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Statutory Compliance in HR & Payroll in 2026

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Statutory compliance in payroll and HR is a serious legal matter for both employees and the organisation. The Indian Government has enacted various acts and regulations governing employee payments, and every company must comply with them to avoid legal consequences. Since November 2025, India’s compliance landscape also includes the four labour codes, which this guide covers below. Whether to follow these rules is not really a choice, because non-compliance carries fines, disputes, and even imprisonment in serious cases.

What is Statutory Compliance?

Statutory means “required by law,” and compliance means “following the rules.” So statutory compliance simply means running your company within the legal framework the government has set for employment and pay.

Adhering to these laws protects everyone: employees get their minimum wages and social security, and the company protects its existence and reputation. Every country builds its own set of rules, and in India these rules grow and change every year. Staying compliant takes real effort and money, which is hard for smaller companies, and that is exactly why automation matters.

Why is Statutory Compliance Important?

Statutory compliance in HR refers to the legal framework organisations must follow on employee rights, workplace safety, and fair compensation. The government mandates these regulations for every organisation that employs staff.

Key Statutory Areas

• The Four Labour Codes (in force from November 2025)
• Provident Fund (PF)
• Employees’ State Insurance (ESI)
• Minimum Wages
• Professional Tax
• Gratuity, Bonus, and Maternity Benefits
• Industrial Relations and Trade Union laws

Note: specific provisions vary by state and are updated periodically.

Why It Matters

• Employee protection: ensures fair wages, social security benefits, and a safe working environment
• Employer safeguard: shields the organisation from legal disputes, financial penalties, and reputational harm
• Business continuity: non-compliance can cause fines, business disruption, and failed statutory audits
• Audit readiness: statutory audits verify that payroll and HR practices align with legal requirements

Best Practices for Compliance

• Stay informed about changes at both central and state levels, as Indian labour law requirements vary by act, industry, employee category, and state
• Implement robust payroll and HR systems for timely, accurate compliance
• Conduct regular internal audits to find and fix compliance gaps

Statutory Benefits

For employees

• Ensures minimum wages and equal pay for men and women
• Fair treatment and better industrial relations
• Protection from inhuman working conditions, with workplace health and safety
• Social security through compensation and benefits

For employers

• Protection of the organisation’s existence
• Protection against unlawful wage demands
• A strong reputation with clients and candidates
• No risk of fines and penalties

Cost of Non-Compliance

• Financial losses and penalties
• Employee conflicts and loss of trust
• A threat to the organisation’s existence
• Damaged client relationships

The Four Labour Codes: What Changed from November 2025

India’s biggest labour law change in decades is now in effect. On 21 November 2025, the government brought the four labour codes into force. These codes merge 29 older central labour laws into four:

Two practical points for employers. First, the core benefits mostly continue: PF, ESI, gratuity, maternity leave, bonus, and minimum wages all carry forward under the codes. Second, this is a transition, not a switch. Central and state rules under the codes are still being finalised, and during this period the existing rules and notifications continue to operate. Follow your current compliance calendar, and track your state’s rules under the new codes as they are notified.

One change to plan for now: the codes use a common definition of “wages” that generally requires basic pay and dearness allowance to be at least 50% of total remuneration. This can increase PF and gratuity outgo for employees with allowance-heavy salary structures, so review your CTC structures with your compliance team.

The Acts Every Employer Should Know

The sections below explain the key laws in four groups: industrial relations, women’s benefits, social security, and wages. If these rules feel overwhelming, factoHR payroll software can automate the calculations and filings behind most of them. Rules on HR compliance apply uniformly to private companies across India, with state-level variations in forms and thresholds.

Industrial Relations

The Industrial Disputes Act, 1947

The Industrial Disputes Act, 1947, created the legal framework for investigating and settling disputes between employers and workers. Its objective is to maintain peace and harmony in Indian workplaces. It applies across India to establishments in business, trade, manufacturing, and distribution, but does not cover managerial or administrative staff, or members of the Army, Air Force, and Navy. Its provisions now continue under the Industrial Relations Code, 2020.

