Is Your Payroll Process Ready for India's New Compliance Rules?

Labour Codes and Income Tax Act 2025 transform compliance obligations for every employer in India; penalty exposure now reaches ₹50 lakh

NEW DELHI, June 2026 - Between November 2025 and April 2026, two of the most significant regulatory reforms in Indian employment history came into effect simultaneously. The four Labour Codes - consolidating 29 central labour laws - and the Income Tax Act 2025 have together restructured how wages are classified, how statutory contributions are calculated, how employee exits must be processed, and how payroll records are maintained. For organisations still operating on legacy in-house payroll or manual systems, these reforms represent a material and measurable compliance risk.

TankhaPay, India's all-in-one payroll software and managed payroll services platform operated by Akal Information Systems Ltd, is urging HR leaders and CFOs to conduct an immediate audit of their payroll infrastructure against the new statutory requirements.

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What the reforms actually change

The Code on Wages 2019, effective 21 November 2025, introduces the most consequential change: basic salary must now constitute at least 50% of total CTC. Any salary structure where allowances push the non-wage component above this threshold must be restructured immediately. This directly increases EPF contributions, gratuity provisions, and in several cases ESI applicability for existing employees.

The Income Tax Act 2025, effective 1 April 2026, replaces the 64-year-old Income Tax Act of 1961. For payroll operations, the changes are immediate and practical: TDS sections have been renumbered, Form 16 has been replaced by Form 130, Form 24Q now requires updated software compatibility, and new tax slab calculation logic must be incorporated into payroll systems. Organisations with large, multi-state workforces managing this transition internally face compounded operational risk.

❝I've made a payroll. I know what it's like to execute a business plan. I know what it's like to expect the proper return on investment... and I know you can't spend your way out of debt.

- 「Linda McMahon」

Cost of getting it wrong

Non-compliance penalties under the current enforcement environment have escalated significantly. Violation penalties now reach ₹20-50 lakh depending on the nature and extent of non-compliance. Delays in EPF deposit attract interest at 12% per annum plus damages of up to 25% of arrears. TDS default carries interest of 1.5% per month from the date of deduction. Failure to issue Form 130 by 15 June annually carries a penalty of ₹100 per day per employee. Under the Industrial Relations Code, full and final settlement must now be completed within two working days of employee exit - a requirement that most manual payroll processes are structurally unable to meet.

"The framing of payroll compliance as a back-office function is a legacy of simpler regulatory times," said a TankhaPay spokesperson. "In 2026, CHROs and CFOs who treat statutory payroll obligations as routine administration are carrying risk they may not have quantified. The four Labour Codes and the Income Tax Act 2025 have raised both the technical bar and the financial stakes simultaneously."

Multi-state operations face disproportionate complexity

For organisations operating across multiple states, compliance is not a single policy challenge. Professional Tax rates, Labour Welfare Fund contribution schedules, minimum wage notifications, and Shops and Establishments Act requirements vary by state and are subject to independent revision. An organisation with operations in Maharashtra, Karnataka, Tamil Nadu, Telangana, and Delhi is simultaneously subject to five different PT structures, five Shops Acts, different LWF obligations, and minimum wage schedules that can be revised twice annually per state. Internal payroll teams managing this without dedicated compliance infrastructure are, structurally, a compliance risk.

TankhaPay's payroll outsourcing service covers salary structure redesign under the 50% wage rule, end-to-end statutory calculation and filing - EPF, ESI, TDS, PT, LWF, gratuity, and bonus - multi-state compliance monitoring, Form 130 generation, and full and final settlement processing within the two-working-day statutory window.

Read Our Related Blogs:
Payroll Compliance Penalties: https://www.tankhapay.com/blog/payroll-compliance-penalties/
Payroll Errors: https://www.tankhapay.com/blog/payroll-errors/

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Company Name: TankhaPay by Akal Information System Ltd.
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Website: https://www.tankhapay.com
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TankhaPay is the flagship HR and payroll compliance product of Akal Information Systems Ltd., a 26-year-old HR technology company. The platform serves 500+ enterprise clients across India in industries including IT, manufacturing, healthcare, and staffing. TankhaPay covers end-to-end payroll processing, statutory compliance (EPF, ESIC, PT, TDS), Employer of Record (EOR) services, Global Talent Mobility, staffing and recruitment, and apprenticeship management under the National Apprenticeship Training Scheme (NATS).

This release was published on openPR.