Consultation
+91 97731 50167
Payroll Processing for Start-ups under New Labour Codes
If you’re running a start-up, you’re probably juggling a hundred things at once—product development, fundraising, customer acquisition, team building. Payroll might seem like just another administrative task that can be figured out later. But here’s the reality: getting payroll wrong can cost you heavily in penalties, damage employee trust, and even scare away investors during due diligence.
The game changed significantly with the New Labour Codes coming into effect from November 2025. What used to be 29 different labour laws have been consolidated into four simplified codes. Sounds easier, right? Well, yes and no. While the consolidation streamlines things, the compliance requirements have actually become stricter, especially around salary structuring explained by Kaizen Consultancy – Payroll Processing for Start-up provider
What Changed with the New Labour Codes?
Let's break down what the New Labour Codes mean for your start-up's payroll operations.
The Four Codes replacing 29 old laws:
- Code on Wages (replacing Payment of Wages Act, Minimum Wages Act, etc.)
- Code on Social Security (covering PF, ESI, gratuity)
- Industrial Relations Code (trade unions, disputes)
- Occupational Safety, Health and Working Conditions Code
What this means for your Payroll
Gone are the days of registering on multiple portals and dealing with different authorities. Now you have centralized digital platforms—primarily the Shram Suvidha Portal and EPFO Unified Portal. One registration covers most of your compliance needs.
Wage slips have become mandatory, not optional. Every employee must receive a detailed payslip showing the complete salary breakup, deductions, and net pay. No more informal cash payments or vague salary credits.
The Critical 50% Wages Rule Every Start-up must understand
This is probably the most significant change affecting start-up payrolls, so let's dig deep into it.
The old approach (pre-2025):
Most start-ups structured salaries something like this:
- Basic: 20-30% of CTC
- HRA: 40%
- Special Allowance: 30%
- Other perks: Remaining
This minimized PF contributions (which are calculated only on basic + DA, capped at ₹15,000) and kept take-home salaries higher. Employees were happy, and costs were controlled.
The new mandatory structure:
Basic Pay + Dearness Allowance + Retaining Allowance must equal at least 50% of total remuneration. Additionally, all allowances combined cannot exceed 50% of remuneration. If they do, the excess gets treated as "wages" for statutory calculations.
Why this matters
Mandatory Payroll Structure
PF contributions are 12% from both employer and employee, calculated on basic + DA (capped at ₹15,000). When basic increases from 30% to 50% of CTC, your PF base potentially increases, meaning higher deductions.
Gratuity is calculated as 15 days' wages for every completed year of service after 5 years. Higher basic means higher gratuity liability when employees leave.
Let's see this with real examples:
Example 1: Compliant Structure (₹60,000 CTC)
- Basic: ₹30,000 (50% of CTC)
- HRA: ₹15,000
- Special Allowance: ₹15,000
- Total: ₹60,000
PF Calculation:
- PF Base: ₹15,000 (capped, even though basic is ₹32,000)
- Employee deduction: ₹1,800 (12% of ₹15,000)
- Employer contribution: ₹1,800
- Total PF cost: ₹3,600
The smart restructure approach:
Take that same ₹60,000 CTC and structure it properly from day one:
- Basic: ₹32,000 (53%)
- HRA: ₹16,000 (27%)
- Special Allowance: ₹12,000 (20%)
The good news? For most salary levels, because PF caps at ₹15,000, the actual cost impact isn't huge. The real issue is compliance and avoiding penalties.
Step-by-Step Payroll Processing Workflow
Running payroll for a start-up doesn't have to be chaotic. Here's a systematic workflow that works:
Step 1: Data Collection (1st to 5th of every month)
This is your foundation. Garbage in, garbage out applies to payroll big time.
Collect from your attendance system:
Gather from managers and HR:
Step 2: Salary Structure Verification
Before processing, verify each employee's salary structure complies with the 50% rule:
For new hires, ensure their offer letters have compliant structures. For existing employees, if you haven't restructured post-November 2025, do it now with proper communication.
Step 3: Calculate Gross Pay
Start with the fixed components:
- Basic Pay
- Dearness Allowance (if applicable)
- HRA
Add variable components:
- Overtime pay (at double the regular hourly rate)
- Attendance bonuses
Adjust for partial months:
Step 4: Calculate All Deductions
Statutory deductions:
- PF (Employee share): 12% of basic + DA, capped at ₹15,000 base (so maximum ₹1,800 deduction)
- Professional Tax: State-specific (Maharashtra: ₹200/month, ₹300 in Feb)
- TDS (Tax Deducted at Source): Based on employee's tax slab and declarations
Employer contributions (not deducted from salary but added to your cost):
- PF (Employer share): 12% matched contribution
- ESI (if applicable): 0.75% employee, 3.25% employer on wages up to ₹21,000
Other deductions:
- Advance salary recoveries
- Loss of pay for unpaid leaves
Step 5: Generate and Issue Payslips
Payslips are now legally mandatory. They must show:
- Complete salary breakup (basic, allowances, bonuses)
- All deductions itemized
- Gross pay, total deductions, net pay
- Number of paid days and leave balance
- PF and ESI numbers (if applicable)
Issue payslips by your pay date. Most start-ups pay on the last working day or first week of the month. Digital payslips via email are acceptable and preferred—easier to maintain records.
