The modern startup ecosystem has evolved rapidly, with businesses scaling faster, adopting flexible work models, and managing increasingly complex workforce structures. As startups grow, payroll management is no longer limited to salary processing—it has become a critical compliance function that requires alignment with new labour codes, statutory deductions, employee benefits, and tax reporting obligations. 

Even small payroll errors can lead to penalties, employee disputes, audit exposure, and reputational risks. This makes a structured payroll compliance checklist 2026 essential for startups seeking sustainable and compliant growth. 

The New Labour Code 

The Government of India has undertaken a significant labour law reform by consolidating 29 existing labour legislations into four comprehensive codes — the Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020. Effective nationwide from 21 November 2025, these reforms introduced a more structured, streamlined, and standardized regulatory framework. Consequently, India’s payroll compliance landscape is now largely governed by the new Labour Codes framework, alongside applicable tax and social security regulations. 

Key payroll-related laws impacting startups include: 

• Code on Wages, 2019  
• Code on Social Security, 2020  
• Employees’ Provident Fund Act, 1952  
• Employees’ State Insurance Act, 1948  
• Payment of Gratuity Act, 1972  
• Payment of Bonus Act, 1965  
• Income Tax Act, 1961 

In addition to central laws, startups must also comply with Professional Tax regulations, Labour Welfare Fund requirements, and Shops & Establishments rules applicable across states.  

Code on Wages 

One of the most important payroll reforms introduced under the Labour Codes is the uniform definition of “wages” under the Code on Wages, 2019. This definition directly affects salary structuring, statutory deductions, gratuity calculations, and overall payroll costs for startups. 

Wage Structure and Minimum Wage Compliance  

Components Included in Wages 

Under the new framework, wages generally include:  

• Basic Pay – the fixed core component of salary used for calculating most statutory benefits and contributions. 
• Dearness Allowance (DA) – an allowance paid to offset inflation and cost-of-living increases, commonly used in structured payroll systems. 
• Retaining Allowance – an allowance paid to employees retained during off-season periods in seasonal industries. 
• Components Excluded from Wages 

The following salary components are generally excluded: 

• House Rent Allowance (HRA) – an allowance provided to employees for accommodation expenses. 
• Conveyance allowance – reimbursement or allowance for commuting and travel expenses. 
• Bonuses – a mandatory annual payment linked to employee wages and company eligibility under the Payment of Bonus Act. 
• Overtime payments – compensation paid for work beyond prescribed working hours. 
• Commission – variable earnings linked to sales or performance targets. 
• Employer PF contribution – employer’s statutory contribution towards provident fund. 
• Gratuity – a statutory retirement benefit payable to employees after completing continuous service of at least five years. 

However, the Labour Codes introduce the “50% rule.” If excluded components exceed 50% of total remuneration, the excess amount must be added back and treated as wages. 

This significantly impacts how startups structure compensation packages because statutory benefits such as EPF, gratuity, and bonus are calculated based on wages. 

Under the Code on Wages framework, employers must ensure employees receive at least the applicable minimum wage prescribed by the relevant state government. Minimum wages continue to vary based on: 

• State  
• Skill category  
• Industry classification  

The Code on Wages also introduces the concept of a National Floor Wage, below which states cannot fix minimum wage rates. 

The Impact 

The revised wage definition under the Labour Codes directly impacts compliances relating to EPF, ESI, gratuity, bonus, overtime, and leave encashment. As a larger portion of salary may now qualify as wages, startups relying heavily on allowance-based structures could face higher statutory contribution liabilities and employee benefit costs. 

This may require businesses to restructure salary components and revise CTC models, potentially increasing basic pay, employer payroll costs, and overall compliance obligations. 

EPF Applicability and Contributions 

The Employees’ Provident Fund (EPF) Act generally applies to establishments employing 20 or more employees. Certain businesses may also obtain voluntary registration. 

EPF coverage is mandatory for eligible employees earning up to ₹15,000 per month (basic wages plus DA), though employers may voluntarily extend coverage beyond the threshold. 

