Monthly Payroll Compliance Checklist for Indian Employers

1. Executive Answers

The monthly statutory calendar in one view

Where we are in the cycle: the TDS deposit for September was due on 7 October 2026. The EPF and ESIC contributions for September are due on 15 October 2026, and the September EPF filing is the first to carry the split-month computation for the Rs 25,000 ceiling. The Q2 salary TDS return (Form 138, July to September) is due on 31 October 2026. ESIC's new contribution period (October to March) begins on 1 October, so ceiling eligibility needs re-testing in this cycle.

Personal liability vectors

1. TDS. The person responsible for deducting and paying tax is liable for failure to deduct, failure to deposit, and late deposit. Deducting tax and not depositing it carries prosecution exposure under the tax statute, alongside interest and fees.
2. PF and ESIC. Deducting the employee share and not remitting it is the most serious default under the social security framework. Directors and officers in charge can be prosecuted, and recovery proceedings can attach company accounts.
3. Wages. Delayed payment, unauthorised deductions and delayed final settlement attract penalties under the Code on Wages, with officers in charge answerable.
4. State levies. Professional Tax and LWF defaults attract State-specific interest, penalties and, in some States, prosecution.

Operating rule for leadership: payroll compliance fails at the data stage, not the filing stage. A wrong UAN, a missing IP number, a misclassified allowance, or an outdated State slab surfaces weeks later as a rejected ECR, a short-deposited challan or a notice. Control the inputs, then the computation, then the filing, then the reconciliation.

2. Scope & Applicability

2.1 Central withholdings and contributions

2.2 State enactments

• Professional Tax (PT): levied by the State where the employee works, not where the company is registered. Slabs, registration requirements, return formats and due dates differ by State. The constitutional cap is Rs 2,500 per person per year. Several States, including Delhi, Haryana, Rajasthan and Uttar Pradesh, do not levy PT on salaries. Registration and enrolment obligations of the employer arise once any employee's salary crosses the State threshold, and in some States regardless of threshold.
• Labour Welfare Fund (LWF): applies in the States that have notified it, with employee and employer contributions fixed by each State and paid monthly, half-yearly or annually. Applicability by establishment size and the contribution amounts are State-specific.
• Shops and Establishments and factory laws: govern wage periods, weekly off and overtime rules at State level, which feed into payroll inputs.

2.3 Multi-state footprint triggers

• PT: a separate registration, slab table and return for each State in which employees are based. Employees posted temporarily at another State's site may attract that State's PT depending on its rules.
• LWF: apply each State's applicability and due date. Do not apply a single national calendar.
• EPF: each establishment is registered under its own code or sub-code. Confirm whether your entity files under a consolidated arrangement or location-wise.
• ESIC: each State or implemented area requires its own employer code, and employees are linked to the branch where they work.
• TDS: TAN-wise. Many groups use one TAN per entity; confirm that each deduction is deposited under the TAN used for the quarterly return.
• Contractors: contract workers count toward thresholds, and the principal employer carries residual exposure for contractor defaults.

3. Detailed Guide

3.1 Phase 1: Input validation and attendance freeze

Cut-off discipline. Fix a payroll cut-off date (for example, the 25th) after which attendance, leave, overtime, new joiner and exit inputs are frozen for the cycle. Late changes go into the next cycle as arrears, with documentation.

Inputs to validate before any computation

• Headcount movement: joiners, exits, transfers (including inter-State), and changes in work location, because PT and LWF depend on location.
• Joiners: UAN generated and verified (Aadhaar-seeded, name and date of birth matching KYC) and ESIC IP number generated, before the first payroll run that includes the employee. Capture nominee, family details and residence PIN for ESIC dispensary allocation.
• Exits: last working day, notice pay, leave encashment, and the date for the final settlement, which falls due within two working days of separation under the Code on Wages.
• Attendance and overtime: reconcile system attendance with approved overtime. Overtime is paid at not less than twice the normal rate.
• Salary changes and arrears: effective dates, approvals and the months affected.
• Tax declarations: employee regime choice for the year (recorded on Form 122 under the 2026 Rules), proof submissions, rent and investment declarations, and previous-employer income for new joiners.
• Loans, advances and deductions: only authorised deductions, within the aggregate cap in the Code on Wages, with written consent where required.
• Contractor workforce: headcount and wage proof for the month from each contractor.

