from day one is how to set up payroll correctly. According to a 2025 survey by the Confederation of Indian Industry (CII), over 60% of new businesses in India face at least one compliance notice related to payroll or statutory deductions within their first 18 months of operation. The penalties for getting it wrong can be severe, ranging from Rs 10,000 for a missing TAN to damages of up to 25% for late PF deposits.
Whether you are hiring your first employee or scaling to a team of fifty, this comprehensive guide walks you through every step of payroll setup, from obtaining the right registrations to running your first salary cycle. We have designed this as a practical, actionable checklist that you can follow in sequence, ensuring you do not miss a single compliance requirement.
By the end of this guide, you will have a clear roadmap for setting up a fully compliant payroll system, understand how to structure salaries under the Labour Codes 2025, know every statutory deadline you must meet, and have the confidence to run payroll without worrying about penalties.
What Is Payroll? Definition and Why It Matters
Payroll is the process of calculating and distributing employee compensation, including base salary, allowances, statutory deductions such as Provident Fund (PF), Employee State Insurance (ESI), Tax Deducted at Source (TDS), and Professional Tax (PT), and the resulting net pay that reaches an employee’s bank account. In simple terms, payroll is every calculation and action between agreeing on an employee’s CTC (Cost to Company) and depositing their take-home salary.
For a new business in India, setting up payroll correctly from day one is not optional — it is a legal necessity. The Income Tax Act, the EPF & MP Act, the ESI Act, and various state-level Professional Tax acts all mandate specific registrations, deductions, and filing timelines. Non-compliance penalties can reach Rs 5 lakh or more, and in some cases, directors can face imprisonment under the PF and ESI acts.
Beyond compliance, payroll directly impacts employee trust. When salary arrives on time, with a clear payslip showing every component and deduction, employees feel secure. When it does not, attrition follows. A study by PeopleMatters found that payroll errors are the number one reason employees in Indian SMBs lose trust in their employer within the first six months.
| Why Payroll Setup Order Matters The 12 steps in this checklist are arranged in dependency order. For example, you cannot register for TRACES without a TAN, and you cannot file PF returns without an Establishment Code. Follow the sequence to avoid rework and delays. |
Pre-Payroll Setup: 5 Registrations You Need
Before you can process a single salary payment, your business needs to complete several statutory registrations. Each registration serves a specific purpose in the payroll ecosystem, and missing any of them can block your ability to deduct taxes, deposit provident fund contributions, or file mandatory returns.
Step 1: Obtain Company PAN and TAN
PAN (Permanent Account Number) is a ten-character alphanumeric identifier issued by the Income Tax Department. Every business entity in India — whether a sole proprietorship, partnership, LLP, or private limited company — must have a PAN to conduct financial transactions and file tax returns.
TAN (Tax Deduction and Collection Account Number) is a separate ten-character number specifically required for entities that deduct or collect tax at source. If you are hiring employees and paying salaries, you must deduct TDS from their salary. You cannot do this without a TAN.
How to apply: Apply for PAN through NSDL (onlineservices.nsdl.com) or UTIITSL (pan.utiitsl.com). For TAN, submit Form 49B through the NSDL portal. Both applications can be completed online and cost approximately Rs 100-115 for e-PAN/e-TAN.
Key details:
- Processing time: 7-15 business days for each
- PAN is required for all other registrations (PF, ESI, TRACES)
- TAN is mandatory before deducting any TDS from employee salaries
- Penalty for not obtaining TAN: Rs 10,000 (Section 272BB of Income Tax Act)
- Both PAN and TAN should be applied for immediately after company incorporation
| Pro Tip: Apply for PAN and TAN Simultaneously Since both require similar company documents, submit both applications on the same day. This saves time and ensures you have all prerequisites ready for subsequent registrations. |
Step 2: Register for Provident Fund (EPFO)
The Employees’ Provident Fund Organisation (EPFO) manages India’s largest social security scheme. PF registration is mandatory for every establishment employing 20 or more employees. However, businesses with fewer than 20 employees can register voluntarily, which many do to attract better talent.
