Payroll errors often go unnoticed but they can quietly lead to compliance risks, penalties, and financial losses for your business. From EPF & ESIC non-compliance to incorrect TDS calculations and poor record-keeping, even small mistakes can have a big impact.
In this guide, we break down the 5 most common payroll mistakes and how you can fix them early to ensure smooth operations and stay legally compliant.
Author: TalentCo HR Services
The Beginner’s Guide to Payslips
Most employees receive a payslip every month but rarely read it with full understanding. Every component on that document has a name, a purpose, and a legal basis and knowing what each one means can directly affect how much tax is paid, how much PF is accumulated, and whether entitlements are being correctly applied. This article breaks down every component of a payslip, explains how it is calculated, and highlights what employees commonly miss.
According to industry surveys, a significant proportion of employees estimated at around 60% do not fully understand the components of their payslip, which can lead to confusion about actual earnings, deductions, and benefits.
Research also indicates that approximately 1 in 3 employees end up overpaying income tax, often because they miss making the necessary declarations or fail to submit proof of investments and expenses on time. (Source: Income Tax Department – TDS on Salary)
Surveys further suggest that a significant share of employees in some estimates, as many as 74% have never checked their Form 26AS to verify their TDS (Tax Deducted at Source) credits, which increases the risk of discrepancies in tax filings and potential financial loss. (Source: CBDT – Form 26AS Overview)
The gap nobody talks about
Consider a common scenario: an employee is offered ₹10 LPA. The monthly credit to their account is ₹69,000 which works out to ₹8.28L annually, not ₹10L. The difference of ₹1.72L is accounted for by statutory deductions and employer-borne costs included in the CTC. This is a standard feature of how CTC is structured in India, and the payslip is the document that explains every element of it.
CTC (Cost to Company) is the total expense your employer incurs including their PF contribution, gratuity, and insurance. It is a notional figure, not your take home. Gross salary is what you earn before deductions. Net salary is what lands in your bank. The Payment of Wages Act, 1936 mandates employers furnish a wage slip every pay period.
What every line on your payslip means
Here is a decoded breakdown of a typical ₹10 LPA payslip every component, its purpose, and the law behind it.
Understanding Deductions in Detail
Special Allowance
Special Allowance: This is a fully taxable component used by employers to bridge the gap between CTC and structured allowances such as Basic and HRA. It carries no exemptions. Employers include it to meet a target CTC figure without inflating components that affect PF or HRA calculations.
Tax Deducted at Source (TDS)
TDS is not a separate tax it is the annual income tax liability divided across 12 months. The employer estimates the employee’s tax liability for the year and deducts a proportionate amount
each month. This amount reduces when the employee submits Form 12BB declarations covering rent, ELSS, PPF, and insurance premiums. Declarations should be submitted at the start of the financial year in April, not at the end in March. (Ref: Section 192 – Income Tax Act)
Professional Tax
This is a state-level statutory levy. The applicable amount varies by state — Maharashtra, for example, caps it at ₹200 per month, while certain states such as Delhi do not levy it at all.
Professional Tax is deductible from taxable income under Section 16(iii) of the Income Tax Act.
Provident Fund (PF)
The employee contributes 12% of Basic Pay to the EPFO account each month, and the employer matches this with an equivalent 12% contribution. In the example above, this amounts to a combined monthly credit of ₹9,600 to the employee’s PF account, earning interest at 8.25% per
annum as applicable. The employee’s contribution is deductible under Section 80C of the Income
Tax Act. PF accumulations are generally accessible upon retirement at age 58, subject to applicable EPFO regulations.
How Form 12BB Declarations Affect Take-Home Pay
One of the most direct ways to reduce monthly TDS is through the Form 12BB declaration submitted at the start of every financial year. When employees inform their employer of rent payments, ELSS investments, PPF contributions, and insurance premiums at the beginning of April, the employer factors these into the TDS calculation and reduces the monthly deduction accordingly. Many employees either skip this step or submit declarations late in March rather than April.
When declarations are submitted late, TDS is deducted at a higher rate for most of the year. The employee then claims a refund during ITR filing which means the excess amount remains with the government, interest-free, for several months. Under Section 80C of the Income Tax Act, investments up to ₹1.5L per year including PF, ELSS, PPF, and life insurance premiums reduce taxable income directly, and timely declaration ensures these benefits are reflected in monthly take-home pay rather than recovered as a lump-sum refund.
