30 Apr 2026Updated: May 2026
Payroll Trends in India 2026: Labour Codes, Automation, and Compliance Shifts Every Employer Must Know
Payroll compliance in India is undergoing its most significant structural overhaul in decades. The four Labour Codes that consolidate 29 central labour laws have been enacted, and while full implementation awaits notified state rules, employers who defer preparation are building up compliance debt. Simultaneously, payroll automation has moved from a convenience to a necessity, driven by integrated government portals and real-time reconciliation requirements.
This post covers the key payroll trends for India in 2026 — from the redefined concept of wages under the new codes to TDS changes under the default new tax regime.
The Four Labour Codes: What Employers Must Prepare For
The central government has enacted four Labour Codes that subsume 29 existing labour statutes:
- Code on Wages 2019: Consolidates the Minimum Wages Act 1948, Payment of Wages Act 1936, Payment of Bonus Act 1965, and Equal Remuneration Act 1976.
- Industrial Relations Code 2020: Consolidates the Trade Unions Act 1926, Industrial Employment (Standing Orders) Act 1946, and Industrial Disputes Act 1947.
- Social Security Code 2020: Consolidates the EPF Act, ESI Act, Gratuity Act, Maternity Benefit Act, and related statutes.
- Occupational Safety, Health and Working Conditions Code 2020: Consolidates the Factories Act 1948 and 13 other statutes.
Most states have published draft rules but are yet to notify final rules. The codes will come into force on a date to be notified after state rules are finalised. Employers — particularly those with multi-state operations — should already be conducting a gap analysis between current payroll structures and the requirements under the codes.
The Redefined Concept of "Wages" and Its Payroll Impact
The single most significant operational change in the Code on Wages 2019 is the new definition of wages. Under the Code, wages include basic pay plus dearness allowance and retaining allowance. Excluded components — HRA, overtime pay, bonus exceeding 50% of wages, conveyance allowance, gratuity — cannot cumulatively exceed 50% of total remuneration. If they do, the excess is deemed part of wages.
The practical consequence: many employers who have structured CTC to minimise the basic component — and thus minimise PF and gratuity liability — will find that low-basic, high-allowance structures are non-compliant. A higher wage base means higher employer PF contributions, higher gratuity accruals, and a larger bonus computation base. Payroll systems must be reconfigured to apply this definition once the codes are notified.
Social Security Code 2020: Expanded Coverage and Gig Workers
The Social Security Code 2020 proposes to expand ESIC coverage to all establishments with 10 or more employees, removing existing industry-specific exemptions. This significantly broadens the compliance universe for SMEs in the services sector.
The Code also introduces provisions for social security coverage of gig workers and platform workers employed through aggregators. While contribution rates and the mechanism are yet to be notified, platform businesses and companies engaging gig workers on a material scale should begin tracking this development.
Payroll Automation in India 2026: Integration with Government Portals
Payroll automation has advanced from basic salary computation to real-time integration with statutory portals:
- EPFO Unified Portal: ECR (Electronic Challan cum Return) filing is UAN-based and must be completed by the 15th of the following month. Modern payroll systems integrate directly with the EPFO portal for UAN generation, ECR preparation, and payment reconciliation.
- ESIC Portal: Monthly contribution filing and payment through the ESIC portal, with employee-level mapping to IP (Insured Person) numbers.
- TDS Auto-Calculation (Section 192): Payroll software must compute TDS on salary on a month-by-month basis, factoring in the employee's declared investment proofs, chosen tax regime, and the applicable standard deduction of ₹75,000.
Employers relying on manual payroll processing face increasing risk of errors in ECR filing, incorrect TDS computation, and delayed challans — each carrying penalties under the respective statutes.
TDS on Salary: Key Changes for FY 2025-26 Onwards
- New Tax Regime as Default: From FY 2024-25 onwards, the new tax regime under Section 115BAC is the default. Employees wishing to opt for the old regime must submit a written declaration to their employer. In the absence of a declaration, TDS must be computed under the new regime.
- Standard Deduction — ₹75,000: Enhanced from ₹50,000 to ₹75,000 per annum under the new tax regime from FY 2025-26 (Finance Act 2025). This must be factored into TDS computation under Section 192.
- Leave Encashment Exemption: The Section 10(10AA) exemption for leave encashment at retirement or resignation by non-government employees has been raised to ₹25 lakh. Payroll teams should ensure TDS treatment of leave encashment payments correctly applies this threshold.
What Employers Should Do Now
- Conduct a CTC structure audit against the Code on Wages definition of wages to assess PF and gratuity impact.
- Implement or upgrade payroll software to handle new-regime-as-default TDS logic, ₹75,000 standard deduction, and regime-selection documentation workflows.
- Review ESIC applicability if headcount is approaching 10 employees.
- Ensure ECR filings are current and UAN mapping is complete for all employees.
Regi Tom Antony And Associates is a Chartered Accountant firm based in Kakkanad, Kochi, providing payroll outsourcing, statutory compliance management, and labour law advisory for SMEs. For payroll compliance support, visit www.smeadvisory.in or write to us at letstalk@rtaandassociates.com.