Step 6: Process Payments
Transfer net salaries to employee bank accounts. Most start-ups use:
- Bulk transfer through company's bank portal
Keep proof of all transfers—you'll need this for reconciliation and audits.
Step 7: Deposit Statutory Dues and File Returns
This is critical. Missing deadlines means penalties.
By 15th of next month:
- Deposit PF contributions (employer + employee share)
- File ECR (Electronic Challan cum Return) showing employee-wise PF details
- Ensure UAN is linked and KYC is complete for all employees
By the 7th of next month:
- Deposit TDS to the Government
- File challan 281 online
Any mismatches? Fix them immediately. Don't let discrepancies pile up.
Payroll Processing for Start-up
Monthly, Quarterly, and Annual Compliance Calendar
Staying on top of deadlines is half the battle. Here's your compliance calendar:
Pro tip: Set up calendar reminders 3-5 days before each deadline. Better yet, use payroll software that automatically reminds you.
Essential Statutory Forms Explained Simply
Let's demystify the forms you'll encounter:
ECR (Electronic Challan cum Return): This is your monthly PF filing. It contains employee-wise details of:
- Basic wages
- PF deducted from employee
- PF contributed by employer
- Pension contribution
- EDLI (insurance) contribution
You upload this via the EPFO portal, and it generates a challan for payment.
Form 24Q: Quarterly TDS return for salary payments. Contains details of:
- Total salary paid to each employee
- TDS deducted each month
- Employee PAN and other details
Filed on the Income Tax portal with quarterly annexures.
Form 5 (Annual PF Return): Consolidated annual return showing all PF contributions, member details, and compliance status for the year.
PT Returns: State-specific professional tax returns. Format varies by state. In Maharashtra, it's filed monthly online.
Must-Have Registers and Records
The New Labour Codes mandate specific record-keeping. Here's what you must maintain:
Form IV - Wage Register: Details of every employee's daily wages, overtime, deductions, net pay. This should be updated daily or at least at every pay cycle.
Muster Roll: Daily attendance record showing presence/absence, leave taken, and overtime worked. Essential proof for wage calculations.
Leave Register: Track each employee's leave balances, leaves taken, leaves encashed. Important for full and final settlement.
Payroll Registers: Monthly payroll sheets showing calculations, gross pay, deductions, net pay for all employees.
Statutory Payment Records: Copies of all challans, receipts, and return acknowledgments for PF, ESI, PT, and TDS.
All these records must be maintained digitally and preserved for at least 5 years. During inspections or audits, these are the first things authorities check.
Compliance Checklist for Start-up Payroll Teams
Print this checklist and stick it near your desk. Check off each item every month:
Our recommendation: Even if you're below the thresholds, consider voluntary PF registration. It's a huge benefit for employees and makes you attractive to talent. Plus, you'll already have systems in place when you scale.
Cost planning as you scale:
Budget for employer statutory costs of 14-18% on top of gross salaries:
- PF: 12%
- ESI: 3.25% (if applicable)
- Bonus: ~8.33% (if profits warrant)
- Gratuity accrual: ~4-5%
So if you're paying ₹10 lakhs in monthly salaries, budget an additional ₹1.4-1.8 lakhs for statutory costs.
Payroll Outsourcing consideration
Many start-ups find that outsourcing payroll when they hit 20-30 employees makes sense. Good payroll consultants charge around ₹50-150 per employee per month, which is often cheaper than hiring a full-time payroll person plus software costs.
Technology and Automation Options
Don't try to do everything manually. Use technology to your advantage:
What to look for in payroll software:
- Automated salary calculation with compliant structures
- Statutory deduction calculation (PF, PT, TDS)
- Direct integration with EPFO and IT portals
- Automated payslip generation and email
- Attendance integration
- Bank file generation for bulk transfers
- Compliance calendar and reminders
- Report generation for audits
Even if you're just 5 people, using basic payroll software from day one establishes good habits and makes scaling easier.