Under the current framework: 

• Employer contribution: 12% of wages  
• Employee contribution: 12% of wages  

Out of the employer’s contribution, 8.33% is allocated towards the Employees’ Pension Scheme (EPS), subject to prescribed limits, while the balance is contributed towards EPF. 

Under the revised wage framework, a larger portion of employee compensation may now qualify as wages for provident fund calculations. This may increase the salary base used for EPF contributions, thereby increasing both employer and employee provident fund liabilities. 

ESI Applicability and Contributions 

The Employees’ State Insurance (ESI) Act generally applies to establishments employing 10 or more employees (thresholds may vary across states). 

ESI is a statutory social security and medical insurance scheme applicable to employees earning up to ₹21,000 per month.  

Contribution Structure 

• Employer contribution: 3.25%  
• Employee contribution: 0.75%  

As a result, startups may need to reassess employee registration, contribution calculations, and overall ESI compliance obligations. This could increase overall social security compliance requirements for startups with expanding workforces. 

Gratuity Applicability and Calculations 

The Payment of Gratuity Act, 1972 generally applies to establishments employing 10 or more persons. Once applicable, the Act continues to apply even if employee strength subsequently falls below the threshold. 

Employees become eligible for gratuity after completing five years of continuous service, subject to certain exceptions such as death or disability. 

Gratuity is a statutory retirement benefit payable to employees after completing continuous service of at least five years. Since gratuity calculations are linked to wages, the revised wage definition may increase the salary base used for gratuity computations, potentially increasing long-term payout obligations for employers. 

Calculation Framework 

• Gratuity is calculated as 15 days’ wages for every completed year of service  
• Maximum gratuity limit remains ₹20 lakh  

Startups with long-term workforce planning must therefore account for higher future gratuity liabilities. 

Bonus Calculations 

The Payment of Bonus Act, 1965 generally applies to establishments employing 20 or more persons. 

Eligible employees are entitled to statutory bonus payments subject to prescribed salary thresholds and conditions under the Act. 

Bonus Structure 

• Statutory bonus ranges from 8.33% to 20% of salary or wages  

Since bonus calculations are wage-linked, businesses with high allowance-based salary structures may see an increase in bonus payout obligations under the revised wage framework. 

Overtime 

Under the Labour Codes framework, overtime wages must generally be paid at twice the normal wage rate for work performed beyond prescribed working hours. Since overtime payments are linked to wage calculations, changes in wage structuring may also influence overtime payout values. 

Leave Encashment 

Leave encashment refers to payment made for accumulated earned leave not availed by employees. As leave encashment calculations are also linked to wages, revisions in the wage definition and salary structure may increase employer liabilities towards leave-related payouts. 

Other Considerations 

While wage structuring, EPF, ESI, gratuity, and bonus form the core of payroll compliance under the Labour Codes, startups must also pay close attention to broader labour law obligations that directly affect payroll governance and statutory reporting. 

Working Hours, Leave, and Employee Welfare, Workplace Safety, Accident Benefits, and Employee Health 

The Labour Codes framework standardises workplace compliance requirements relating to working hours, overtime, leave management, and employee welfare. Key provisions include limits on working hours, mandatory weekly rest periods, overtime compensation at twice the normal wage rate, and employee consent requirements for overtime work. 

The framework also introduces clearer earned leave provisions, including leave accrual, eligibility conditions, and carry-forward limits. These requirements make accurate attendance tracking, leave management, and employee record maintenance increasingly important for startups. 

Under the Occupational Safety, Health and Working Conditions Code, startups must maintain basic workplace safety standards and comply with employee welfare obligations. Depending on the nature of operations, businesses may also need to address accident reporting, employee compensation, and periodic health check-up requirements. 

POSH Compliance 

Startups employing 10 or more employees are generally required to constitute an Internal Committee under the POSH Act, 2013. Maintaining POSH policies, complaint mechanisms, and employee awareness records forms an important part of HR and compliance governance. 

Contract Labour and Fixed-Term Employment Compliance 

Businesses engaging contract labour or fixed-term employees must ensure proper agreements, wage payments, and statutory compliance wherever applicable. Fixed-term employees may also be entitled to proportionate statutory benefits under the Labour Codes framework. 