Output of Phase 1: a signed input freeze report, with exceptions listed and approved.

3.2 Phase 2: Wage calculation within statutory ceilings

Wage definition. Under the Code definition, excluded components (HRA, conveyance, statutory bonus, overtime, employer PF contribution, gratuity and similar) are capped at 50% of total remuneration, and any excess is added back to wages. The mapping of every pay component to its treatment for PF, ESIC and gratuity should be maintained as a version-controlled table.

EPF, EPS and EDLI

• Ceiling transition: the Rs 25,000 ceiling applies from 17 September 2026. September 2026 contributions are computed for 1 to 16 September at the Rs 15,000 ceiling and 17 to 30 September at the Rs 25,000 ceiling, on a 30-day basis, as reflected in EPFO's FAQs. From October 2026, apply Rs 25,000 for the full month.
• Newly covered employees: those with wages above Rs 15,000 and up to Rs 25,000 who were previously excluded are brought into EPF, EPS and EDLI. Confirm enrolment before the run.
• Non-contributory days: record loss-of-pay days correctly, since they reduce the wage base and appear in the ECR.

ESIC

• Employee 0.75% and employer 3.25% on gross wages for employees within Rs 21,000 (Rs 25,000 for persons with disability).
• Contribution periods are April to September and October to March. An employee whose wages cross the ceiling during a period stays covered to the period end. A new period starts on 1 October 2026, so test every employee against the ceiling for the October to March period.
• Employees with a daily average wage up to Rs 176 are exempt from the employee share; the employer share remains payable.

Professional Tax and LWF

• Apply the slab for the employee's work State, using the gross wages for the month as that State defines them. Some States have month-specific adjustments (for example, a different amount in the last month of the year).
• Apply LWF in the months and amounts the State prescribes, and provision the employer share monthly even where payment is half-yearly or annual.

Tax deduction under the Income-tax Act, 2025

• Section 392 requires deduction of tax on salary at the average rate computed on estimated annual income for the Tax Year, under the regime the employee has chosen.
• Recompute projected tax each month for changes in salary, bonus, perquisites, declarations and previous-employer income. Check the employee's regime declaration before the first run.
• Take into account employee contributions, standard deduction and other permitted items for the regime applied.

3.3 Phase 3: Portal generation, payment and filing

The quarterly Form 138 due dates are 31 July, 31 October, 31 January and 31 May. Deposit TDS for March by 30 April for non-government deductors.

Filing controls

• Generate payment files at least two working days before the due date, leaving time to correct rejections.
• Obtain approval from a second person (checker) on the challan amount, matched to the payroll liability report.
• Save the payment confirmation, challan and acknowledgement for each filing.

3.4 Phase 4: Reconciliation and archival

• Payroll to statutory: reconcile payroll deductions against challans for PF, ESIC, PT, LWF and TDS each month. Investigate any variance above a set tolerance.
• Portal to payroll: compare the EPFO passbook and ESIC contribution history with the ECR and contribution file. Check that every active employee appears, and that exits are recorded.
• Ledger to bank: match statutory payables in the ledger to bank payments and clear the liability account.
• TRACES: check Form 138 and challan matching status each quarter, and fix mismatches before the return is final.
• Archive: store the input freeze report, payroll register, computation sheets, challans, returns, acknowledgements and approvals in a structured repository. Set retention at the longest period applicable to each record under the Labour Codes, the Rules and the tax law, and confirm the period before disposal.

4. Table / Checklist

Month-end sign-off checklist

• Input freeze report approved
• New joiner UAN and IP numbers verified before the run
• Rs 25,000 EPF ceiling applied; ESIC October to March ceiling test done
• PT slab applied by work State; LWF provisioned
• TDS projected and deducted under Section 392 with regime declarations checked
• ECR, ESIC file, TDS challan and State returns generated and approved by a checker
• Payments made with buffer before due dates; confirmations stored
• Payroll-to-portal reconciliation signed; variances explained
• Records archived

