The India SME HR Compliance Checklist: PF, ESI, Gratuity, and Beyond

HR compliance is the thing most Indian SMEs think they're doing correctly — until they receive an audit notice, a labour court summons, or a legal threat from a former employee.

India's statutory HR framework is complex, multi-layered (both Central and State obligations), and updated with sufficient frequency that what was compliant two years ago may not be compliant today. Missing a single filing, under-reporting wages, or failing to issue the right documentation at the right time exposes businesses to fines, penalties, and in some cases personal liability for directors.

This checklist covers every major HR statutory obligation for businesses with 5–500 employees in India.

Mandatory Registrations

Before any compliance activity is possible, the right registrations must be in place.

Employees' Provident Fund (EPF)

Threshold: Mandatory for businesses with 20 or more employees. Voluntary registration available below this threshold.

Contribution: 12% of basic salary + DA from the employee. 12% from the employer — of which 8.33% goes to the Employee Pension Scheme (EPS) and 3.67% to EPF.

Monthly filing: Electronic Challan cum Return (ECR) due by the 15th of the following month.

Key nuance: "Employee" count includes contract workers deployed at your premises if your business exercises functional control over them. Many SMEs undercount here and find themselves retrospectively liable.

Penalties: Interest at 12% p.a. on delayed payments, plus damages between 5% and 25% of arrears depending on delay duration.

Employee State Insurance (ESI)

Threshold: Applicable to businesses in notified areas with 10 or more employees whose gross wages are ₹21,000/month or below (₹25,000/month for persons with disability).

Contribution: 0.75% of gross wages from employee; 3.25% from employer.

Monthly filing: Contribution challan due by the 15th of the following month. Half-yearly returns due by 11 November and 11 May.

Penalties: Interest at 12% p.a. on delayed contributions, plus prosecution for persistent non-compliance.

Professional Tax

Applicability: State-level obligation, not uniform across India. Karnataka, Maharashtra, Tamil Nadu, West Bengal, Gujarat, and several other states levy professional tax on employees.

Structure: Slab-based monthly deduction from employee salary. Employer contribution varies by state. Filing frequency is monthly or annual depending on the state and headcount threshold.

Common gap: Businesses operating in multiple states often comply in their home state and miss the obligation in other states where they have employees.

Labour Welfare Fund

Applicability: Maharashtra, Gujarat, Karnataka, Andhra Pradesh, and several other states.

Contribution: Small amounts from both employer and employee, paid annually or half-yearly to the state Labour Welfare Fund Board.

Monthly Compliance Calendar

Missing the 15th deadline for EPF and ESI consistently is the single most common compliance gap we find in SME HR audits. The penalties compound faster than most businesses realize.

Annual Filings and Statutory Obligations

EPF Annual Return: Form 3A (member-wise annual statement) and Form 6A (consolidated annual statement) — due 30 April each year.

ESI Annual Returns: Two filings per year. Form 5 (return of contributions) due by 11 November for the April–September period and 11 May for the October–March period.

Income Tax Form 24Q: Quarterly TDS returns on salary. Due dates: 31 July, 31 October, 31 January, and 15 May.

Form 16: Issued to every employee by 15 June each year. Failure to issue Form 16 is both a tax default and an employee grievance waiting to happen.

Shops and Establishments Registration: Annual renewal in most states. Penalties for lapsed registration can result in business activity being ordered to cease — a disproportionate outcome for an administrative oversight.

Leave, Benefits, and Statutory Minimums

Earned Leave (EL): The Factories Act and various State Shops & Establishments Acts mandate minimum paid leave — typically 1 day per 20 days worked. Accumulated leave must be encashed on separation; carry-forward limits vary by Act.

Maternity Benefit: 26 weeks of paid maternity leave for employees in businesses with 10 or more employees (Maternity Benefit Act, 2017). The first 8 weeks must be taken before the expected delivery date. Non-compliance is a criminal offence under the Act, not merely a civil penalty.

Paternity Leave: No Central statutory mandate currently, but several state government and PSU employees are entitled. Review your applicable state Act.

Gratuity: Payable to every employee who has completed 5 or more years of continuous service, on separation (resignation, retirement, or death). Formula: (Last drawn basic salary × 15 × completed years of service) / 26. Applicable to businesses with 10 or more employees under the Payment of Gratuity Act.

POSH Compliance: The Prevention of Sexual Harassment (POSH) Act requires every business with 10 or more employees to: (a) constitute an Internal Complaints Committee (ICC), (b) publish a written POSH policy, and (c) conduct awareness training for employees annually. An annual report must be filed with the district officer. Penalty for non-compliance: up to ₹50,000 plus potential licence cancellation for repeat violations.

Employment Documentation Checklist

Documentation is where compliance gaps become legal liability. For every employee on your rolls, the following should exist on file:

• Signed offer letter
• Signed appointment letter with full terms and conditions
• Salary structure / CTC breakup in writing
• EPF UAN linking completed and verified
• ESI card issued (where applicable)
• POSH policy receipt acknowledged in writing
• Confidentiality / NDA agreement (where applicable)
• Background verification completed and documented

For every separated employee:

• Resignation letter (or termination letter with documented basis)
• Acknowledgement of resignation / notice period terms
• Full and final settlement completed within 30–45 days
• Experience letter / relieving letter issued
• EPF transfer or withdrawal initiated
• Form 16 provided for the relevant tax year

Missing exit documentation for departed employees is the second most common source of labour disputes after wrongful termination claims.

The Five Compliance Gaps We Find Most Often

After running HR compliance audits across 50+ businesses, these are the issues that appear most frequently:

1. EPF on the wrong salary components. Many businesses include HRA and special allowances in the EPF calculation (overpaying) or exclude basic salary components that should be included (creating arrear liability). The correct EPF base is basic salary + dearness allowance. Anything else is discretionary unless specifically notified.

2. Contract workers not covered. Using contractors to avoid EPF/ESI obligations is legitimate when the contractor is a genuine independent business. When the contractor functions as a de-facto employee — fixed hours, employer-directed work, single client — the principal employer carries the compliance liability under the Contract Labour Act.

3. No POSH ICC constituted. Overlooked by the majority of SMEs until a complaint is filed. The liability is significant even when no complaint has yet occurred — the absence of an ICC is itself a violation.

4. Late or missing Form 16. Common in businesses that manage payroll informally or change accountants mid-year. Creates tax problems for employees and non-compliance exposure for the employer.

5. Multiple registrations, inconsistent data. Businesses that have grown through multiple locations often have EPF and ESI registrations under different establishment codes, with employee records that don't reconcile across them. This creates audit complexity that is expensive to untangle retrospectively.

The Real Cost of Non-Compliance

EPF and ESI arrears compound quickly — 12% interest plus damages of up to 25% of the principal amount. A business that has been under-contributing to EPF for 3 years can face a liability several multiples of the original shortfall.

Labour court cases — even frivolous ones — take 2–5 years to resolve. The legal cost alone, before any settlement or award, frequently exceeds ₹10–15 lakhs. Prevention is measurably cheaper.

The most effective approach: an annual HR compliance audit, a clean documentation system, and a monthly statutory filing calendar tracked by someone accountable.

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Attune's HR practice conducts end-to-end HR compliance audits and manages ongoing statutory filings — EPF, ESI, professional tax, and labour law compliance — for growing businesses across India. Request an HR compliance audit.