Factors Determining Statutory Compliance in Payroll Components in India

Salary structuring, statutory compliance, and outsourcing are important components of payroll in India in 2019.  Salary structuring with correct tax planning helps reduce the tax liability of the employee and the employer. On the other hand, statutory compliance is mandatory if you want to avoid legal penalties and other fines. Outsourcing of the payroll function, along with convenience, enables efficient management of payroll processing by experts in the field, who are well versed with the relevant laws and regulations.  

Here, we shall look at the main factors that determine statutory compliance in payroll components in India in 2019 for you to be better informed.

1. Tax-efficient option: The structuring of the payslip and its components, availing the tax benefit by investing in tax saving options under CHVI-A of the Income Tax Act, 1961 can result in a significant reduction of tax liability for the employee. The employer must include the relevant headings and provide the opportunity to the employee to take advantage of the legal provisions to enjoy a higher tax deduction. Some examples include House rent allowance, leave travel allowance, Employees provident fund and other eligible instruments u/s 80C of the Income Tax Act, 1961. Examples of a few salary components are:
2. Basic Salary + Dearness allowance: In case the amount is high, the tax liability if the employee would increase as it is fully taxable.
3. House rent allowance: The employee must declare the amount at the beginning of the financial year and submit relevant proofs of rent paid before the close of the financial year.
4. Reduce the monetary liability of employer: A suitable salary structure can also help reduce the tax burden of the employer. Employers get a tax benefit in their contribution to the Employees Provident Fund. An example of a salary component is as follows:
5. Basic Salary + Dearness allowance: If high, the employer liability would be impacted as it would entail a higher contribution towards PF, ESIC, etc. In case the amount is set low, the employer would risk violating the minimum wages norms set by the Government.
6. Compliance of relevant regulatory framework: It is essential to fully adhere to rules like minimum wages to be paid to employees and a minimum 12% contribution in case of Employee Provident fund.
7. Cost efficient: Often it is a good idea to outsource the payroll to professionals who are aware of the tax laws and the best salary structure to reduce tax liability. Rather than recruiting several HR members in the house who would have to study the tax provisions and then determine the payroll costs, one can consider outsourcing the function. This way one can save the costs of hiring HR personnel as well as obtain the benefit of obtaining a payroll structure that is 100% complaint with statutory provisions.

The broad income components of a salary slip:

1. Basic: This forms the core of the salary structure, comprising the lion’s share of around 40% of CTC. The PF, Gratuity, and ESIC are dependent on this amount. This is as per the Minimum wages allowed and fully taxable.
2. Dearness Allowance: This helps ease the inflation impact on the employees. This works out to 5% of CTC and is fully taxable. This influences the amount of PF, ESIC.
3. Medical Allowance: From April 2018, this stands replaced by the standard deduction. Thus, there is no need to submit any medical proof.
4. Conveyance Allowance: From April 2018, this stands replaced by the standard deduction. Thus, there is no need to submit any conveyance proof.
5. House Rent Allowance: This applies to those employees who pay rent. The maximum HRA is 50% of basic in case of metro and 40% of basic in case of non-metro.
6. Leave Travel Allowance: LTA reimburses employees for their fare towards travel within India for vacation purposes (non-business travel). Immediate dependent family members are covered.

The deduction from salary which forms part of CTC as available in a payslip is:

1. Provident Fund: This is calculated as 12% of (Basic+DA+Special Allowance, if any). Both employer and employee are expected to make a minimum mandatory contribution of 12% each. However, the employee can contribute more as part of voluntary PF.  This rule is valid where companies have 20 or more employees on their payroll.
2. ESIC: This is mandatory where the gross salary of employees is not more than Rs 21000. Employees contribute 1.75% of the gross salary and employers contribute 4.75% of the gross salary. It is valid in companies where there are 20 or more employees falling within the Rs.21,000 gross salary range.
3. Professional Tax: The amount varies from state to state.
4. Labour welfare fund: The amount varies from state to state.

In conclusion, the above are the broad parameters that impact the salary components along with the mandatory statutory compliances that need to be kept in mind while outsourcing payroll in India.