Unorganised Workers and Social Security Compliance 

The Code on Social Security, 2020 expands regulatory focus to gig workers, platform workers, and certain unorganised workers. As implementation evolves, startups using flexible workforce models may face additional registration, contribution, or reporting obligations. 

Tax Matters – TDS and Income Tax  

In addition to labour law obligations, payroll taxation remains a critical component of overall payroll compliance. Payroll taxation continues to be governed by the Income Tax Act, 1961, with the Income Tax Act, 2025 expected to become operational from April 2026 for the 2026–27 tax year. The revised framework may introduce updated payroll reporting structures and compliance procedures. 

TDS compliance must be aligned closely with salary structures, payroll records, and statutory deductions maintained under the Labour Codes framework. Errors in tax deductions, reporting, or reconciliation can result in penalties and compliance exposure for startups. 

Payroll compliance checklist 

Wage Structure and Salary Compliance 

• Ensure salary structures comply with the 50% wage rule  
• Verify excluded allowances do not exceed permissible thresholds  
• Review CTC structures periodically for Labour Code compliance  
• Ensure salaries meet applicable state minimum wage requirements  
• Maintain wage registers and employee classification records 

EPF Compliance Checklist 

• Deposit EPF contributions by the 15th of the following month  
• Ensure UAN registration and Aadhaar-linked KYC for employees  
• Maintain Form 2 and contribution records  
• File monthly electronic returns through the EPFO portal  
• Review PF impact arising from revised wage calculations 

ESI Compliance Checklist 

• Register eligible employees through the ESIC portal  
• Deposit ESI contributions within statutory timelines  
• Maintain employee wage and benefit records  
• File periodic ESIC returns electronically  
• Reassess employee eligibility after salary restructuring 

Gratuity and Bonus Compliance Checklist 

• Track employee tenure accurately  
• Calculate gratuity using statutory formulas  
• Disburse gratuity within prescribed timelines  
• Ensure statutory bonus calculations and payments  
• Maintain service and payroll records 

Professional Tax Compliance Checklist 

• Verify state-wise Professional Tax slabs  
• Obtain PT registrations where required  
• Deduct PT according to applicable thresholds  
• File periodic PT returns through state portals  
• Monitor state-specific due dates and exemptions 

TDS Checklist 

• Deduct TDS based on applicable tax slabs  
• Collect PAN, Aadhaar, and investment declarations  
• File quarterly Form 24Q returns  
• Issue Form 16 annually  
• Maintain payroll and tax computation records  
• Reconcile payroll data with statutory filings regularly 

Best Practices for Sustained Payroll Compliance in 2026 

Maintaining payroll compliance for startups requires ongoing monitoring. 

Key Best Practices 

• Track working hours, attendance, leave records, and overtime payments accurately.  
• Ensure compliance with maternity benefits, employee welfare provisions, and statutory registers. 
• Conduct periodic payroll audits to identify compliance gaps and reconciliation issues.  
• Monitor updates from EPFO, ESIC, labour departments, and tax authorities regularly. 
• Train HR and payroll teams on evolving labour law and payroll compliance requirements 2026.  
• Use digital payroll platforms such as Zoho Payroll, greytHR, and KEKA for automated compliance management.  
• Leverage analytics and reporting tools such as Microsoft Power BI for payroll monitoring and statutory tracking. 
• Periodically review salary structures, wage classifications, and statutory contribution calculations to align with the revised wage framework and 50% wage rule. 

Final Thoughts 

As India transitions into the new Labour Codes regime, payroll compliance for startups is becoming far more structured, data-driven, and compliance-focused than before. The revised wage definition, evolving social security obligations, and increased emphasis on digital statutory reporting are expected to reshape how startups design salary structures and manage employee benefits. 

Going forward, businesses will need to treat payroll not merely as an administrative function but as a core compliance and workforce-planning process. A well-defined payroll compliance checklist, supported by periodic reviews, accurate documentation, and digital payroll systems, will be essential to meet evolving payroll compliance requirements 2026.

For startups operating with modern and flexible workforce models, proactive compliance planning today can help minimise regulatory exposure, improve payroll governance, and support scalable business growth in the years ahead.