Women’s Benefits

Equal Remuneration Act, 1976

The Equal Remuneration Act requires equal pay for men and women doing the same work or work of a similar nature. It was passed because women were often paid less than men for the same job.

The Act’s main rules are simple:

• An employer must pay men and women equally for the same work
• An employer cannot discriminate against women in recruitment, promotions, transfers, or training for the same work
• An employer cannot reduce anyone’s pay in order to comply with the Act

These provisions now continue under the Code on Wages, 2019, and the equal pay duty remains the same.

Maternity Benefit Act, 1961

The Maternity Benefit Act, 1961 provides eligible women with paid maternity leave and protects their jobs during that leave. It applies to factories, mines, plantations, shops, and establishments with 10 or more employees, in both the private and government sectors. A woman qualifies after working at least 80 days in the 12 months before her expected delivery, and she is paid at her average daily wage for the leave period.

The 2017 Amendment strengthened the law in four big ways:

• Paid leave increased from 12 weeks to 26 weeks for the first two children, and 12 weeks from the third child onwards
• Adoptive mothers (child below 3 months) and commissioning mothers became entitled to 12 weeks of leave
• A work-from-home option was added after the leave period, where the nature of work allows it, on terms agreed between employer and employee
• Establishments with 50 or more employees must provide a creche facility, with four visits allowed to the mother each day

Employers cannot dismiss a woman during maternity leave, and violations can bring imprisonment and fines. The Act’s provisions now continue under Chapter VI of the Code on Social Security, 2020, with the same core entitlements. An appropriate leave management system helps HR track eligibility, leave windows, and return dates without manual errors.

Social Security

The Payment of Gratuity Act, 1972

The Payment of Gratuity Act guarantees gratuity to employees in railways, mines, factories, ports, oilfields, shops, and the private sector. Gratuity is a lump sum paid at retirement or exit, and an employee becomes eligible after five years of continuous service with one organisation.

Under Section 4(1), gratuity is payable on death or disablement even if five years are not complete. Under Section 4(3), the maximum gratuity payable under the Act is Rs. 20,00,000. Income tax exemption is also available up to Rs. 20,00,000 for covered employees, and any amount paid above this is taxable. If the employee count in an establishment falls below 10 after the Act has applied, the Act continues to apply. The Act does not cover apprentices or civil service employees of the Central and State governments, who have their own gratuity rules. Gratuity provisions now also continue under the Code on Social Security, 2020, which adds pro-rata gratuity eligibility for fixed-term employees.

The formula:

Gratuity = Last drawn salary x completed years of service x 15/26

Service of more than six months in the final year counts as a full year, and less than six months counts as zero. For example, seven years and eight months counts as eight years, while six years and four months counts as six years.

The Employees’ Compensation Act, 1923

Many jobs carry the risk of injury, disability, or death. The Employees’ Compensation Act, 1923 protects an employee or their dependents through compensation in such cases.

Under Section 17A, every employer must inform employees about their compensation rights at the time of joining, and failure attracts penalties under the Act. These protections now continue under the Code on Social Security, 2020.

Labour Welfare Fund (State Acts)

The Labour Welfare Fund is governed by state-specific Acts, such as the Karnataka Act of 1965 and the Bombay Act of 1953, which mandate contributions to a state-level welfare fund that improves the quality of life for workers. Each state sets its own contribution amounts and deduction cycles, supporting healthcare, education, housing, vocational training, and recreation.

Why it matters:

• It fulfils a key social security function, especially for unorganised sectors
• It is central to employer compliance and social responsibility
• It contributes directly to workforce morale and retention

The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

The EPF Act provides retirement social security and applies to establishments with 20 or more employees. Both employee and employer contribute every month, and companies can use provident fund software to manage the funds. EPF must be deducted from salary and deposited before the 15th of each month.

