As the calendar year draws to a close, this is the ideal time for organisations to review their key compliance areas and departmental processes. With 3–4 months still left before the end of the Indian financial year, companies can identify potential gaps or non-compliances and take timely corrective action. One critical area that calls for focused attention during this period is Payroll Processing. Conducting a detailed payroll health check ensures correct tax computation, robust statutory compliance, and a hassle-free experience for both employers and employees.
Here are the essential components of a comprehensive payroll health assessment:
1. Employee Tax Declarations
- Verification of the tax regime selected by each employee (Old vs New).
- Review of investment proofs submitted under the Old Regime to ensure accuracy and completeness.
- Ensuring all declarations and proofs are updated in the payroll system, with any discrepancies identified early.
2. Ad-hoc Payments and Special Pay-outs
- Identify bonus payments, incentives, or any other one-off pay-outs processed outside the payroll system.
- Ensure these payments are added to taxable income and that appropriate TDS is deducted during the remaining months of the year.
3. Income from Previous Employment for New Joiners
- Collection and verification of Form 12B and previous employer salary details.
- Proper inclusion of past income and TDS to ensure accurate tax computation and seamless Form 16 issuance.
4. Valuation of Perquisites
Perquisites form a significant part of an employee’s taxable income and must be accurately captured. Key items to review include:
- Insurance expenses reimbursed to employees.
- Car reimbursements – ensuring fuel bills, driver salary records, travel logbooks, and accurate valuation as per Income Tax Rules are in place.
- ESOPs, RSUs and other equity-based benefits.
- Excess employer contributions – If the combined employer contribution to PF, NPS, and superannuation exceeds ₹7.5 lakh annually, the excess amount and the interest thereon must be taxed as a perquisite.
- Personal expenses incurred by the company on behalf of employees.
5. Review of Tax Computation and Form 24Q Filings
- Ensuring accuracy of monthly TDS calculations for all employees, including those with zero TDS liability.
- Verifying that the figures reported in the quarterly TDS return (Form 24Q) match payroll records and the books of accounts, and ensuring proper reconciliations are prepared.
- Identifying employees with invalid or unlinked PANs and applying TDS at the applicable higher rate wherever required.
- Checking for any late-payment interest or defaults and addressing them proactively.
6. Other Statutory Compliance Checks
- Verifying the accuracy of PF calculations, especially in cases involving arrears or retrospective salary revisions.
- Ensuring the exit date of resigned employees is correctly updated in PF, ESIC, and other statutory portals.
- Revalidating ESIC applicability wherever necessary.
- Ensuring timely submission of LWF contributions, PT returns, and other state-specific statutory compliances.
7. Verification of Employee Payments
- Identifying and correcting any excess or short salary payments arising from calculation errors.
- Ensuring proper tracking and recovery of employee loans, salary advances, and related deductions.
- Verifying the accuracy of leave encashment, gratuity, and full-and-final settlements.
8. Additional Areas to Consider
- Data Security & Access Controls: Review who has access to payroll data and ensure that appropriate security checks and restrictions are in place.
- Payroll System Configuration: Confirm that the payroll system is updated to reflect tax changes announced in the Budget and that all configurations are correctly applied.
- Process Documentation: Maintain clear and comprehensive SOPs for all payroll processes to support audit readiness and process consistency.
- Employee Communication: Ensure payroll-related queries are handled promptly, accurately, and transparently to strengthen trust and clarity.
Benefits of a Payroll Health Check-Up
A timely and comprehensive payroll review offers several key advantages:
- Early identification of errors or risks before they escalate.
- Sufficient time for corrective action well ahead of year-end reporting.
- Ready availability of documents, reconciliations, and supporting records for annual audits.
- Reduced exposure to future queries or scrutiny from Income Tax, PF, ESIC, or TDS authorities.
- Improved process efficiency, including smoother onboarding and exit processes with consistent data capture.
- Enhanced employee satisfaction through accurate salary details, tax computations, and timely Form 16 issuance.
Conclusion
A well-timed and structured payroll health check-up can significantly reduce compliance risks while strengthening the overall efficiency of your payroll processes. It not only safeguards the organisation from potential penalties or regulatory notices but also ensures employees receive accurate, reliable information—building trust and confidence across the board. By staying proactive and maintaining strong payroll governance, organisations can operate with greater clarity, certainty, and peace of mind as they move forward.