Registration portal: unifiedportal-emp.epfindia.gov.in
Documents required:
- Company PAN card
- Certificate of Incorporation or Registration Certificate
- Address proof of the establishment (utility bill, lease agreement)
- Bank account details with cancelled cheque
- Digital Signature Certificate (DSC) of the authorised signatory
- List of all employees with their Aadhaar numbers
- First salary disbursement proof or employee appointment letters
Upon successful registration, you receive an Establishment Code, which is your unique identifier for all PF-related filings. Processing typically takes 3-7 business days for online applications.
Step 3: Register for ESI (ESIC)
The Employees’ State Insurance Corporation (ESIC) provides medical, disability, and maternity benefits to employees. ESI registration is mandatory for establishments with 10 or more employees in notified areas (most urban and semi-urban regions).
Applicability: ESI applies to employees earning a gross salary of up to Rs 21,000 per month (Rs 25,000 per month for persons with disabilities). Employees earning above this threshold are exempt.
Registration portal: esic.gov.in
Documents required:
- Company PAN and Registration Certificate
- Address proof of the establishment
- Complete list of employees with Aadhaar and bank details
- Bank account details of the establishment
Upon registration, you receive an Employer Code. Each eligible employee also gets an ESI Insurance Number. Processing time is 3-7 business days.
Step 4: Register for Professional Tax
Professional Tax is a state-level tax levied on salaried employees and professionals. Unlike PF and ESI, which are central-level regulations, Professional Tax rules vary significantly from state to state.
Key facts:
- Maximum Professional Tax: Rs 2,500 per year (as per the Constitution)
- Some states require employer registration even for a single employee
- Major states with PT: Maharashtra, Karnataka, West Bengal, Tamil Nadu, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh, Kerala, Odisha, Assam, Meghalaya, Tripura, Jharkhand, Bihar, Sikkim
- States with no PT or suspended PT: Rajasthan, Delhi (suspended), Haryana (notified but not active for all categories), Uttarakhand, Uttar Pradesh, Himachal Pradesh
Register with your state’s tax authority or commercial tax department. The process is usually online and takes 5-10 business days. You will need your company PAN, registration certificate, and details of employees working in that state.
Step 5: Register on TRACES Portal
TRACES (TDS Reconciliation Analysis and Correction Enabling System) is the government portal for filing TDS returns, downloading TDS certificates (Form 16), and managing all TDS-related compliance.
Portal: tdscpc.gov.in
Registration steps:
- Register as a ‘Deductor’ using your company TAN
- Verify using PAN and email/mobile OTP
- Once registered, you can file quarterly TDS returns (Form 24Q for salary TDS)
- Generate Form 16 for employees at the end of the financial year
TRACES registration is entirely online and usually completes within 24-48 hours. You will need your TAN, PAN, and the email ID and mobile number of the authorised person.
Designing a Compliant Salary Structure
Salary structuring is one of the most important decisions in payroll setup. A well-designed salary structure maximises tax efficiency for employees while ensuring full compliance with labour laws. Under the Labour Codes 2025, the rules for salary structuring have changed significantly.
The 50% Basic Salary Rule Under Labour Codes 2025
The most critical change under the new Labour Codes is the redefinition of ‘wages.’ Basic salary (or ‘wages’ as defined in the Code on Wages) must constitute at least 50% of an employee’s total remuneration. This means that if an employee’s CTC is Rs 5,00,000 per year, their basic salary must be at least Rs 2,50,000.