Important: Timing of Investment Declarations
Declare your investments in April not March. The earlier you submit Form 12BB, the more your TDS reduces across the full year. Late declarers get a refund instead of monthly savings, which means less cash flow all year long.
Common Payslip Questions, Answered
The following addresses questions employees commonly raise about their payslip components:
- “My PF says ₹4,800, where’s my employer’s share?” Into the same EPFO account. Your total monthly credit is ₹9,600. Verify it on the EPFO Member Portal using your UAN.
- “I pay TDS monthly do I still file an ITR?” Yes, always. TDS is advance tax. ITR reconciles your actual liability you may get a refund or owe more. Skipping ITR blocks future loans and
- “My HRA is ₹20,000 but I pay ₹15,000 rent am I losing the gap?” Exemption is the lower of: actual HRA received, actual rent minus 10% of basic, or 40–50% of basic (by city). Submit receipts to HR to claim it.
- “CTC was ₹10L but I get ₹28L was I misled?” No. CTC includes employer’s PF, gratuity, and benefits. Ask HR for a written CTC breakup letter every employer must provide one under the Labour Codes.
5-Step Payslip Review
1. Confirm name, PAN, and UAN are Errors here affect TDS credit and PF access both are painful to fix later.
2. Verify PF deduction equal to exactly 12% of Basic Any discrepancy should be raised with HR in writing.
3. Check TDS against Form 26AS every quarter to confirm the employer is depositing
4.Compare HRA with your offer letter some companies silently reduce it at appraisal while keeping gross unchanged.
5.Save all payslips in one Banks, visa offices, and background-check firms ask for 3–6 months often at the worst moment.
Understanding a payslip in full its earnings, deductions, and statutory components enable employees to verify accuracy, make timely investment declarations, and avoid common errors in tax filing. Many employees forego significant savings each year simply due to undeclared investments, unverified TDS credits, or unclaimed HRA exemptions.
Reviewing last month’s payslip against the breakdown in this article is a practical starting point. Matching each component to its purpose, verifying PF and TDS figures, and checking Form 26AS quarterly are straightforward steps that can prevent errors and optimize tax outcomes over the full financial year.
References
- 1. Employees’ Provident Fund Organisation (EPFO) – Official Website: epfindia.gov.in
- 2. Income Tax Department of India – Official Portal: incometax.gov.in
- 3. Form 12BB – Investment Declaration Form (CBDT)
- 4. Payment of Wages Act, 1936 – Chief Labour Commissioner (CLC): gov.in/clc/acts- rules/payment-wages
- 5. Section 80C Deductions – Income Tax Department (AY 2026-27): gov.in – Salaried Individuals AY 2026-27
- 6. Code on Wages, 2019 – Ministry of Labour and Employment: https://labour.gov.in/offerings/schemes-and-services/details/labour-codes-gzNzQzMtQWa
- 7. EPFO FAQ on PF Contributions: gov.in/site_en/FAQ.php
Reader Note
TalentCo HR Services LLP is an HR consulting and solutions company offering services across HR operations, compliance, liasoning, payroll management, and HR technology through its proprietary platform — ABStart. This article is intended for general informational and educational purposes only. Labour laws, tax regulations, and compliance requirements are subject to change. Readers are advised to independently verify current regulations or consult qualified professionals before making any business or financial decisions. Our role is to simplify and present complex HR and payroll concepts in a comprehensible manner for business owners, HR professionals, and employees.
5 Common Payroll Mistakes Small Businesses in India Make and How to Fix Them
Payroll compliance is a critical operational responsibility for small businesses in India, yet it is often mishandled. Most defaults occur not due to negligence, but because the regulatory framework is complex, multi-layered, and frequently changes at both state and central levels. According to the Employees’ Provident Fund Organisation (EPFO) and the Ministry of Labour and Employment, small businesses default on thousands of crores in payroll obligations each year. With stricter enforcement under India’s new Labour Codes, the financial, legal, and reputational costs of non-compliance are increasing.
This article outlines five common payroll mistakes made by small businesses in India, explains why they occur, and provides the specific steps required to address each one.
1. Non-Compliance with EPF and ESIC Contributions
Among the most frequently observed payroll compliance failures is the incorrect or delayed registration and contribution under the Employees’ Provident Fund and the Employees’ State Insurance schemes. Under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, any establishment with 20 or more employees is required to register with the EPFO and contribute 12% of each employee’s basic salary towards the Provident Fund. Under the Employees’ State Insurance Act, 1948, businesses with 10 or more employees are required to register with ESIC and make contributions towards medical and disability coverage.
