Common Indian payroll mistakes and how to avoid them
Reviewed by Mellow Editorial Team, HR & payroll content team
Getting Indian payroll right comes down to consistent compliance across tax deductions, statutory contributions and timely filings. Most errors are not dramatic — they are small process failures that compound over time into penalties, employee grievances or audit risk.
Wrong tax regime applied to employees
From FY 2026/27, the new income tax regime is the default. Employees can opt out, but many do not do so formally. The mistake employers make is assuming employees will speak up, rather than collecting written declarations at the start of each financial year.
What goes wrong: payroll runs an entire year under the wrong regime. The employee then files their return and finds a mismatch with Form 16. Reconciling this mid-cycle wastes significant time.
How to avoid it: circulate a simple declaration form in April, before the first payroll of the year. Record the choice in writing. If an employee misses the deadline, default to the new regime and document that decision.
Remember that under the new regime, slabs rise to 30% at higher income levels. The section 87A rebate reduces liability for lower-income employees, and a 4% health and education cess applies on the final tax figure. Applying these correctly requires accurate gross salary data each month, especially when employees have variable pay.
Errors in EPF and ESI contributions
Provident Fund contributions are straightforward in principle: 12% of basic wages from the employee, matched at 12% by the employer. The mistake is applying these percentages to the wrong base — using gross salary instead of the defined wage components, or omitting allowances that should be included.
ESI applies to employees below the applicable wage threshold. The error here is failing to update the ESI register when an employee's salary crosses that threshold mid-year. Once an employee breaches the limit during a contribution period, the rules on whether contributions continue for the rest of that period are specific. Many payroll teams handle this inconsistently.
Practical steps: define wage components clearly in your payroll structure from day one. Review ESI eligibility at every salary revision, not just at annual increments. Reconcile EPF challan amounts monthly against your payroll register before submitting.
Late or incorrect TDS filings
TDS on salaries is deducted at source each month based on the employee's estimated annual tax liability. The filing obligation is Form 24Q, submitted quarterly. Form 16 is issued to employees after the financial year closes.
Two common mistakes here. First, employers do not revise their TDS estimate when an employee's income changes — a mid-year bonus, a salary hike or a variable component paid in Q3 can significantly alter the annual projection. If TDS is not recalculated promptly, the shortfall accumulates and the employee faces a large deduction in the final months of the year.
Second, Form 16 details do not match Form 26AS or the Annual Information Statement. This happens when the challan is deposited under the wrong TAN or the amount is entered incorrectly. It creates problems for employees filing their own returns and can trigger notices.
The fix is a monthly reconciliation habit: verify that the TDS amount deducted in your payroll matches the challan actually deposited with the government. Do not leave this to the quarter-end filing.
Gratuity not provisioned or calculated correctly
Gratuity is payable once an employee completes five years of continuous service. The calculation is formula-based, using last drawn salary and years of service. The mistake is treating gratuity as a cost that only materialises when someone resigns or retires, with no provision made along the way.
For growing companies, this creates a sudden liability that was not budgeted. Accounting teams and HR often work in silos here — payroll processes monthly salary, but nobody is tracking the accruing gratuity exposure.
Build a simple tracker: for every employee past the two-year mark, maintain a running gratuity estimate. Revisit it when salaries change. This is especially important with the four consolidated Labour Codes now in force from 2025, which carry revised definitions and compliance timelines that affect how entitlements are interpreted.
Inconsistent records and missing documentation
Payroll audits in India rely on documentary evidence — signed salary registers, investment declaration forms, reimbursement proofs, leave records that affect loss-of-pay calculations. Missing documents are often the reason a straightforward audit becomes complicated.
The habit to build is contemporaneous documentation. Collect proof at the time the event happens, not retrospectively when the auditor asks. Store salary revision letters, appointment letters and full-and-final settlement calculations in a retrievable format.
For employers managing payroll across states, remember that professional tax slabs, thresholds and deadlines vary by state. What applies in Maharashtra does not apply in Karnataka. Map out your obligations in each state where you have employees and assign clear ownership for each filing.
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