This rule has significant implications for payroll costs:
- Higher basic salary means higher PF contributions (calculated on basic salary)
- Higher basic salary increases gratuity liability (calculated on last drawn basic)
- Employers who previously kept basic at 30-40% of CTC must restructure
- Non-compliance can result in penalties under the Code on Wages
Recommended Salary Components
- Basic Salary: 50% of CTC (minimum as per Labour Codes)
- House Rent Allowance (HRA): 40-50% of Basic (50% for metro cities, 40% for non-metro)
- Special Allowance: Balancing figure to make total match CTC
- Employer PF: 12% of Basic (capped at Rs 15,000 basic for mandatory contribution)
- Employer ESI: 3.25% of Gross (applicable if gross salary is up to Rs 21,000/month)
- Gratuity: 4.81% of Basic (provision for Payment of Gratuity Act)
- NPS (optional): Employer contribution up to 10% of Basic for additional tax benefit
Sample Salary Breakup: Rs 5 LPA CTC
The following table illustrates how a Rs 5,00,000 per annum CTC can be structured in compliance with the Labour Codes 2025, with basic salary at 50% of CTC:
| Salary Component | Monthly (Rs) | Annual (Rs) |
| Basic Salary | 20,833 | 2,50,000 |
| House Rent Allowance (HRA) | 10,417 | 1,25,000 |
| Special Allowance | 5,564 | 66,775 |
| Employer PF (12% of Basic) | 1,800 | 21,600 |
| Employer ESI (3.25% of Gross) | 1,197 | 14,362 |
| Gratuity (4.81% of Basic) | 1,002 | 12,013 |
| NPS (Optional) | 0 | 0 |
| Total CTC (Approx.) | 40,813 | 4,89,750* |
*Note: The special allowance is adjusted to bring the total CTC to exactly Rs 5,00,000. The figures above are rounded approximations. Employer PF is capped at 12% of Rs 15,000 (Rs 1,800/month) for the mandatory contribution.
Employee Documentation Checklist
Before you can process payroll for any employee, you must collect specific documents. Missing documents can delay PF registration, cause TDS miscalculation, or create compliance issues during audits. Here is the complete list:
Mandatory Documents:
- Aadhaar Card: Mandatory for PF. EPFO requires Aadhaar-UAN linking for all employees, and PF filings will be rejected if Aadhaar is not linked.
- PAN Card: Mandatory for TDS calculation and filing. Without PAN, TDS must be deducted at 20% (higher rate).
- Bank account details: Account number and IFSC code for salary transfer. Verify with a cancelled cheque or bank statement.
- Previous employer Form 16 (Part A and Part B): For employees joining mid-year, this is essential to calculate correct TDS.
- Investment declaration (Form 12BA / Form 12BB replacement): Employees declare their planned tax-saving investments (Section 80C, 80D, HRA exemption, etc.) so you can calculate monthly TDS accurately.
Recommended Additional Documents:
- Emergency contact details
- Passport-size photographs (for ID cards and official records)
- Education certificates and experience letters (for background verification)
- Medical fitness certificate (for certain industries)
- Signed appointment letter and employment contract
- Non-disclosure agreement (NDA) if applicable
| Important: UAN-Aadhaar Linking As of 2024, EPFO has made Aadhaar-UAN linking mandatory for all ECR (Electronic Challan cum Return) filings. If even one employee’s Aadhaar is not linked to their UAN, your entire monthly PF filing can be rejected. Collect Aadhaar at the time of joining and complete the linking process immediately. |
Setting Up Attendance Tracking
Accurate attendance tracking is the foundation of correct payroll calculation. Without it, you cannot accurately prorate salaries for partial months, track leaves, calculate overtime, or maintain compliance with the Factories Act and Shops & Establishments Act.
Attendance Tracking Methods
- Biometric devices: Fingerprint or facial recognition systems installed at the workplace. Reliable for office-based teams but expensive for small businesses (Rs 5,000-25,000 per device).
- GPS-based mobile apps (such as SalaryBox): Employees mark attendance from their smartphones with GPS verification. Ideal for field teams, remote workers, and businesses with multiple locations. Cost-effective and scalable.
- RFID/Smart Cards: Proximity cards swiped at entry/exit points. Common in manufacturing and large offices.
- Manual registers: Paper-based attendance. Acceptable for very small teams but error-prone, difficult to audit, and not recommended for businesses planning to scale.
What to Configure
- Working hours: Define standard hours per day (8, 9, or 12 hours based on your work schedule and applicable labour laws)
- Leave policy: Define the number of Casual Leave (CL), Earned Leave (EL), and Sick Leave (SL) days per year. Most states mandate 12-21 earned leaves per year.