PF is calculated on basic salary plus dearness allowance (DA), not on gross salary. Allowances like HRA, overtime, and incentives are excluded. The statutory wage ceiling for mandatory coverage is Rs. 15,000 per month of basic plus DA. The contribution split is:

Non-compliance can lead to imprisonment and fines under the Act. Related fund types include:

• SPF (Statutory Provident Fund): for government and semi-government employees
• UPF (Unrecognised Provident Fund): employer or employee schemes without government approval
• PPF (Public Provident Fund): a savings-cum-tax-saving scheme open to every Indian citizen

The Employees’ State Insurance (ESI) Act, 1948

The ESI Act provides medical care and cash benefits, covering sickness, maternity, and employment injury, for employees earning up to Rs. 21,000 per month (Rs. 25,000 for persons with disability). It applies to non-seasonal factories with 10 or more employees, and to notified establishments as per state-wise thresholds.

The ESI scheme has been progressively extended across India and now operates in districts across all states and union territories, with coverage continuing to expand district by district. Both employee and employer contribute:

Women employees covered under ESI receive their maternity benefit through the ESI scheme instead of directly from the employer under the Maternity Benefit Act.

Tax Deducted at Source (TDS)

TDS on salary means the employer deducts income tax from each month’s salary and deposits it with the government under the employee’s PAN. The employer files quarterly TDS returns (Form 24Q) and issues Form 16 at year end. Employees can claim refunds of excess TDS when filing their income tax return.

A major change took effect from 1 April 2026: the new Income Tax Act, 2025 replaced the six-decade-old Income Tax Act, 1961. The slabs and both tax regimes continue unchanged, but the law now uses the single term “Tax Year” in place of the old Financial Year and Assessment Year framework, and revised returns can now be filed up to 31 March on payment of a fee.

Income Tax Slabs for Tax Year 2026-27

Budget 2026 made no changes to the slabs, so the structure introduced in Budget 2025 continues.

New Tax Regime (Default)

Two reliefs make the effective picture better than the slabs suggest. The Section 87A rebate reduces tax to zero for resident individuals with income up to Rs. 12 lakh. Salaried taxpayers also get a standard deduction of Rs. 75,000, so a salaried person earning up to Rs. 12.75 lakh pays no tax under the new regime. Health and education cess of 4% applies on the tax payable, and surcharge applies above Rs. 50 lakh, capped at 25% under the new regime.

Old Tax Regime (Optional)

The old regime allows deductions and exemptions such as 80C, HRA, and home loan interest, and keeps a higher basic exemption for senior citizens: Rs. 3,00,000 for ages 60 to 79 and Rs. 5,00,000 for 80 and above. The new regime is the default, so employees must opt for the old regime if they want deductions. Employers should collect each employee’s regime choice at the start of the tax year for correct monthly TDS.

Wages

The Payment of Wages Act, 1936 (as Amended)

The Payment of Wages Act guarantees that wages are paid on time and without unauthorised deductions. It applies to employees earning up to Rs. 24,000 per month.

Key timelines under the Act:

• Establishments with fewer than 1,000 employees must pay wages by the 7th of the following month
• Establishments with 1,000 or more employees must pay by the 10th
• If an employee is terminated, wages must be paid within two working days
• The 2017 amendment allows payment by cash, cheque, or direct bank credit

These provisions now continue under the Code on Wages, 2019, which extends timely-payment protection to all employees regardless of wage ceiling.

The Payment of Bonus Act, 1965 (as Amended in 2015)

The Payment of Bonus Act requires an annual bonus for employees in every factory, and in other establishments with 20 or more employees. The bonus ranges from a minimum of 8.33% to a maximum of 20% of salary, based on the establishment’s profits and allocable surplus.