Common errors include delayed registration, miscalculating PF on an incorrect wage base, and excluding eligible contract staff. EPFO may levy damages for delays in depositing contributions, making timely compliance essential for employers. ESIC defaults attract penalties under Section 85, including possible prosecution.
Fix: Register with EPFO and ESIC as soon as the applicable employee threshold is crossed. Review the payroll structure to confirm that PF is being calculated on the correct wage components. Businesses that have delayed registration should approach the respective authorities proactively both EPFO and ESIC provide regularization provisions that are considerably less burdensome than a formal audit, allowing businesses to rectify errors with reduced penalties and legal risk.
2. Incorrect TDS Deduction on Salaries
Tax Deducted at Source on salary income, governed by Section 192 of the Income Tax Act, is among the more technically complex payroll obligations and one where processing errors are common across small businesses.
Most errors occur when employers deduct TDS without collecting investment declarations from employees or apply the wrong tax regime. Since the new tax regime became the default under Budget 2023, some businesses still process payroll under the old regime without confirming employee preferences. According to the Income Tax Department of India, TDS defaults attract interest under Sections 201 and 234E, plus penalties that may equal the total TDS amount. The consequences include unexpected tax demands for employees and short-deduction notices for the business.
Fix: At the beginning of each financial year, collect Form 12BB from all employees to record their investment declarations and confirm their chosen tax regime either physically or digitally through email or payroll software. Use payroll software that calculates TDS monthly based on projected annual income and adjusts as declarations are updated. TDS returns in Form 24Q must be filed on time every quarter without exception.
3. Non-Compliance with Applicable Minimum Wage
Minimum wage compliance in India is more nuanced than a single national standard. Applicable wages vary by state, industry sector, and employee skill category and state governments revise these figures periodically, in many cases twice a year.
Under the Minimum Wages Act, 1948 now being consolidated under the Code on Wages, 2019 employers are legally required to pay at least the applicable scheduled minimum wage. A business in Maharashtra and one in Tamil Nadu may face different wage obligations for the same role and skill level. Salaries fixed at onboarding and left unrevised can leave employees underpaid and the business legally exposed often without either party being aware.
Fix: Subscribe to notifications from the relevant State Labour Department and check the Labour Department portal at least once every six months. Build a biannual salary review into the HR calendar to ensure all employee compensation remains aligned with the latest applicable minimum wage revisions.
4. Mismanaging Statutory Bonus and Leave Encashment
Statutory bonus and leave encashment are frequently treated as discretionary payments payable based on business performance or individual circumstance. This is a misconception that carries significant legal and financial risk. Under the Payment of Bonus Act, 1965, any establishment with 20 or more employees is required to pay annual bonus to eligible employees regardless of whether the business turned a profit. Separately, earned leave encashment at the point of resignation or retirement carries specific obligations under the Shops and Establishments Act of the relevant state. When these liabilities are not accounted for in advance, businesses face both legal exposure and sudden cash flow pressure when the obligation falls due.
Fix: Treat statutory bonus and leave encashment as monthly accruals within the payroll budget not year-end decisions. Maintain a leave ledger for each employee and reconcile it every quarter. Once the business crosses the 20-employee mark, bonus provisions should be factored into the financial plan immediately.
5. Running Payroll Without Maintaining Statutory Registers
A common situation in small businesses is managing payroll through spreadsheets which, while functional for salary disbursement, do not meet the statutory recordkeeping requirements under Indian labour law. Consider a manufacturing business that processes payroll on time each month, makes PF deposits without delay, and pays all salaries correctly. During a labour inspection, the inspector requests attendance records linked to salary payments, a wage register in the prescribed format, and proof of overtime calculations as required under the Payment of Wages Act, 1936. A spreadsheet-based system typically cannot produce any of these in the required statutory format. The resulting compliance fees, consultant costs, and management disruption are entirely avoidable with the right systems in place.
Under Indian labour law, employers are required to maintain specific registers in prescribed formats including the Wage Register, Leave Register, Attendance Register, and Muster Roll. While digital formats are accepted in most states, these records must be maintained consistently and be available for inspection at any time.
Fix: Transition from spreadsheets to a compliant payroll software solution that auto-generates statutory registers in the required formats including Form A (Muster Roll), Register of Wages, and Register of Deductions. Indian-built platforms such as Keka, GreytHR, Zoho Payroll, and RazorpayX Payroll are designed for local compliance and generate these registers automatically.