- Shift schedules: If your business operates in shifts, configure shift timings and rotation rules
- Overtime rules: Define how overtime is calculated (typically 2x the ordinary rate of wages for work beyond standard hours, as per the Factories Act)
- Holiday calendar: Mark national holidays, state-specific holidays, and company-declared holidays
Statutory Deduction Rates for FY 2026-27
The following table provides a comprehensive reference of all statutory deductions that apply to payroll in India. These rates are effective for FY 2026-27 and should be configured in your payroll system before processing the first salary:
| Deduction | Employee Share | Employer Share | Applicability | Cap / Limit |
| EPF | 12% of Basic | 12% of Basic (3.67% EPF + 8.33% EPS) | 20+ employees | Basic capped at Rs 15,000 |
| ESI | 0.75% of Gross | 3.25% of Gross | 10+ employees, Gross <= Rs 21,000/mo | No cap within threshold |
| Professional Tax | Varies by state | N/A | State-specific | Max Rs 2,500/year |
| TDS (Income Tax) | As per tax slab | N/A | All salaried employees | Based on regime (old/new) |
| LWF | State-specific | State-specific | State-specific | Nominal amounts (Rs 5-25) |
Note on EPF calculation: While the employee’s full 12% goes to the EPF account, the employer’s 12% is split — 3.67% goes to EPF and 8.33% goes to the Employee Pension Scheme (EPS). The EPS contribution is capped at Rs 15,000 basic salary (i.e., maximum Rs 1,250/month to EPS).
Payroll Calendar: Key Deadlines You Must Not Miss
Missing a payroll deadline in India does not just mean a late fee — it can mean compounding interest, damages, and even prosecution in severe cases. Set up calendar reminders for every deadline listed below. Better yet, use payroll software that automates these reminders.
Monthly Deadlines
| Deadline | Task | Penalty for Delay |
| 1st-7th of month | Pay employee salaries (Labour Codes: within 7 days of wage period end) | Non-compliance under Payment of Wages Act |
| 7th of following month | Deposit TDS with government (Challan 281) | 1.5% per month interest on TDS amount |
| 15th of following month | Deposit PF contributions and file ECR | 5-25% damages + interest at prescribed rate |
| 15th of following month | Deposit ESI contributions | 12% per annum interest |
| As per state schedule | Deposit Professional Tax | Varies by state (typically Rs 5-10/day) |
Quarterly and Annual Deadlines
| Deadline | Task | Form / Portal |
| July 31 | File Q1 TDS return (April-June) | Form 24Q on TRACES |
| October 31 | File Q2 TDS return (July-September) | Form 24Q on TRACES |
| January 31 | File Q3 TDS return (October-December) | Form 24Q on TRACES |
| May 31 | File Q4 TDS return (January-March) | Form 24Q on TRACES |
| April 11 | File ESI half-yearly return (Oct-March) | ESIC Portal |
| November 11 | File ESI half-yearly return (April-September) | ESIC Portal |
| June 15 | Issue Form 16 to employees | Generated via TRACES |
Running Your First Payroll: Step-by-Step
You have completed all registrations, designed your salary structure, collected employee documents, and set up attendance tracking. Now it is time to process your first payroll. Follow these steps carefully:
Step 1: Finalise Attendance for the Month
Lock attendance records at the end of the pay period. Review for any discrepancies, unapproved leaves, or missing check-ins. For the first month, pay special attention to mid-month joiners whose attendance will be prorated.
Step 2: Calculate Gross Salary
For full-month employees, gross salary is the sum of all earning components (basic + HRA + special allowance + any other allowances). For mid-month joiners, prorate the salary:
Prorated salary = (Monthly salary / Total calendar days in the month) x Number of days worked
Some companies use working days instead of calendar days for proration. Choose one method and apply it consistently.
