A garment factory, a hospital and a SaaS company all run payroll in India this month. All three deduct PF, ESI, TDS and Professional Tax.
None of them follow the same rulebook.
Quick AnswerThe compliance of payroll is based on industry due to the fact that the law applicable to you as an establishment varies. There is the Factories Act for factories, Shops and Establishments Act for offices, BOCW Act for construction, and CLRA for contract-intensive industries.
What changed in 2026, and why does it hit industries unevenly
Two reforms landed within five months of each other.
The four Labour Codes took effect on 21 November 2025 at the central level, with states notifying at different times. The Code on Wages requires basic pay plus dearness allowance to be at least 50% of total remuneration.
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, renumbering the forms your payroll system generates. Form 16 becomes Form 130. Form 24Q becomes Form 138.Â
Two changes hit specific industries far harder than others.
Full and final settlement within 2 working days as per Code on Wages, with applicability to resignations based on state laws. Sectors with high turnover and daily wage workers would take this up differently than an organization with 200 people resigning each month.
Gratuity for fixed-term employees after one year, down from five, under the Social Security Code. Project-based and seasonal hiring models carry a liability they did not carry in 2025.
Payroll compliance by industry: Comparison Table
| Industry | Key compliance requirement | Biggest risk | Automation priority |
|---|---|---|---|
| IT and Software | Shops and Establishments Act, ESOP perquisite tax, multi-state PT | Wrong perquisite valuation flowing into Form 130 | ESOP and variable pay in-cycle |
| Manufacturing | Factories Act, CLRA, shift and overtime rules | Contractor PF liability falling back on the principal employer | Attendance to payroll, contractor tracking |
| BFSI | Shops Act, audit trail, data protection | Incomplete audit trail during regulatory inspection | Immutable logs, maker-checker |
| Healthcare | Shops Act or Clinical Establishments Act, ESI across all staff | Contract nursing and housekeeping misclassified | Shift-linked attendance, ESI eligibility |
| Retail | Shops Act, store-wise PT, high turnover | Missing the two-day F&F window at scale | Automated F&F, store-wise PT |
| Logistics | Motor Transport Workers Act, multi-depot PT | Field staff attendance evidence for inspections | GPS attendance, depot-wise compliance |
| Construction | BOCW Act, cess, CLRA, migrant workers | Unregistered BOCW workers and unpaid cess | Site-based attendance, worker registration |
| Hospitality | Shops Act, tips and service charge treatment | Service charge and tips excluded from wage base | Wage-base configuration, seasonal rosters |
| Education | Shops Act or state education rules, contract faculty | Visiting faculty treated as employees or vice versa | Contract vs payroll segregation |
| Professional Services | Shops Act, Section 194J contractor TDS | Consultant misclassification | Contractor and employee separation |
| Startups | Shops Act, PF from 20 employees, ESOP | Crossing thresholds without registering | Threshold alerts, statutory automation |
| Enterprise | All of the above, multi-entity | Inconsistent rules across entities and states | Multi-entity engine, consolidated reporting |
IT and Software
Governs you: Shops and Establishments Act, not the Factories Act.
Statutory load: PF, ESI where applicable, TDS under the new Act, Professional Tax in every state your remote staff are registered in; Section 194J TDS for consultants.
Common mistake: Valuing ESOP perquisite on the wrong date. Perquisite is computed on fair market value at exercise for ESOPs and at vesting for RSUs. Get the date wrong and every affected employee’s Form 130 is wrong.
Automate first: perquisite computation inside the regular cycle and Professional Tax by each employee’s registered work state rather than by head office.
See payroll software for IT companies for how these components are handled together.
Manufacturing
Governs you:Â The Factories Act and the Contract Labour (Regulation and Abolition) Act in case you use contractors.
Statutory obligation: Shift differential, statutory overtime pay, PF & ESI for employees and contract labour, minimum wages by state-wise, and the Factories Act registers.
Most common mistake: Considering the labour contractor’s PF liability to end there. The CLRA states that the responsibility of the principal employer is the fallback option in case the contractor defaults.
Automate first: Biometric attendance feeding directly into payroll and contractor compliance tracking with challan-level evidence.
BFSI
Governs you: The Shops & Establishment Act, in addition to the sector regulator’s expectation on documentation.
Statutory obligation: Standard deductions, in addition to audit trail depth and access controls that will be tested during the regulator’s review.
