Payroll Management for Factories in India — Fully Compliant Under the 50% Wage Rule, Form 138, and the New Labour Codes 2026
Factory payroll in 2026 is not what it was in 2024. The 50% wage rule has restructured CTCs. Form 24Q has been replaced by Form 138 under the Income Tax Act 2025. Full and final settlement must happen within 2 working days. Every one of these changes has serious downstream impact on your PF, ESI, gratuity, and TDS math. We run your payroll under the exact framework that applies today — not what worked last year.
Get a Free Payroll Compliance Audit
50% Wage Rule, Form 138 TDS, PF/ESI, & 2-day F&F settlement.
Factory Payroll Is a Different Animal — And Most Payroll Firms Get It Wrong
Payroll for a 200-person tech startup is straightforward: fixed salaries, monthly cycles, one location, one shift, no contract labour. Payroll for a 200-person factory involves:
- Shift-based wage calculations (morning, general, night with differential rates)
- Attendance-linked wages where "paid days" determine everything downstream
- Overtime under Section 59 (previously) / OSH Code (now) — with double-rate calculations
- Contract labour payroll with Principal Employer liability
- Multiple states with different PT slabs, LWF calendars, and minimum wage revisions
- Production-linked incentives (PLI), attendance bonus, and shift allowances
- Piece-rate wages for certain job categories
- Migrant worker payroll with ISMW displacement allowance requirements
Generic payroll software and generic HR outsourcers routinely miscalculate factory payroll — which is why factories consistently show up on Labour Department risk-audit lists. We specialize in factory payroll, not office payroll.
What's Changed in Factory Payroll from April 2026
Four regulatory shifts have made 2024-era payroll structures non-compliant:
1. The 50% Wage Rule (Code on Wages, 2019)
Under the Code on Wages, 2019, basic pay including Dearness Allowance must now constitute at least 50% of total CTC. This single rule has the widest payroll impact because it changes PF contribution amounts (PF is calculated on basic wages, so a higher basic means higher PF contributions), gratuity payouts (calculated on last drawn basic salary), ESI thresholds, and income tax efficiency of the CTC package.
Splitting wages with a low basic to reduce PF cost has been struck down repeatedly by the Supreme Court in the Vivekananda Vidyamandir case (2019). The safer rule: basic + DA should be at least 50-60% of gross. Anything lower is an audit invitation.
Most factories still running on pre-2025 CTC structures are underdeducting PF and ESI every month — building silent compliance liability that surfaces during audits with interest, damages, and penalties.
2. Form 138 Replaces Form 24Q (Income Tax Act 2025)
TDS on salary from April 2026 is governed by Form 138 under the Income Tax Act 2025, replacing the previous Form 24Q. Businesses that have not updated their payroll systems for the new form references are filing incorrect quarterly returns.
The Income Tax Act 2025 replaces the 64-year-old Income Tax Act 1961. Every quarterly TDS filing since Q1 FY 2026-27 must be in the new format. Form 16 issued after 15 June 2026 must be in the revised format.
3. Full & Final Settlement Within 2 Working Days (Code on Wages)
Full and final settlement — including gratuity provisioning for fixed-term employees, leave encashment, and pending dues — must now be completed within 2 working days of an employee's last working day. The old 30-45 day timeline is no longer legally acceptable.
4. Mandatory Digital Records (OSH Code, 2020)
Under the OSH Code, statutory registers, attendance, wage records, and payslips must be maintained in digital, tamper-evident, timestamped formats. Manual registers and Excel-based payroll are increasingly rejected during audits.
Our Payroll Management Service — What's Actually Included
Every payroll engagement covers three functional blocks: monthly processing, statutory compliance, and year-end closure. Nothing is charged extra as a "surprise."
Monthly Payroll Processing
- Attendance integration from biometric, RFID, or manual systems
- Paid days calculation with shift-wise, leave-wise, and overtime breakup
- Gross wage computation including basic + DA + all allowances
- Overtime calculation at double rate under Section 59 / OSH Code
- Production-linked incentive (PLI) and bonus computation
- 50% wage rule validation before every payroll run
- Statutory deductions — PF, ESI, PT, LWF, TDS
- Net pay calculation and bank transfer file generation (NACH/RTGS/NEFT)
- Digital payslips issued to every employee with complete breakup
- Payroll register maintained in digital, audit-ready format
- Salary paid by 7th-10th of the following month (statutory requirement)
Monthly & Quarterly Statutory Compliance
Provident Fund (PF)
- ECR generation and deposit by 15th
- UAN mapping for all workers (including contract labour)
- KYC updates and portability transfers
- PF withdrawal and transfer support (Form 10C, 10D, 31)
- Annual PF return
Employees' State Insurance (ESI)
- Monthly challan generation and deposit by 15th
- Employee onboarding and IP number generation
- 3.25% employer + 0.75% employee contribution on gross wages
- ESI benefit claims support for workers
- Half-yearly returns by 11 April and 11 October
Professional Tax (PT)
- State-specific PT registration and monthly deposits
- Slab-wise deduction per state (Maharashtra, Gujarat, WB, etc.)
- Annual returns
Labour Welfare Fund (LWF)
- State-specific contribution as per calendar (some states half-yearly, some annual)
- Employee-employer share calculation
TDS on Salaries
- Monthly TDS deduction under Section 192
- Quarterly Form 138 filing (new format under Income Tax Act 2025)
- TDS deposit by 7th
- Form 16 issuance by 15 June in revised format
Year-End & Annual Closure
- Form 16 issuance to all employees (revised format from FY 2026-27)
- Investment proof collection and validation
- Form 138 Q4 filing with year-end reconciliation
- Annual returns — PF (Form 3A/6A), ESI, PT, LWF
- Gratuity provisioning and actuarial support
- Leave encashment processing
- Bonus computation under Payment of Bonus Act (up to 20% of wages)
- Full & final settlement processing within 2 working days for exits
Still Splitting Basic Pay Below 50% to Save PF Costs?