The 2015 amendment set the current thresholds: employees earning up to Rs. 21,000 per month are eligible, and for calculation, salary is capped at Rs. 7,000 per month or the minimum wage for that employment, whichever is higher. An employee becomes eligible after working 30 days in the year, and the bonus must be paid within 8 months of the financial year’s close. Bonus is calculated on basic plus DA only. Employees dismissed for fraud or violent misconduct can be disqualified. These provisions now continue under the Code on Wages, 2019.

Minimum Wages Act, 1948

The Minimum Wages Act, 1948 guarantees minimum wages to skilled and unskilled workers. The idea of a living wage covers basic livelihood, health, food, education, and dignity.

The Act sets these working condition rules alongside the wage rates:

• A normal working day includes fixed working hours with at least one rest interval, and the total must not exceed the prescribed daily hours
• Every worker gets at least one day of rest each week, and work on the rest day is paid at the overtime rate
• Overtime is paid at the premium rate set under the law, typically double the ordinary rate
• Where an employee does two or more classes of work with different minimum rates, wages are paid at the respective rate for the time spent on each
• The employer must maintain wage registers and provide wage slips

The government revises minimum wages through two methods: the committee method, where a committee inquires and recommends rates, and the notification method, where proposed rates are published in the Official Gazette for feedback before finalisation. Minimum wage fixation now operates under the Code on Wages, 2019, which also introduces a national floor wage that no state minimum wage can fall below.

Shops and Establishments Act

The Shops and Establishments Act is state-specific legislation governing working conditions in shops, offices, hotels, restaurants, theatres, and other commercial establishments. Each state has its own version, but the core objectives are consistent nationwide.

All commercial establishments not covered under the Factories Act must register under their state’s Shops and Establishments Act, typically within 30 days of starting business. The Act governs working hours, rest intervals, overtime, holidays, and termination of service.

Conclusion

Understanding and following India’s labour laws is a continuous effort, and the arrival of the four labour codes makes 2026 the most important year to review your compliance in a decade. This guide has covered the acts and codes that affect payroll processing, from PF and ESI to the latest tax slabs. Payroll software in India can carry most of this weight automatically, keeping calculations, deductions, and filings correct as the rules evolve.

For any related queries, use the chat box in the bottom right corner to reach our experts, or contact us.

FAQs

What is Statutory Compliance in HR and Payroll?

Statutory compliance means following all the labour and tax laws that govern how you employ and pay people, including PF, ESI, TDS, Professional Tax, minimum wages, bonus, gratuity, and maternity benefits. Non-compliance risks fines, disputes, failed audits, and imprisonment in serious cases.

Are the Old Labour Acts Still Applicable after the Four Labour Codes?

The four labour codes came into force on 21 November 2025 and merge 29 older laws. During the transition, while central and state rules are finalised, the existing rules and notifications continue to operate. In practice, employers follow their current compliance calendar while tracking their state’s rules under the new codes.

What are the PF and ESI Contribution Rates in 2026?

PF: the employee contributes 12% of basic plus DA, and the employer contributes 12% (3.67% to EPF and 8.33% to EPS), with a Rs. 15,000 wage ceiling for mandatory coverage. ESI: the employee contributes 0.75% and the employer 3.25% of gross pay, for employees earning up to Rs. 21,000 per month.

What are the Income Tax Slabs for Tax Year 2026-27?

Under the default new regime: nil up to Rs. 4 lakh, then 5%, 10%, 15%, 20%, and 25% in Rs. 4 lakh bands, and 30% above Rs. 24 lakh. The Section 87A rebate makes income up to Rs. 12 lakh tax-free, and the Rs. 75,000 standard deduction extends this to Rs. 12.75 lakh for salaried taxpayers. Budget 2026 made no slab changes.

What Happens if a Company Fails Statutory Compliance?

Consequences range from fines and interest to prosecution. Examples include imprisonment and fines under the EPF Act, penalties for not informing employees of compensation rights, and imprisonment of three months to one year for maternity benefit violations. Beyond penalties, non-compliance damages employee trust and client relationships.

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