A payroll set-up checklist for Indian employers
Reviewed by Mellow Editorial Team, HR & payroll content team
Setting up payroll correctly in India requires completing a specific sequence of registrations, configurations and compliance steps before you run your first salary. Miss one, and you risk penalties, delayed salaries or incorrect deductions from day one.
Get your registrations in order first
Before a single rupee of salary is processed, the business needs the right legal identifiers in place.
PAN and TAN. Your company's PAN (Permanent Account Number) is the foundation. TAN (Tax Deduction and Collection Account Number) is what you actually quote when depositing TDS with the government. Without TAN, you cannot legally deduct tax at source or file returns.
EPF registration. Once you cross 20 employees, registration with the Employees' Provident Fund Organisation (EPFO) is mandatory. You will receive a PF code that goes on every challan and return. The contribution rate is 12% from the employee and 12% from the employer, calculated on the applicable wage component.
ESI registration. Employees whose monthly wages fall below the prescribed threshold are covered under the Employees' State Insurance scheme. Registration is with ESIC and, like EPF, triggers once you meet the headcount threshold. You need an ESIC code before you can deduct and remit contributions.
Professional Tax (PT) registration. PT is a state-level levy, so the requirement, slab and due date vary by state. Check your registered office state, your employees' work locations, and whether you need separate enrolments in multiple states.
Shop and Establishment registration. This is also state-governed and is typically one of the first things a business does, but it feeds into payroll because some states require it before you can process employment contracts and salary structures that hold up legally.
Build your salary structure carefully
A compliant salary structure is not just a breakdown of numbers — it determines your EPF base, your TDS calculation and your employees' take-home clarity.
Define the Basic component first, because EPF contributions are tied to it. Then layer allowances — House Rent Allowance, conveyance, special allowance and any others relevant to your business. Be deliberate about which allowances have statutory limits for tax exemption and which are fully taxable under the new regime.
Under the new income tax regime (the default from 2024/25 onwards), most exemptions and deductions are unavailable. Employees who want to claim deductions must opt for the old regime explicitly. Your payroll system needs to capture each employee's regime choice at the start of the financial year so that TDS is deducted correctly throughout. Forgetting to collect declarations leads to either excess or short deduction — both create reconciliation headaches at year end.
Account for gratuity from day one even if it only becomes payable after five years of continuous service. Building it into your cost-to-company modelling avoids a cash shock later.
Configure your TDS and statutory payment calendar
TDS on salary is not a year-end exercise — it is a monthly obligation. You deduct estimated annual tax, divide it across the remaining months of the financial year, and deposit it by the seventh of the following month (with a different deadline for March).
Quarterly, you file Form 24Q with the Income Tax Department. At year end, you issue Form 16 to every employee — Part A summarises TDS deposited, Part B gives the salary and deduction breakup. Employees use Form 16 to file their ITR, so errors here create problems downstream for your workforce.
EPF and ESI challans have their own monthly deadlines. Late payment attracts interest and damages. Set up a compliance calendar that lists every due date — TDS deposit, PF challan, ESI challan, PT remittance, quarterly TDS return — and assign clear ownership for each.
Set up your payroll processing workflow
Decide early whether you are running payroll in-house, using payroll software, or outsourcing. Each path has different control, cost and risk profiles. If you are processing in-house, document your payroll run sequence: attendance and leave data cut-off, variable pay inputs, reimbursement claims, then calculation, then approval, then bank transfer, then statutory remittances.
Integrate your leave management with payroll so that loss-of-pay days flow automatically into the calculation. Manual inputs at this step are a common source of errors.
Maintain payslips and payroll registers as statutory records. The four Labour Codes that came into force in 2025 consolidate earlier record-keeping obligations, but the principle remains: you need to be able to produce clean wage records on request.
Run a parallel check before going live
Before your first live payroll run, process a parallel test using real employee data. Verify that EPF, ESI and TDS deductions match your manual calculations. Check that the net salary figure on the payslip matches what will hit the bank. Confirm that your bank's bulk payment file format matches your payroll output.
A single test run catches structural errors — a wrong PF wage base, a missed PT slab, an incorrect regime flag — before they compound across twelve months and require a corrected return to fix.
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