Step 3: Apply Statutory Deductions
- PF (Employee share): 12% of Basic salary (capped at Rs 15,000 basic for mandatory contribution)
- ESI (Employee share): 0.75% of Gross salary (only if gross is up to Rs 21,000/month)
- Professional Tax: As per applicable state slab (deducted monthly or as per state schedule)
Step 4: Calculate TDS
TDS calculation for the first payroll requires careful attention:
- Determine the employee’s chosen tax regime (old or new regime under Section 115BAC)
- Project their total annual income based on the current salary
- For mid-year joiners, collect previous employer Form 16 to factor in income already earned
- Apply standard deduction of Rs 75,000 (new regime) or Rs 50,000 (old regime)
- Apply declared deductions (Section 80C, 80D, HRA exemption, etc. for old regime)
- Calculate annual tax liability and divide by remaining months in the financial year
- This monthly figure is the TDS to deduct from each salary payment
Step 5: Calculate Net Pay
Net Pay = Gross Salary – Employee PF – Employee ESI – Professional Tax – TDS – Any Other Deductions
Step 6: Generate Payslips
Every employee is legally entitled to a payslip under the Payment of Wages Act. The payslip must show all earnings, all deductions, and the net pay amount. Generate payslips before salary transfer and make them available to employees on or before the payment date.
Step 7: Transfer Salaries
Transfer net pay to employee bank accounts. Use NEFT, RTGS, or IMPS for transfers. If paying more than 10 employees, consider setting up a salary disbursement account with your bank for bulk transfers. Remember: salary payments above Rs 10,000 must not be made in cash (Payment of Wages Act).
Step 8: Deposit Statutory Dues
- Deposit PF contributions (employee + employer share) by the 15th of the following month via the EPFO portal
- Deposit ESI contributions (employee + employer share) by the 15th of the following month via the ESIC portal
- Deposit TDS by the 7th of the following month using Challan 281 on the Income Tax e-filing portal
- Deposit Professional Tax as per your state’s schedule
Step 9: File Monthly PF ECR
After depositing PF, file the Electronic Challan cum Return (ECR) on the EPFO unified portal. The ECR contains employee-wise PF contribution details and must match the amount deposited. This is a monthly filing with no exceptions.
10 Common First-Time Payroll Mistakes (and How to Avoid Them)
Setting up payroll for the first time is complex, and mistakes are common. Here are the ten most frequent errors new businesses make, along with guidance on how to avoid each one:
- Not registering for TAN before the first salary payment. You cannot legally deduct TDS without a TAN. Apply for TAN immediately after incorporation, even before hiring your first employee. The processing time is 7-15 days, so plan ahead.
- Keeping basic salary below 50% of CTC. Many businesses still structure salaries with basic at 30-40% to reduce PF liability. Under the Labour Codes 2025, this is non-compliant. Restructure all salary offers to ensure basic is at least 50% of total remuneration.
- Missing PF and ESI deposit deadlines. Late PF deposits attract damages of 5-25% of the contribution amount, plus interest. Late ESI deposits attract 12% per annum interest. Set up automated reminders for the 15th of every month.
- Not linking employee Aadhaar to UAN. EPFO rejects ECR filings if any employee’s Aadhaar is not linked to their Universal Account Number. Make Aadhaar-UAN linking part of your onboarding process and verify before filing the first ECR.
- Ignoring Professional Tax registration. Many new businesses focus on PF and ESI but forget Professional Tax. This is a state-level requirement, and non-registration can result in penalties and back-assessments. Check your state’s PT rules immediately.
- Not collecting previous employer Form 16 for mid-year joiners. Without the previous employer’s Form 16, you cannot accurately calculate TDS for the current year. You may end up under-deducting or over-deducting tax.
- Paying salary in cash above Rs 10,000. The Payment of Wages Act mandates that salary payments exceeding Rs 10,000 must be made through bank transfer. Cash payments above this threshold are a violation.
- Not maintaining payroll records. Indian labour laws require businesses to maintain payroll records (salary registers, attendance records, leave records, PF/ESI contribution records) for a minimum of 3 years. Some states require 5 years.
- Wrong TDS calculation by not accounting for regime choice. India has two income tax regimes — old and new (Section 115BAC). Employees must declare their choice, and TDS must be calculated accordingly. The new regime is the default if no declaration is made.
- Skipping payslip generation. Payslips are mandatory under the Payment of Wages Act. Beyond compliance, payslips build transparency and trust. Employees need payslips for loan applications, visa processing, and tax filing.