Why Getting Payroll Right Matters
Payroll errors in India carry consequences that extend beyond financial penalties. A notice from the EPFO, a TDS default flagged by the Income Tax Department, or a failed labour inspection can disrupt business operations, affect employee confidence, and consume significant management time often at the most operationally inconvenient moments.
The five areas outlined above are among the most common compliance gaps observed across small businesses in India and each one is addressable with the right processes, tools, and awareness. For businesses looking to scale, getting payroll compliance right early is not just a legal requirement. It is a foundation for operational stability and organizational credibility.
Reviewing current payroll processes against applicable statutory requirements is a practical and low-cost starting point. Where gaps exist, addressing them proactively before an inspection or notice arrives is always the more cost-effective approach.
References
[1] Employees’ Provident Fund Organisation (EPFO) – Official Portal: www.epfindia.gov.in
[2] EPFO FAQ – PF Contributions and Registration: epfindia.gov.in/site_en/FAQ.php
[3] Ministry of Labour and Employment, Government of India: www.labour.gov.in
[4] Income Tax Department – Section 192 TDS on Salary: www.incometax.gov.in
[5] Payment of Bonus Act, 1965 – Chief Labour Commissioner: clc.gov.in – Payment of Bonus Act
[6] Payment of Wages Act, 1936 – Chief Labour Commissioner: clc.gov.in – Payment of Wages Act
[7] India Code – Payment of Bonus Act, 1965 (Legislative): indiacode.nic.in – Payment of Bonus Act
[8] Labour Bureau – Payment of Wages Act Reports: labourbureau.gov.in
Reader Note
TalentCo HR Services LLP is an HR consulting and solutions company offering services across HR operations, compliance, liasoning, payroll management, and HR technology through its proprietary platform — ABStart. This article is intended for general informational and educational purposes only. Labour laws, tax regulations, and compliance requirements are subject to change based on government notifications and jurisdictional updates. Readers are advised to independently verify current regulations or consult qualified professionals before making any business or financial decisions. Our role is to simplify and present complex HR and payroll concepts in a comprehensible manner for business owners, HR professionals, and employees.
CTC vs. Take-Home Salary
One of the most common points of confusion for working professionals in India is the difference between the CTC mentioned in an offer letter and the amount that actually gets credited to their bank account each month. This article breaks down the structure of CTC, explains each component clearly, and helps readers understand where their salary goes and why.
What Is CTC?
CTC is an acronym for Cost to Company. It represents the total annual expenditure an employer incurs on an employee. This includes not just the monthly salary, but also contributions toward statutory savings, benefits, and other allowances.
When a company states a CTC of ₹20 LPA (Lakhs Per Annum), it means the total cost of employing that individual across all heads, some of which are paid monthly, some held for the future, and some directed toward statutory obligations.
CTC is not the same as the amount deposited into an employee’s account each month. That figure is called take-home salary or in-hand salary, and it is always lower than CTC.
Components of CTC
1) Basic Salary
Basic salary is the fixed core component of the compensation structure. It is usually between 40% and 50% of the total CTC and is fully taxable under Indian income tax law.
Under the Code on Wages, 2019, the government mandated that the basic salary must be at least 50% of total remuneration. This move was intended to reduce the practice of artificially suppressing Basic salary to lower statutory contributions like the Provident Fund, Gratuity, Leave encashment, Bonus, etc.
2) House Rent Allowance (HRA)
HRA is a component provided to help employees meet rental expenses. It is typically calculated as a percentage of Basic salary:
• 50% of the basic salary for employees in metro cities (Mumbai, Delhi, Kolkata, Chennai)
• 40% of the basic salary for employees in non-metro locations
HRA is partially exempt from income tax for employees who pay rent, subject to conditions specified under Section 10(13A) of the Income Tax Act. Employees living in their own homes or with family without paying rent do not qualify for this exemption, and the full HRA becomes taxable in their case.
3) Special Allowance
Special allowance is the residual amount that fills the gap between the defined components and the total CTC. It is fully taxable and does not carry any specific statutory benefit or exemption. Its presence in the salary structure primarily serves to complete the CTC computation.
4) Provident Fund (PF)
Employees’ Provident Fund (EPF) is a statutory savings mechanism governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952. Both the employer and the employee contribute 12% of the employee’s Basic salary to the EPF account each month.