Special Considerations: Gig Workers and Contractors
The New Labour Codes have provisions for gig workers too. Here's what you need to know:
If you're engaging freelancers or gig workers regularly, you might need to treat them as employees for social security purposes. The threshold and definition are still evolving, but here's the principle:
When gig workers might need coverage:
- They work exclusively for you
- Fixed monthly retainer (not per-project)
- Work from your premises regularly
- Use your equipment and resources
Best practices:
- Clearly define contractor relationships in agreements
- Use per-project invoicing rather than monthly salaries
- Don't provide typical employee benefits (leave, PF, etc.)
- Issue payment against invoices with TDS deducted
TDS on contractor payments:
- Professional services: 10% TDS if annual payment exceeds ₹30,000
- Section 194C applies for contract work
- File Form 26Q quarterly
When in doubt, consult with a professional. Misclassifying employees as contractors can lead to serious compliance issues and back-payment of all statutory dues.
Common Payroll Mistakes Start-ups Make
Learn from others' mistakes. Here are the most common ones we see:
❌ Delaying payroll setup until forced to Many start-ups operate informally until they hit 20 employees and PF becomes mandatory. Then they scramble. Set up proper payroll from day one.
❌ Copying outdated salary structures Using old offer letters as templates results in non-compliant 30/70 structures. Create fresh templates with 50% basic minimum.
❌ Missing statutory deadlines "I'll file it next week" turns into penalties. Set up automatic reminders 5 days before every deadline.
❌ Not maintaining proper records Excel sheets scattered across computers, no systematic filing. One day you'll need these for an audit or funding due diligence.
❌ Mixing personal and payroll accounts Using the founder's personal account to pay salaries. Maintain separate accounts for clean audit trails.
❌ Ignoring employee declarations Not collecting investment declarations for TDS calculation results in excess deduction and unhappy employees.
❌ No backup person trained Only one person knows how to run payroll. What if they're sick or quit?
❌ Treating all states equally Professional Tax, Shops Act, and other regulations vary by state. Don't assume what works in Bangalore works in Mumbai.
❌ Delaying exit settlements Taking months to process full and final settlements. Labour laws require payment within 2-10 days depending on circumstances.
❌ Not budgeting for statutory costs Planning only for gross salaries without factoring in 14-18% employer costs. This breaks budgets quickly.
Why Outsourcing Might Make Sense
Why Outsourcing Might Make Sense
Let's be real—as a start-up founder, should you be spending hours figuring out PF forms and TDS calculations? Probably not.
When outsourcing makes sense:
- You've hit 15-20 employees
- Compliance requirements feel overwhelming
- You don't have HR expertise in-house
- Your time is better spent on core business
- Cost of mistakes exceeds cost of consultant
How Kaizen Consultancy Services Can Help Your Start-up
Running a start-up is hard enough without worrying about whether your PF filing is correct or if you've calculated gratuity properly. That's where Kaizen Consultancy Services comes in.
We specialize in start-up payroll because we understand your challenges:
You're bootstrapped and watching every rupee. You're scaling fast and regulations are the last thing you want to think about. You need someone who gets start-up culture and doesn't burden you with corporate red tape.
Why Start-ups Choose Kaizen Consultancy
✅ Quick Onboarding: Get started in 2-3 days, not weeks.
✅ Start-up Friendly: We work with teams of 5 to 500. Pricing scales with you.
✅ Mumbai Based: We understand local regulations, speak your language, available for in-person meetings.
✅ Proactive Support: We remind you before deadlines, not after. We spot issues before they become problems.
✅ Dedicated Account Manager: One point of contact who knows your business.
✅ 18+ Years Experience: We've seen it all—from 3-person start-ups to post-Series C scale-ups.
Get Started: Payroll Processing for start-up in Mumbai
Step 1: Free Payroll Audit Share your current payroll sheets (we keep everything confidential). We'll identify compliance gaps, risks, and optimization opportunities. No obligation, completely free.
Step 2: Customized Proposal Based on your team size and needs, we'll send a transparent quote. You'll know exactly what you're paying for and what's included.
Step 3: Quick Onboarding Once you're ready, we'll complete onboarding in 2-3 days:
- Collect employee data and documents
- Set up compliant salary structures
- Configure our platform
- Process your first payroll with us
Special Start-up Package:
- First month processing at Discounted for teams under 20 employees
- Salary restructuring for all existing employees
- Free compliance health check
Your Next Steps - Payroll Processing Outsourcing for Start-up in Mumbai
Payroll under the New Labour Codes doesn't have to be complicated. With proper structuring (remember that 50% basic rule!), systematic processes, and the right support, you can ensure complete compliance while keeping your team happy.
Do this today:
- Check your current salary structures—is basic at least 50%?
- Review your last 3 months' compliance filings—any missed deadlines?
- Calculate your employer statutory costs—are they budgeted properly?
Start today: Consult Experts Simplify - Payroll Processing for Start-up. For hands-on support, reach local compliance experts - Kaizen Consultancy Services.