Most common mistake: Confusing audit trail with reporting function. The regulator wants to know who has made changes to salary records, when, and whose approval was there.
Automate first: Immutable audit logs and maker-checker approval for each payroll modification.
Healthcare
Governs you: Shops and Establishments Act or Clinical Establishments regulations as per your registration.
Statutory obligation: ESI applies to a wide share of hospital staff. Round-the-clock shift rosters, night differentials, and a mix of employed, contract and visiting practitioners.
Most common mistake: Treating contract nursing, housekeeping and security as outside your compliance perimeter. Under the CLRA, they are not.
Automate first: Shift-linked attendance and automated ESI eligibility checks as wages move across the threshold.
Retail
Governs you: Shops and Establishment Act; registration of your shop by store in different states.
Statutory obligation: Professional Tax at each store site, seasonal employment, and full settlement within two days now.
Most common mistake: Batching F&F by month. With 40 exits in a month from 15 shops, this is not possible.
Automate first: Exit-triggered F&F, and store-wise Professional Tax applied automatically.
Logistics
Governs you: ‘the Motor Transport Workers Act’ for transport workers and ‘Shops Act’ for office workers. Frequently both together.
Statutory obligation: driver working time restrictions, multi-depot Professional Tax, high turnover, and attendance for people who are never in one place.
Most common mistake: Not having any defendable record of attendance for field people. It’s an inspection that asks for proof, not an estimate.
Automate first:Â geofencing and GPS-based attendance and statutory registration mapping.
Construction
Governs you:Â The BOCW Act, CLRA, and the Inter-State Migrant Workmen sections that are now incorporated into the Labour Codes.
Statutory obligation: worker registration with the BOCW welfare board, levy on construction costs, calculation of daily wages, and site register.
Most common mistake: Unregistered workers on site. This is the single most penalised failure in the sector, and it is a registration failure, not a payroll one.
Automate first: Site-based attendance with worker registration status tracked alongside it.
Hospitality
Governs you:Â Shops & Establishment Act, with state-wise guidelines for hotels and restaurants.
Statutory obligation: Seasonal rosters, split shifts, and treatment of tips/service charges for computing wages.
Most common mistake: Neglecting service charge disbursements while computing statutory wages. In accordance with the Code of Wages, allowances in excess of 50 % of the total wage amount come under the wage component, and this industry gets most impacted by the change.
Automate first: configure your wage calculation to accommodate the current definition of wage and rosters tied to payroll for seasons.
Education
Governs you: The Shops and Establishment Act, or state education department guidelines if there’s an aided institution.
Statutory obl.igation: Permanent, contractual, visiting faculty, and non-teaching staff, all on distinct conditions. Annual academic year cycle as opposed to the financial year cycle.
Most common mistake: Paying visiting faculty through payroll when the engagement is professional in nature, or the reverse. Both create exposure.
Automate first: Clean separation between payroll and professional-fee tracks, with correct TDS on each.
Professional Services
Governs you: Shops and Establishments Act.
Statutory obligation:Â Standardized deductions for employees, TDS of 194J for consultants, and frequently the highest ratio of contractors to employees among industries listed here.
Most common mistake: Classification error. The consultant is working full-time for you, using your system, and following your direction; he starts looking like an employee in the eyes of the inspector despite the contract.
Automate first: Segregate tracks with audit-ready documentation for every engagement.
Startups
Governs you: Shops & Establishment Act.
Statutory obligation: PF is mandatory above 20 employees. ESI is applicable to 10-15 employees in most states. Taxation of ESOPs starts with exercising options.
Most common mistake: crossing the threshold and registering late. The obligation comes into effect from the date of crossing, not the date of registration.
Automate first: alerts on employee threshold, then automate statutes. Find out who requires payroll software for full details on thresholds.
Enterprise
Governs you: Whichever Acts apply to each entity, which is usually several at once.
Statutory load: Multi-entity, multi-state, multiple establishment types. A manufacturer with a corporate office runs the Factories Act and the Shops Act in parallel.
Common mistake: Letting each entity configure its own rules. Inconsistency across entities is what turns one finding into a group-wide audit.
Automate first: A single rules engine across entities, with consolidated statutory reporting.