The employer’s contribution of 12% is included within the CTC figure. This is a significant reason why the CTC appears higher than the actual take-home amount. These funds are accessible to the employee upon retirement, resignation after a qualifying period, or under specific permitted withdrawal conditions.
With higher Basic salaries under the new Labour Codes, EPF contributions increase proportionally, strengthening long term financial security even if short-term take-home is marginally lower.
5) Gratuity
Gratuity is a statutory benefit payable under the Payment of Gratuity Act, 1972. It is a lump sum amount paid by the employer when an employee leaves the organization after completing at least five continuous years of service. It is calculated as 15 days’ Basic salary for every year of completed service. Although gratuity accrues over the tenure of employment, it forms part of the CTC structure from day one.
6) Other Allowances and Benefits
CTC may also include the following components, depending on the employer’s salary policy:
• Medical Allowance – provided for healthcare-related expenses
• Conveyance Allowance – for commuting costs
• Leave Travel Allowance (LTA) – partially exempt from tax for eligible travel within India
• Performance Bonus – variable pay linked to individual or company performance
The inclusion and value of these components vary by organization, role, and industry sector.
Deductions That Reduce Take-Home Salary
1) Tax Deducted at Source (TDS)
Employers are required to deduct income tax at source before crediting the monthly salary. The amount deducted depends on the employee’s total taxable income for the year and the tax regime they have opted for. (Ref: Section 192, Income Tax Act)
As of Budget 2023, the New Tax Regime is the default option. Employees may, however, opt for the Old Tax Regime if it is more beneficial, given deductions available under sections such as 80C, 80D, and exemptions like HRA.
2) Professional Tax
Professional tax is a state-level levy applicable in several Indian states. The amount typically ranges between ₹150 and ₹200 per month, depending on the state and income bracket. It is a relatively minor deduction but is reflected on every payslip.
3) Employee’s PF Contribution
As noted above, 12% of the basic salary is deducted from the employee’s gross pay each month and deposited into their EPF account. While this amount belongs to the employee, it is not immediately accessible and forms part of their long term savings.
How Take-Home Salary Is Calculated
The following formulas provide a standard framework for understanding the relationship between CTC and take home salary:
Gross Salary = CTC − Employer’s PF Contribution − Gratuity − Other Non-Cash Benefits
Take-Home Salary = Gross Salary − (Employee’s PF + TDS + Professional Tax)
For illustrative purposes: on a CTC of ₹10 LPA, the monthly take-home salary typically falls in the range of ₹65,000 to ₹72,000, depending on the city of residence, applicable tax regime, and specific salary structure. Actual figures will vary based on individual circumstances and employer policy.
Impact of the New Labour Codes
The Government of India has consolidated multiple labour laws into four new Labour Codes: the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. Once fully implemented, these codes are expected to bring meaningful changes to how salary structures are designed:
• Higher Basic salary thresholds will lead to proportionally higher PF, Gratuity, Leave encashment and bonus contributions.
• Clearer definitions of wages will reduce ambiguity in how CTC is structured.
• Extended social security coverage for gig and platform workers.
Employees may notice a slight reduction in short-term take-home salary as Basic salary proportions increase. However, this also means stronger statutory savings and greater long-term financial security.
Key Takeaways
Understanding the structure of CTC helps employees make informed financial decisions, from tax planning to evaluating job offers. The key distinctions to remember are:
• CTC is the employer’s total cost of employment — it is not the same as take-home salary.
• Several components within CTC are directed toward future savings or statutory obligations.
• Deductions, including TDS, employee PF, and professional tax, reduce the gross salary to the amount actually received.
• The New Tax Regime is the default option from FY 2023-24 onwards, though employees may evaluate the Old Regime based on their eligible deductions.
• The new Labour Codes, once implemented, will further reshape salary structures across organisations.
• CTC is the employer’s total cost of employment — it is not the same as take-home salary.
• Several components within CTC are directed toward future savings or statutory obligations.
• Deductions, including TDS, employee PF, and professional tax, reduce the gross salary to the amount actually received.
• The New Tax Regime is the default option from FY 2023-24 onwards, though employees may evaluate the Old Regime based on their eligible deductions.
• The new Labour Codes, once implemented, will further reshape salary structures across organisations.