5. Common Mistakes

1. Missing multi-State PT slab variations. Applying the head-office State's slab to every employee, or ignoring month-specific slab changes. Consequence: recurring short deduction and short deposit in the affected State, interest and penalties, and employee grievances over wrong deductions.
2. Running payroll before UAN and ESIC numbers are mapped. New joiners are paid without a verified UAN or IP number, so their contributions are not reported. Consequence: ECR rejection or a short-filed ECR, arrear filings in later months with interest, and gaps in member and insured-person records.
3. Late PF and ESIC remittance. Filing near the 15th and finding data errors that block the file. Consequence: interest at 12% per annum and graded damages that rise with the length of delay, plus recovery proceedings for persistent defaults.
4. Late TDS deposit. Missing the 7th. Consequence: interest for each month or part of a month of delay from the date of deduction (under the earlier regime, 1.5% per month; confirm under the 2025 Act), and prosecution exposure where deducted tax is not deposited.
5. Late or incorrect Form 138. Filing after the quarterly due date, or with challan mismatches and PAN errors. Consequence: a late filing fee for each day of delay under the earlier regime, limited to the tax amount, penalties for failure or incorrect filing, and employee refund claims affected by Form 130 errors. Confirm the equivalent provisions under the 2025 Act.
6. Using old form numbers and sections. Referring to Section 192, Form 24Q or Form 16 for Tax Year 2026-27. Consequence: rejected returns, challan code errors and mismatched TRACES records.
7. Not applying the Rs 25,000 ceiling transition correctly. Computing the whole of September 2026 on one ceiling, or not enrolling newly covered employees. Consequence: a short contribution, correction filings and differential deposits.
8. Misclassifying allowances under the 50% rule. Treating special allowances as outside wages without the cap test. Consequence: understated PF, ESIC and gratuity bases, recovery with interest and damages, and employee claims.
9. Skipping the ESIC period reset. Failing to test eligibility at the start of the April and October periods. Consequence: continued contributions for employees who are out of cover, or missed contributions for employees who are in.
10. Delayed final settlement. Using a 30- to 45-day cycle for exits. Consequence: breach of the two-working-day rule, penalties and wage claims.
11. Weak records and reconciliation. No monthly match of payroll, challans and portals. Consequence: notices and demands that surface months later with accumulated interest.

6. Action Plan: 4-Stage Monthly Operational Blueprint

Stage 1: Pre-Payroll Cut-off (Day -7 to Day 0)

1. Publish the cut-off calendar and freeze attendance, leave, overtime, joiner and exit inputs on the cut-off date.
2. Verify UAN and ESIC IP numbers for every joiner, and obtain missing KYC.
3. Check employee work locations and State mapping for PT and LWF.
4. Confirm tax regime declarations (Form 122), proofs and previous-employer details.
5. Update statutory parameters in payroll: EPF ceiling, ESIC period, State slabs, TDS projections.
6. Obtain contractor wage and compliance proofs for the month.
7. Output: signed input freeze report with exceptions.

Stage 2: Calculation & Verification (Day 1 to Day 3)

1. Run payroll in a test mode and compare with the prior month. Investigate variances above the defined tolerance for headcount, gross pay, PF base, ESIC base, PT, LWF and TDS.
2. Sample-test 5% of employees, with all joiners, leavers, ceiling crossovers and changed salaries included.
3. Test every component against the wage mapping table and the 50% rule.
4. Validate TDS projections for employees with mid-year changes.
5. Maker-checker sign-off by Payroll and Finance.
6. Output: approved payroll register and statutory liability report.

Stage 3: Remittance & Filing (Day 4 to Due Date)

1. Pay wages by the 7th, and generate the TDS challan for deposit by the 7th.
2. Prepare the ECR and ESIC files at least two working days before the 15th, correct validation errors, and generate the challans.
3. Obtain checker approval of challan amounts against the liability report, then pay.
4. File PT and LWF as per each State's date.
5. File the quarterly Form 138 in the quarter-end month, after challan matching.
6. Save all payment confirmations and acknowledgements.
7. Output: filing tracker showing each obligation, due date, filed date and owner.

Stage 4: Reconciliation & Archival (Month-end close)

1. Reconcile payroll to challans, portals and bank for each statute.
2. Compare the EPFO passbook and ESIC contribution history with filed data, and correct gaps through supplementary or arrear filings.
3. Review TRACES matching status and request challan or statement corrections where required.
4. Update the exception log and root causes, and feed them back to Stage 1.
5. Archive the full month file under the retention policy.
6. Report to leadership: on-time filing rate, variances, open notices and quantified exposure.

Frequently asked questions