Payroll Compliance Risk Matrix by Industry
The level of risks can reflect three things: penalty exposure, inspection frequency, and how easily a failure goes unnoticed until it compounds.
| Industry | Primary compliance risk | Biggest payroll challenge | Automation priority | Risk level |
|---|---|---|---|---|
| Construction | Unregistered BOCW workers, unpaid cess | Daily wages, migrant workforce | Site attendance and registration | High |
| Manufacturing | Principal employer liability under CLRA | Shift, overtime, contract labour | Attendance to payroll integration | High |
| Logistics | No defensible attendance evidence | Field workforce, multi-depot | GPS attendance | High |
| Healthcare | Contract staff outside the perimeter | 24-hour rosters, ESI thresholds | Shift-linked ESI checks | High |
| Retail | Two-day F&F missed at volume | High turnover, store-wise PT | Exit-triggered F&F | Medium-High |
| Hospitality | Service charge outside the wage base | Seasonal peaks, split shifts | Wage-base configuration | Medium-High |
| Enterprise | Inconsistent rules across entities | Multi-entity, multi-state | Single rules engine | Medium-High |
| Education | Faculty classification | Academic-year cycles | Payroll and fee separation | Medium |
| Professional Services | Consultant classification drift | High contractor ratio | Separate processing tracks | Medium |
| IT and Software | ESOP perquisite valuation errors | Multi-state remote PT | Perquisite computation in-cycle | Medium |
| Startups | Threshold crossed, registration late | Growth outpacing process | Threshold alerts | Medium |
| BFSI | Audit trail gaps at inspection | Record-keeping depth | Immutable logs | Low-Medium |
BFSI is placed last not because the obligations are easier but because the industry is operating with established controls. The construction industry is placed at the top because the failure mode is registration, and payroll cannot fix it.
Best Payroll Compliance practices across every industry
- Ensure that you know which Establishment Act applies to your establishments. Many multi-establishment firms get it wrong at least once.
- Change salary structure for the 50 percent wage base rule ahead of the next cycle, and maintain a state-wise notification separately.
- Amend all the references in forms to the numberings in Income-tax Rules, 2026.
- Shift full and final settlement to an exit-driven process and not the monthly batch process.
- Consider contract labor as falling within your compliance purview since the law does.
- Maintain digital registers for inspection purposes rather than prepare them after getting the notice.
Work through the payroll compliance checklist for the full statutory calendar.
FAQs
Why does payroll compliance differ across industries in India?Â
This is because of the distinction between the statutes. Factories run on the Factories Act, offices run on the Shops and Establishments Act, while construction comes under the BOCW Act. The deductions according to the statutes are common while registers, inspections and working hours vary.
Which industry has the highest payroll compliance risk?Â
BOCW worker registration and the cess levied upon daily-wage calculation and migrant labor make up construction. This is followed by manufacturing and logistics operations based on contract labor and attendance.
Do the Labour Codes apply to all industries equally?Â
They apply to all sectors, but the process of implementation is staggered, with states notified at different times. Their effect varies since the two-day settlement code affects high-attrition sectors more, and the wage base code affects allowance-based remuneration systems.
Does payroll software cover industry-specific compliance?Â
Partly. It handles calculation, registers and filings. It does not handle registration under the BOCW Act or a labour contractor’s own filings. Confirm what a platform actually generates for your act before buying.
What is the most common payroll compliance mistake by industry?Â
Contract labour treated as outside the compliance perimeter. It appears in manufacturing, healthcare, construction and logistics, and under the CLRA the principal employer carries the fallback liability when a contractor defaults.
Should we use payroll software or payroll outsourcing for a high-risk industry?Â
Software fits teams with in-house compliance expertise. Outsourcing fits teams without it, which is common in construction, logistics and healthcare. Compare payroll software vs payroll outsourcing on expertise, not price.
Conclusion
Compliance in payroll is not a single criterion that applies at various levels. It consists of different criteria, depending on how you have registered your establishment and who works for you.
These reforms did not level the playing field but instead made the playing field more uneven due to the fact that two-day settlement criteria and a modified wage base affect certain industries more than others.
If you are not certain which Act governs each of your locations, that is the place to start, before any software decision. Book a Strategy Call and we will map your establishment types, states and workforce mix against what you are actually obligated to file.
TankhaPay is a global HR platform by AKAL Information Systems Ltd., delivering HRMS, payroll, and Employer of Record (EOR) solutions to businesses worldwide since 2000. Backed by AKAL, a CMMI Maturity Level 5 appraised and ISO 9001, ISO/IEC 20000-1, and ISO/IEC 27001 certified technology company. TankhaPay serves over 1,000 organizations with secure, scalable, and compliance-driven workforce solutions.