Penalties for Payroll Non-Compliance in India
Understanding the financial consequences of non-compliance is essential motivation for getting payroll right from the start. Here is a quick-reference table of penalties:
| Non-Compliance Area | Penalty / Consequence |
| No TAN before TDS deduction | Rs 10,000 (Section 272BB) |
| Late PF deposit | 5-25% damages + interest at prescribed rate |
| Late ESI deposit | 12% per annum interest on the amount due |
| Late TDS deposit | 1.5% per month interest on TDS amount |
| Not filing TDS return on time | Rs 200/day late fee (max = TDS amount owed) |
| Salary payment in cash > Rs 10,000 | Fine under Payment of Wages Act |
| No appointment letter issued | Penalty under Labour Codes (fines up to Rs 50,000) |
| Not maintaining payroll records | Penalty under Shops & Establishments Act / Labour Codes |
| Incorrect TDS deduction or non-deduction | Interest + disallowance of expense under Section 40(a)(ia) |
| Non-registration under PF/ESI when applicable | Prosecution of directors + back-payment with damages |
| Remember: Compliance Penalties Add Up A single missed PF deadline with damages of 25% on a contribution of Rs 50,000 means Rs 12,500 in penalties. Multiply that across 12 months and add interest, and you could face lakhs in avoidable costs. Automated payroll software eliminates this risk entirely. |
Choosing the Right Payroll Software
The final step in setting up your payroll system is choosing the right software. While it is technically possible to manage payroll manually using Excel, this approach becomes impractical and risky beyond a handful of employees. Here is a comparison of the most popular options for Indian businesses:
Manual Payroll (Excel/Spreadsheets)
- Cost: Free
- Best for: 1-5 employees (temporary solution only)
- Limitations: No automatic statutory calculations, high error rate, no auto-filing, no payslip generation, not scalable, difficult to audit
SalaryBox
- Cost: Free for small teams; affordable premium plans
- Best for: Indian SMBs with 1-500 employees
- Key features: Auto-calculates PF, ESI, TDS, and Professional Tax. Attendance tracking (GPS-based) and payroll processing in a single app. Automatic payslip generation. Bank-ready salary disbursement files. Employee self-service portal. Compliance calendar with automated reminders.
- Why it stands out: Purpose-built for Indian payroll regulations, SalaryBox combines attendance and payroll in one platform, eliminating the need for separate tools.
Tally
- Cost: Rs 18,000-54,000/year
- Best for: Businesses already using Tally for accounting
- Limitations: Payroll is an add-on module; attendance tracking requires a separate tool; primarily an accounting solution
Zoho Payroll
- Cost: Rs 40-100 per employee/month
- Best for: Medium businesses integrated with the Zoho ecosystem
- Limitations: Separate tool needed for attendance tracking; per-employee pricing can become expensive
Keka / GreytHR
- Cost: Rs 50-150+ per employee/month
- Best for: Mid-size to large enterprises with 100+ employees
- Limitations: Higher cost, more complex setup, features may be overkill for small businesses
| Set Up Your Payroll in Minutes with SalaryBox Stop worrying about compliance deadlines and penalty calculations. SalaryBox auto-calculates PF, ESI, TDS, and Professional Tax. Attendance + Payroll + Payslips — all in one app. Download Free: salarybox.in Available on Android & iOS |
Frequently Asked Questions (FAQ)
Below are answers to the most common questions new business owners have about setting up payroll in India.
Q: What is payroll and why is it important for a new business?
A: Payroll is the complete process of calculating employee compensation, applying statutory deductions (PF, ESI, TDS, Professional Tax), and distributing net pay to employees. For a new business, payroll is critical because it directly affects legal compliance, employee satisfaction, and financial planning. Incorrect payroll can lead to penalties from EPFO, ESIC, and the Income Tax Department, while delayed or inaccurate salary payments erode employee trust.
Q: What registrations do I need before running payroll in India?
A: At minimum, you need: (1) Company PAN for tax identification, (2) TAN for TDS deduction, (3) PF registration if you have 20+ employees (voluntary for smaller teams), (4) ESI registration if you have 10+ employees in notified areas, (5) Professional Tax registration as required by your state, and (6) TRACES registration for TDS return filing. All of these can be completed online, and the total setup time is typically 2-4 weeks.