References
[1] Code on Wages, 2019 – Ministry of Labour and Employment (Official Act): labour.gov.in – The Code on Wages, 2019
[2] Employees’ Provident Fund Organisation (EPFO) – Official Website: www.epfindia.gov.in
[3] EPFO – About EPFO and EPF Act, 1952: epfindia.gov.in/site_ en/AboutEPFO.php
[4] Income Tax Department – Section 10(13A) HRA Exemption & Section 80C: incometax.gov.in
[5] Income Tax Department – Official Portal: www.incometax.gov.in
[6] Ministry of Labour and Employment – Labour Reforms Overview (PIB): pib.gov.in – Labour Reforms: Code on Wages & Four Labour Codes
[7] Code on Wages 2019 – PRS Legislative Research Summary: prsindia.org – Code on Wages, 2019
[8] Payment of Gratuity Act – Ministry of Labour: www.labour.gov.in
Readers Note:
TalentCo HR Services LLP is an HR consulting and solutions company offering services across HR operations, compliance, liasoning, payroll management, and HR technology through its proprietary platform — ABStart.
This article is intended for general informational and educational purposes only. Labour laws, tax regulations, and compliance requirements are subject to change based on government notifications and jurisdictional updates. Readers are advised to independently verify current regulations or consult qualified professionals before making any business or financial decisions.
Our role is to simplify and present complex HR and payroll concepts in a comprehensible manner for business owners, HR professionals, and employees.
The 2026 HR Checklist : Preparing for New Indian Labour Codes & FY Transition
Things are looking bright for India’s Labour compliance system in 2026. What was supposed to be a complicated affair due to the adherence to 29 different central labour laws, filing multiple returns, and maintenance of separate registers isn’t there anymore. Moreover, confusion used to arise since an employee could fall under different definitions of “wages”, “worker”, and “establishment” depending on the law applied, increasing litigation and compliance costs for employers. Also, workers found it difficult to navigate all the rights and obligations clearly.
According to the Ministry of Labour and Employment, this framework is fragmented and outdated, and hence, changes are being introduced for all the good reasons. The government consolidated 29 central laws into four labour codes. The objectives are to simplify compliance, standardise definitions, and expand social security coverage. Its implementation was done on 21 November 2025 nationwide. This marks one of the biggest labour law reforms since independence.
For HR professionals, what does this mean? With this fresh regime, they must act now to align people strategy, payroll, contracts, policies, and governance. Well, if you are willing to know the various facets of this legal update, this blog will be immensely helpful for you.
Aligning your payroll and contracts with these four codes is a massive manual undertaking. This is exactly why we built ABStart, a product-led, end-to-end HRMS specifically targeted to HR managers and founders to automate 2026 Labour Code compliance from day 1.
Labour Code Basics: What HR Professionals Need to Understand
To prepare effectively, first understand what’s changed at the law level.
Four Labour Codes Now in Force (Nov 21, 2025)
- 1) Code on Wages, 2019
- 2) Code on Social Security, 2020
- 3) Occupational Safety, Health & Working Conditions Code, 2020
- 4) Industrial Relations Code, 2020
These codes replace old laws such as the Minimum Wages Act, ESI Act, PF Act, Factories Act, and many more.
Fact: Employers will still see old laws apply only until corresponding state-level rules under the new codes are notified and take effect. Most large states are in the final stage of notification as of early 2026.
Immediate Compliance Actions (Next 0–3 Months)
These are some of the few basic items every HR team must do to stay compliant in FY 2026–27:
- 1) Update Contracts & Appointment Letters
It has become necessary for HR teams to provide appointment letters to all workers (full-time, part-time, contract, gig platform, and even informal).
At the same time, workers must be given a compliant employment letter that includes:
- i) Wage structure (basic pay, allowances),
- ii) Employment category (permanent, fixed-term, gig, etc.),
- iii)Social security entitlements.
If stored securely, digital and scanned copies are also acceptable.
- 2) Review Wage Structures & Payroll
At least 50% of total remuneration must be defined as ‘wage’ (basic + dearness allowance + specified allowances). It’s something clearly highlighted under the updated Code on Wages.
This has a huge payroll impact:
- i) This uniform wage definition sets the standard for PF, gratuity, bonus, and leave encashment calculations.
- ii) Overtime must be paid at double the normal rate beyond standard hours.
Manually recalculating the 50% wage rule is prone to error. ABStart’s payroll engine automatically flags non-compliant salary structures and suggests corrections to meet the Code on Wages standards.
- 3) Document Working Hours & Overtime Policies
The new rules will provide workers all sorts of freedom and flexibility. The guidelines allow:
- i) Flexible daily hours: 8–12 hours,
- ii) Total work capped at 48 hours/week,
- iii) Mandatory overtime at double the hourly wage.
