Is a Simple Salary Slip with Only Professional Tax Deduction Acceptable for Small Startups?

I am in a startup company. There is no HR manager to provide advice; I am the only admin, and the HR executive handles the salary attendance part. My query is about our company, which currently comprises 3-5 people. The Chartered Accountant (CA) mentioned that currently, there is only Professional Tax (P.Tax) deduction required, and there is no need for a detailed salary structure such as basic, HRA, etc. Instead, we can directly create a salary slip showing a fixed monthly salary. Is this format acceptable?

Example for the month of August:

Fixed salary: 35000 (Actual monthly package)
Earned salary: 31613 (Amount after deduction of late marks, LOPs/LWPs)

P.Tax deduction: 200
Total deductions: 200
Net salary: 31413

Is this format suitable?

Dear Sayali,

The view of your CA about keeping the consolidated salary structure is correct as long as your organization has fewer than 10 employees. This ensures that labor laws with a threshold number of employees for application purposes, such as the EPF Act, Payment of Gratuity Act, and Payment of Bonus Act, do not apply.

However, it is essential to consider the perspectives of future growth of the organization, employee welfare in the long run, income tax concessions, etc. For example, with a consolidated salary, the entire salary would become taxable. Additionally, if there is a need to develop a componentially structured salary in the future, legal formalities such as employee consultation and consent would become necessary.

Therefore, my suggestion, in the interest of both the employer and the employees, would be to have a salary structure comprising components such as basic pay, dearness allowance, house rent allowance, etc., from the very beginning when the organization is small. Moreover, voluntary participation in social security schemes like EPF, Gratuity Insurance, Profit Sharing, etc., is not legally prohibited. In fact, such provisions in the salary structure would enhance employee morale and attract talented individuals.

Thank you.

Hello Sayali, as Mr. Umakanthan suggested, it's very important to have EPF, insurance, and gratuity implemented from the early stages. This will not only make a goodwill gesture to your employees, but also being compliant in the early stages saves you a lot of fines and headaches that may occur at a later stage.

Please feel free to check the sample salary distribution Excel I am attaching here. It will save you a lot of 'reinventing the wheel' part. I am sure there are some excellent templates on this forum, and it's always a good practice to get it verified with your CA!

Mr. Umakanthan, sir, will you please go through the template once as well.

Regards, Prasanna

Response:

In a small startup company with 3-5 employees, the focus should be on establishing a transparent and compliant salary structure that aligns with applicable labor laws and best practices. While the Chartered Accountant (CA) may suggest a simple salary slip with only Professional Tax (P.Tax) deduction at the moment, it is crucial to consider broader employee benefits and statutory requirements.

Key Points to Consider:

- Legal Compliance: Ensure that the salary structure meets the legal requirements, including Professional Tax regulations in your state or region. Additionally, consider other statutory deductions such as Employee Provident Fund (EPF) and insurance as per the law.

- Employee Benefits: Implementing benefits like EPF, insurance, and gratuity from the early stages not only fosters goodwill among employees but also ensures compliance with labor laws and regulations.

- Consultation with CA: It is advisable to consult with your CA or legal advisor to review the proposed salary structure and ensure it aligns with legal requirements and industry standards.

- Sample Templates: Utilize sample salary distribution templates to streamline the process and ensure accuracy in calculating salaries and deductions.

- Future Growth: As the startup expands, consider revisiting the salary structure to accommodate the evolving needs of the business and its employees.

Actionable Steps:

1. Review the current salary structure with your CA to ensure compliance with Professional Tax and other statutory deductions.
2. Explore the inclusion of benefits such as EPF, insurance, and gratuity to enhance the overall employee package.
3. Utilize sample templates for salary distribution to maintain consistency and accuracy in payroll processing.
4. Regularly update the salary structure to reflect any changes in labor laws or company requirements.

By adopting a comprehensive approach to salary structuring, startups can establish a solid foundation for employee compensation while remaining compliant with legal standards.