Payroll compliance in India has undergone a significant regulatory transition following the implementation of the four Labour Codes with effect from 21 November 2025. The Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 have consolidated the framework previously spread across 29 Central labour laws.

For employers, the implications extend beyond changes in statutory terminology. Compensation structures, statutory wage bases, social security contributions, gratuity liabilities, wage-payment processes and payroll documentation require review against the revised legal framework.

The transition is particularly relevant for organisations operating across multiple States, where payroll and statutory compliance involves the interaction of Central legislation with State-specific requirements relating to minimum wages, professional tax, Labour Welfare Fund and other employment-related obligations.

Definition of Wages under the Labour Codes

A key consideration for payroll compliance is the uniform definition of “wages” introduced under the Labour Codes.

Broadly, wages include basic pay, dearness allowance and retaining allowance, where applicable. Certain specified components are excluded from wages. However, where the prescribed excluded components exceed 50% of total remuneration, the amount exceeding the 50% threshold is required to be added back to wages.

The Ministry of Labour and Employment has further clarified the application of this provision through FAQs issued following implementation of the Labour Codes. The clarification is important because the composition of remuneration may directly influence the wage base considered for various statutory benefits.

For employers, this requires a review of existing salary structures, particularly where fixed compensation has historically been structured with a comparatively low basic salary and a substantial proportion allocated to allowances.

The compliance assessment should not be limited to whether basic pay constitutes a particular percentage of Cost to Company (CTC). Organisations should examine each remuneration component against the statutory definition, applicable exclusions and the methodology prescribed for determining the 50% threshold.

Implications for Provident Fund Compliance

Employees’ Provident Fund remains a significant component of payroll statutory compliance.

The prevailing EPF framework continues to prescribe a statutory wage ceiling of ₹15,000 per month for applicable membership and contribution purposes, subject to the provisions governing existing members, excluded employees, voluntary higher contributions and other specified categories.

At the same time, the Ministry of Labour and Employment has indicated that the revised definition of wages under the Labour Codes has implications for the wage base used for social security benefits.

Employers should therefore evaluate the interaction between the revised definition of wages and the applicable EPF Scheme provisions rather than applying the 50% threshold mechanically to PF calculations.

A payroll compliance review should include employee coverage, continuity of membership, applicable contribution wage, higher-wage contributions where adopted, EPS allocation and the salary components mapped within the payroll system for statutory computation.

ESI Coverage and Payroll Configuration

Employees’ State Insurance is another important area within HR payroll and compliance.

The Ministry of Labour and Employment clarified in March 2026 that the definition of wages under the Code on Social Security, 2020 applies with effect from 21 November 2025, while the existing ₹21,000 per month wage threshold for ESI coverage continues to apply at present.

This distinction is important for payroll administration.

Employers should assess employee eligibility using the applicable statutory definition rather than relying solely on salary-component configurations developed under the earlier framework. Payroll masters should accordingly be reviewed to ensure that components included or excluded for ESI purposes are appropriately classified.

Changes in remuneration during a contribution period should also continue to be handled in accordance with the applicable ESI provisions.

Gratuity Computation and Fixed-Term Employees

The revised wage framework also has implications for gratuity liabilities.

The Ministry of Labour and Employment has clarified that gratuity calculation under the new framework applies with effect from 21 November 2025. Since gratuity is linked to the employee’s last drawn wages, changes in the statutory wage base may have a corresponding impact on gratuity provisioning and eventual liability.

Organisations should therefore consider whether actuarial assumptions, payroll records and gratuity provisioning methodologies remain aligned with the revised definition.

A further development concerns fixed-term employment. Under the Code on Social Security, a Fixed-Term Employee directly engaged by an employer may become eligible for gratuity upon rendering service under the contract for one year, subject to the applicable statutory conditions.

Employers engaging employees on fixed-term contracts should ensure that payroll and HR systems are capable of identifying the relevant employment category and calculating associated statutory liabilities correctly.

Wage Payment, Deductions and Payroll Records

HR payroll compliance extends beyond the calculation of statutory contributions.