Supreme Court rulings and Code on Wages 2019 now trigger automatic EPFO notices for unaligned CTC structures. Get a free 1-on-1 payroll CTC restructuring review today.
Factory-Specific Payroll Capabilities
These are the capabilities generic payroll firms don't offer — but every factory needs.
Shift Differential Wages
Automated calculation of night shift allowance, general shift differential, and rotating shift adjustments per your factory's shift structure.
Piece-Rate & Job-Work Payroll
Output-linked wage computation for workers paid per unit, per operation, or per production target — with automatic conversion to statutory equivalents for PF/ESI base.
Contract Labour Payroll (CLRA Compliant)
Separate payroll runs for contract workers with Principal Employer verification, contractor UAN mapping, and monthly compliance reconciliation to protect you from contractor default liability.
Overtime Under OSH Code
Legally compliant overtime at double the ordinary rate, with automatic capping at statutory limits (typically 60 hours per quarter under old Factories Act, now revised under OSH Code state rules).
Migrant Worker Payroll
Displacement allowance, journey allowance, and welfare fund contributions under the ISMW framework (now under OSH Code) — with all statutory documentation.
Multi-Location Consolidation
If you run factories across Maharashtra, Gujarat, and UP, one master payroll cycle with state-wise statutory splits — one invoice, one relationship manager, one MIS.
Attendance Integration
Biometric, RFID, mobile-based, and manual attendance systems integrated into monthly cycles — with exception reporting for absenteeism, late marks, and shift swaps.
Statutory Deductions & Deposit Calendar
Missing a single deposit deadline triggers interest and damages. Our calendar system prevents this.
| Statutory Item | Rate / Applicability | Deposit Deadline |
|---|---|---|
| PF (Employer) | 12% of Basic + DA | 15th of following month |
| PF (Employee) | 12% of Basic + DA | 15th of following month |
| ESI (Employer) | 3.25% of gross wages | 15th of following month |
| ESI (Employee) | 0.75% of gross wages | 15th of following month |
| TDS on Salary | Per income tax slabs | 7th of following month |
| Professional Tax | State-specific slabs | State-specific (usually 10th-30th) |
| LWF | State-specific rates | State-specific (half-yearly/annual) |
| Bonus | 8.33% – 20% of eligible wages | Within 8 months of financial year-end |
| Gratuity | 15 days per year of service | Within 30 days of exit (2 days for FNF) |
Common Factory Payroll Mistakes We Fix
We've audited factory payrolls across 9 states. These 7 mistakes cost factories crores every year:
- 1Low basic + high allowances structure — underdeducts PF/ESI, triggers Section 7A notices from EPFO
- 2PF/ESI missed for contract labour — Principal Employer liability, treated as your default
- 3Overtime paid at single rate — direct violation of Section 59 / OSH Code
- 4Bonus paid to ineligible employees or missed for eligible workers earning up to ₹21,000
- 5PT missed in states of operation — even if head office is elsewhere
- 6LWF non-deposit — small amounts, but interest and damages accumulate
- 7F&F settlements delayed beyond 2 working days — now a direct Code violation with penalties
Our onboarding starts with a full payroll audit — we surface these gaps before they surface during an inspection.
Why Factories Choose Us for Payroll Management
Factory-Specialized, Not Generic HRMS
We don't sell software subscriptions. We run your payroll — shift-based, attendance-integrated, contract-labour-inclusive.
End-to-End Compliance, Not Just Processing
Payroll processing without PF/ESI/PT/TDS/LWF filings is just salary transfer. We do the full loop — from attendance to Form 16.
Labour Codes 2025 + Income Tax Act 2025 Ready
Our systems already run on the 50% wage rule, Form 138, and 2-day F&F. You don't inherit any transition risk.
Principal Employer Protection Built-In
Contract labour payroll runs are automatically reconciled with contractor PF/ESI filings — you have documentary proof of Principal Employer compliance every month.
Multi-State Coverage as Standard
9 states, one payroll cycle, one invoice. No coordination between "the Pune vendor" and "the Ahmedabad vendor."
Fixed-Scope Monthly Retainer
Priced per employee headcount tier. No surprise charges for "extra runs" or "state additions."
Digital-First Records
Every payroll register, payslip, challan, and return timestamped and audit-ready — accessible via secure dashboard.
Pricing — How Payroll Retainers Work
We offer three retainer tiers based on employee count and complexity:
Up to 50 employees, single location
Monthly payroll + PF/ESI/PT/TDS/LWF compliance + digital payslips + annual returns.
50 to 250 employees, up to 3 locations
Everything in Starter, plus shift-differential support, contract labour payroll, multi-state PT/LWF, dedicated payroll manager.
250+ employees, multi-state
Everything in Growth, plus board-level compliance MIS, custom integrations, dedicated compliance director, 24-hour audit support.
Book a discovery call for a fixed-scope quote based on your actual headcount, states, and complexity.
Frequently Asked Questions
Move Your Factory Payroll to Real Compliance — This Month
Book a free 45-minute payroll audit with our senior expert. We'll review your current CTC structure, statutory filings, and compliance calendar — and give you a clear remediation plan under the 2025-2026 framework.