Being an employer, your role will include the following:
- i) Update internal policies and communicate clearly to workers;
- ii) Attendance and overtime records must be maintained digitally.
Mid-Term Actions (3–6 Months)
Naturally, you will prefer to embed compliance into HR & operations for transparency. How is that possible? These strategic actions can be your call:
- 1) Train HR, Payroll & Legal Teams
The law reframes:
- i) What’s the definition of a worker? (Gig and platform workers are now explicitly covered),
- ii) Wages: How it’s defined
- iii) What constitutes PF and ESIC eligibility.
Understanding these changes isn’t easy for HR and finance teams. For that to happen, they need to undergo internal training, compliance workshops, or expert sessions.
- 2) Digitise Records & Create a Compliance Repository
The codes encourage digital record-keeping, web-based inspections, and risk-based compliance checks.
Therefore, your tech stack should support:
- i) Appointment letters & contracts archive,
- ii) Payroll and wages data,
- iii) Working hours and overtime logs,
- iv) Gratuity and statutory calculations.
When this happens, inspections become easier, and audit risk is also fairly reduced.
- 3) Revise Policies for Safety, Welfare & Leave
The Occupational Safety, Health, and Working Conditions Code adds:
- i) Annual free health check-ups for workers aged 40+ (or defined categories),
- ii) Safety standards across sectors,
- iii) Updated leave entitlements (e.g., paid leave after 180 days of service).
Your job will be to:
- i) Update your internal safety and welfare policies accordingly;
- ii) Supervisors must be trained on record-keeping and compliance
- 4) Assess Fixed-Term Worker Benefits
Fixed-term employees can now reap the benefits of gratuity after 1 year of service. Previously, the scenario was different. At that time, the time period was 5 years.
This raises long-term costs in project-based workforces. So, you have to update workforce planning and accrual systems to forecast liabilities.
Ongoing & Long-Term Checklist
Labour compliance is a continuous process. Hence, HR professionals need to focus on certain aspects. What are they? Let’s have a look:
- 1) Monitor State Rule Notifications
Though national codes took effect in Nov 2025, it doesn’t guarantee that state-specific rules will be the same. Hence, it’s essential on their part to conduct these activities:
- i) Subscribe to the official gazette;
- ii) Engage with local legal advisors;
- iii) When new rules are published, compliance checklists must be updated.
- 2) Audit HR & Payroll Quarterly
Internal or third-party audits are beneficial since they enable you to catch errors early and reduce penalties. Consider these aspects:
- i) Payroll accuracy,
- ii) Contract compliance,
- iii) Social security coverage,
- iv) Working hours enforcement.
- 3) Communicate Changes to Employees
More often, this is overlooked but vital. There must be a clear employee communication plan that unfolds the intricacies relating to:
- i) New wage structures,
- ii) Overtime rules,
- iii) Health & safety measures,
- iv) PF/ESIC updates.
Special Focus Areas for HR
- 1) Gig, Platform & Informal Workers
The Code on Social Security formally recognizes and considers the interests of these worker categories. Unlike the previous law, this guideline brings them under statutory welfare schemes. The tasks on your part will be to:
- i) Identify such workers in your firm;
- ii) Document their contracts and contributions;
- iii) Ensure social security is enabled.
- 2) Industrial Relations & Dispute Handling
As the name suggests, industrial relations are governed by the Industrial Relations Code. It redefines strike notice periods, recognition of unions, and dispute mechanisms. This pushes for modern, facilitated dialogues rather than adversarial engagements. For aligning with this code, you have to:
- i) Review grievance redressal processes;
- ii) Align policies with new IR dispute timelines.
- 3) Gender & Work-Life Policies
Another area the code emphasizes is that the pay structure will be the same for equal work. It also allows women to work in night shifts with safety measures. So, these are some of the actions needed:
- i) Update gender policies;
- ii) Focus on consent and safety protocols.
Final Thoughts
Whatever the size of your business, you can’t bypass the latest labour laws. If you do, be ready to pay a penalty for it in the long run. This way, you can safeguard the rights of your employees while staying compliant with the legal protocols. Risks will also be mitigated significantly, and more importantly, you can promote a positive work environment.
Apart from these, if you adhere to these regulations, there are fewer chances of administrative errors and any sort of disputes. It goes a long way since the HR teams can concentrate more on strategic initiatives like talent development and workforce planning.