Q: How do I register for PF as a new employer?
A: Register online at unifiedportal-emp.epfindia.gov.in. You will need your company PAN, incorporation certificate, address proof, bank details, a Digital Signature Certificate (DSC), and the Aadhaar details of all employees. The process takes 3-7 business days, and upon approval, you receive an Establishment Code for all subsequent PF filings.
Q: What is the 50% basic salary rule under the Labour Codes 2025?
A: The Labour Codes redefine ‘wages’ to require that basic salary must constitute at least 50% of an employee’s total remuneration. This means if an employee’s CTC is Rs 10 lakh, their basic salary must be at least Rs 5 lakh. This rule impacts PF and gratuity calculations since both are computed on basic salary. Companies that previously kept basic at 30-40% must restructure their salary components to comply.
Q: When should PF and ESI be deposited each month?
A: Both PF and ESI contributions (employee share plus employer share) must be deposited by the 15th of the month following the salary month. For example, if you pay salaries for July 2026, the PF and ESI deposits must be made by August 15, 2026. TDS must be deposited by the 7th of the following month. Missing these deadlines results in interest and penalty charges.
Q: How do I calculate TDS on salary for the first time?
A: To calculate TDS: (1) Determine the employee’s total projected annual income. (2) Check if they have opted for the old or new tax regime (new regime is default). (3) Apply the standard deduction (Rs 75,000 for new regime, Rs 50,000 for old). (4) For old regime, subtract declared deductions under Section 80C, 80D, etc. (5) Calculate tax on the resulting taxable income as per applicable slabs. (6) Divide the annual tax by 12 (or remaining months for mid-year joiners) to get the monthly TDS.
Q: Do I need payroll software for a small business?
A: While not legally mandatory, payroll software is strongly recommended even for small businesses. Manual payroll in Excel is feasible for 1-5 employees but becomes error-prone and time-consuming beyond that. Software like SalaryBox automates statutory calculations, generates payslips, sends compliance reminders, and keeps audit-ready records. Many payroll tools offer free plans for small teams, making the investment worthwhile from day one.
Q: What payroll records should I maintain, and for how long?
A: Indian labour laws require you to maintain salary registers, attendance records, leave records, PF and ESI contribution records, TDS computation sheets, and payslip copies for a minimum of 3 years. Some states require 5 years under the Shops and Establishments Act. It is best practice to maintain digital records indefinitely, as they may be needed for employee disputes, tax assessments, or labour inspections.
Q: What happens if I miss a PF deposit deadline?
A: Late PF deposits attract two types of penalties: (1) Damages ranging from 5% to 25% of the contribution amount, calculated based on the duration of the delay. (2) Interest at 12% per annum on the outstanding amount. In extreme cases of persistent non-compliance, EPFO can initiate prosecution against the directors of the company.
Q: How do I handle payroll for mid-month joiners in the first month?
A: For employees who join mid-month, calculate their salary on a prorated basis. The most common formula is: Prorated salary = (Full monthly salary / Total calendar days in the month) x Number of days worked. Apply all statutory deductions (PF, ESI, TDS) on the prorated amount. Make sure to collect all onboarding documents before processing their first salary.
Conclusion
Setting up payroll for a new business in India requires careful planning and attention to multiple regulatory requirements. By following this 12-step checklist — from obtaining your PAN and TAN to running your first salary cycle — you can build a compliant, efficient payroll system from day one.
The key takeaways to remember are: register for all statutory compliances before processing your first salary, structure salaries with basic at 50% or more of CTC to comply with the Labour Codes 2025, never miss deposit deadlines for PF, ESI, and TDS, maintain complete payroll records for at least 3 years, and consider investing in payroll software to automate calculations and compliance tracking.
Payroll may seem overwhelming at first, but with the right systems in place, it becomes a streamlined monthly process. Tools like SalaryBox are specifically designed to handle the complexity of Indian payroll regulations, letting you focus on growing your business rather than worrying about compliance penalties.