The Code on Wages establishes requirements relating to wage periods, timelines for payment, permissible deductions, wage slips and maintenance of prescribed records.

For employees on a monthly wage cycle, wages are generally required to be paid before the expiry of the seventh day of the succeeding month. The Code also prescribes specific timelines in circumstances involving removal, dismissal, retrenchment, resignation or closure of an establishment.

Aggregate deductions from wages during a wage period are restricted to 50% of wages, and deductions must fall within the categories authorised under the legislation.

Employers should consequently review payroll calendars, salary-hold procedures, loan and advance recoveries, loss or damage deductions, full-and-final settlement processes and exception approvals.

The Ministry’s Compliance Handbook also provides for maintenance of prescribed wage, attendance, overtime, fines and deduction records, along with issuance of wage slips. Payroll compliance therefore requires appropriate documentary controls in addition to accurate salary processing.

Salary TDS under the Income-tax Act, 2025

Payroll functions must also account for the transition to the Income-tax Act, 2025, which became applicable from 1 April 2026.

For salary relating to Tax Year 2026–27 and paid from April 2026 onwards, deduction of tax at source on salary is governed by Section 392(1) of the Income-tax Act, 2025, replacing Section 192 of the Income-tax Act, 1961 for the new tax year.

The Income Tax Department has advised employers to reset salary TDS computations from 1 April 2026 based on projected taxable income, applicable deductions and the tax regime selected by the employee. Payroll and ERP systems must also reflect the revised statutory references and reporting framework.

This makes income-tax configuration an integral part of the broader payroll and statutory compliance review for 2026.

State-Specific Payroll Compliance Requirements

Central statutory compliance represents only one layer of payroll administration.

Depending on the State and the location of employees, organisations may also be required to comply with State-specific provisions relating to:

• Minimum wages
• Professional Tax
• Labour Welfare Fund contributions
• State rules governing wage and employment records
• Shops and Establishments requirements
• Holiday and leave-related obligations

For organisations with employees across multiple States, payroll configuration should therefore be location-sensitive. Applying a uniform compliance matrix nationally without considering the relevant State legislation can create gaps even where Central statutory contributions are calculated correctly.

Employer Payroll Compliance Priorities for 2026

In view of the regulatory changes, employers should consider undertaking a structured payroll review covering:

1. Classification of salary and remuneration components under the revised definition of wages.
2. Assessment of the 50% threshold and its impact on statutory wage calculations.
3. Validation of EPF and ESI coverage and payroll configuration.
4. Review of gratuity computation and provisioning.
5. Identification and treatment of Fixed-Term Employees.
6. Verification of applicable Central and State minimum wage requirements.
7. Review of wage-payment timelines and full-and-final settlement processes.
8. Validation of payroll deductions and recovery controls.
9. Updating salary TDS configuration under the Income-tax Act, 2025.
10. Verification of statutory registers, wage slips, returns and payroll records.

Establishing an Effective Payroll Compliance Framework

The implementation of the Labour Codes marks an important change in India’s employment compliance framework. For payroll teams, the principal challenge is not merely understanding the new provisions but ensuring that they are accurately translated into payroll configuration, HR processes and statutory controls.

An effective payroll compliance framework should integrate HR, finance, taxation and labour law requirements rather than treating each statutory obligation independently.

Organisations should periodically review wage structures, employee classifications, statutory thresholds, State-specific obligations and payroll-system configurations. Changes in legislation should also be mapped to payroll processes through a documented compliance-management mechanism.

As payroll regulations become increasingly interconnected, organisations with operations across multiple States require greater visibility over statutory changes and their implementation status.

A structured approach to HR payroll and compliance can help employers reduce compliance gaps, maintain accurate statutory records and respond to regulatory changes in a timely and consistent manner.

Need to Strengthen Your Organisation’s Payroll Compliance Framework?

comply360° can support your organisation with payroll compliance reviews, statutory compliance audits, wage structure assessments, EPF and ESI compliance, gratuity compliance, State-specific payroll requirements and payroll inspection-readiness.

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