The 2026 Labour Codes are too complex for spreadsheets and basic HR tools. As you transition into the new Financial Year, you need a partner that scales with you. ABStart will help Indian SMEs manage this transition with no employee capping and end-to-end automation. Stop worrying about penalties and start focusing on growth.
One Size Fits None: Why your Company needs a truly customizable HRMS
The growth of a company depends on several factors. From expanding the areas of operation to increasing headcount, everything contributes to the change of pace. However, along with these, you have to weigh in the importance of having a customisable HRMS for startups. Most solutions come with features that limit their capabilities as your business scales. As a result, you will remain on the end of a paywall that can increase your expenditure.
Take a look at why your firm needs a truly customizable HRMS tool and how it will affect your day-to-day operations.
What are the Issues with Rigid HR Systems?
Most HR tools are designed with a fixed structure. The tools work under the assumption that all companies follow the same structure. However, in reality, employee structures, growth patterns, and management vary from company to company. While a startup may begin with a tool that offers simple features for attendance and payroll management, its needs might change later. In such situations, a company may face certain issues such as:
- 1) Disorganized HR data spread across spreadsheets and payroll vendors.
- 2) The payroll process is breaking due to manual adjustments or arrears.
- 3) Managers affected by handling approvals from fragmented systems.
- 4) Pricing models that do not evolve with the employee growth of the business.
With this fragmentation in focus, your business may be affected by unnecessary operational friction that can limit growth. Your HR team will spend more time managing systems than doing their work.
How Customizable HRMS Works for Startups and Growing Businesses?
If you own a startup or a small to medium-sized business, you may not need a complex HR system from day one. However, when your team grows, you need to ensure that your HRMS solution can grow with you. Here’s where you understand the importance of scalable HR solutions for mid-sized firms.
With a flexible HRMS tool, you can configure your workflows according to your internal approval structures. From leave requests to employee updates, your HR tool can follow different approval layers according to your needs. It should also manage bulk assignment of leaves, shift changes and other complex operations. When your tool evolves with the available HR infrastructure, it can stay stable while your company grows.
The Role of Integrated HRMS and Payroll System for Business Operations
Disconnected HR tools can kill productivity and bring in roadblocks in your HR team’s operations. With an all-in-one HR and payroll software, you can consolidate all the operations into a single platform. It will connect employee data management, attendance tracking, and payroll processing together, so that your HR professionals do not work with multiple tools for data processing.
Along with simplifying HR operations, a complete HR tool can adjust all the compliance-related factors. It eliminates the need for manual coordination in every step of your HR team’s operations. You can align the tool with the recent Labour regulations and codes of your country, which can help your company remain compliant with the statutory requirements.
How ABStart Fits Your Requirement for a Scalable HR Software?
Most popular HRMS tools have employee capping, which can be quite expensive for small to medium-sized businesses to sustain. While choosing a solution, you can look for ABStart, an end-to-end HRMS in India that addresses the common challenges. You can start with our software with a very small workforce. Instead of forcing offices to meet minimum employee requirements, we offer a scalable solution. This helps it operate without the need to migrate to another system.
Our software can handle all the HR management tasks, including payroll management, attendance checking, and leave approval. You can perform all tasks more reliably without needing to cross-check everything. Your managers can also have access to the tool, which can standardize the process without adding to the administrative workload. Our tool grows with your company, gradually introducing more structured processes as your company paces forward.
Final Thoughts
While a rigid HRMS tool may seem like a solution in the first stage, it will gradually showcase problems. To outgrow these issues, you need a proper HRMS solution. Here’s where ABStart comes through. Our customizable HRMS solution ensures your HR infrastructure evolves without the issue of costly migration or operational disruptions.
Frequently Asked Questions
- 1) What is the Ideal HRMS Software Price in India for Growing Businesses?
The pricing of an HRMS software cannot be absolute. It will depend on various factors such as employee count, customization needs, and operation. To match all these criteria, businesses should look for HRMS software that scales without increasing price.
- 2) Why is Integrated HRMS and Payroll Important?
Integration of HRMS and payroll is important, as it ensures employee data, payroll, and compliance remain connected. This can reduce manual errors and administrative delays.
- 3) How Does a Scalable HRMS Help Mid-sized Companies?
A consolidated HR tech stack for SMEs supports bulk administrative actions and structured approvals. It also offers centralized reporting that supports the expansion of an organization.
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