A-Z Compliance Glossary

What is Audit Trail?

An audit trail is the chronological list of actions performed in the payroll or compliance system with respect to “who”, “what” and “when” has been done in the system.

• Practical use: When in doubt about any salary revision, deduction, etc., during an audit, the audit trail helps track the exact changes and ensure their legitimacy.
• Importance: Building transparency, avoiding disputes and being a prerequisite during compliance audits.

What are Arrears?

Arrears mean the amounts payable to an employee for the previous period as a result of salary revisions, bonuses or corrections.

• Example: An increment effective from April is only processed in June payroll. The unpaid difference for April and May is paid as arrears.
• Importance: Handling arrears appropriately is necessary to avoid complications with payroll accounting, taxation and other processes.

What is Allowance?

Allowances are components added to an employee's basic salary, including House Rent Allowance (HRA), travel allowances, special allowances, etc.

• Importance: Allowances affect salary structuring and taxation. Correct structuring helps maximise take-home salary and avoid penalties.

What is a Compliance Audit?

A compliance audit is a structured examination conducted to determine if statutory and labour laws have been followed correctly.

Checks for:

• On-time filings (PF, ESI, TDS)
• Correctness of deductions and compliance
• Documenting

Importance: Helps identify potential problems and fix them in time in order to avoid trouble with authorities.

What is Cost to Company (CTC)?

Cost to Company (CTC) is the sum spent by the employer on employing the person.

• Clarification: CTC is not the same as take-home salary, since it includes employer contributions such as PF and gratuity.
• Importance: A proper definition of CTC makes it easier to discuss employment conditions.

What is Contractor Compliance?

Contractor compliance implies making sure that any third-party vendor or contractor complies with labour laws.

Example: If a contractor doesn't pay its workers' full wages or PF/ESI contributions, the principal employer can be held liable.

Importance: Protects the business from any potential problems and legal issues.

What is Employees' State Insurance (ESI)?

ESI (the Employees' State Insurance Scheme, run by ESIC) is a statutory scheme providing medical and cash benefits to employees earning up to ₹21,000 a month.

• Process: Each month the employer contributes 3.25% and the employee 0.75% of wages to the scheme.
• Importance: Failure to comply can result in penalties as well as loss of benefits for the employees.

What is Employee Lifecycle?

Employee lifecycle includes all stages of an employee's work within a company, starting from recruitment and finishing with the final settlement.

Key Stages:

• Recruitment
• Onboarding
• Payroll and compliance
• Performance management
• Exit and final settlement

Importance: Every stage is closely related to payroll accounting and compliance.

What are Earnings?

Earnings are the total income an employee earns before deductions. It includes:

• Basic salary
• Allowances
• Bonuses
• Incentives

Importance: They serve as a basis for taxation and calculation of statutory contributions.

What is Factory Act Compliance?

Factory Act compliance means following the Factories Act, 1948 and state rules on licensing, safety, working hours and registers.

• Importance: Violation of rules will inevitably bring severe penalties and even closure of facilities.

What is Full and Final Settlement (FnF)?

Full and Final Settlement (FnF) clears all dues when an employee leaves, by resignation, termination or retirement. It includes:

• Pending salary
• Leave encashment
• Bonus and deduction payments

Importance: Failure to carry it out on time will lead to conflicts and noncompliance.

What is Form 16?

Form 16 is an annual certificate issued by the employer to employees, detailing salary paid and the TDS deducted and deposited with the government.

• Importance: Employees need it to submit their income tax declarations. Wrong forms will complicate the procedure.

What is Gross Salary?

Gross salary is the total sum earned by an employee before statutory deductions (PF, ESI) and taxation.

Importance: Provides information about earnings as a whole and serves as a basis for tax calculation.

What is Gratuity?

Gratuity is a lump sum paid on exit after five years of continuous service (one year for fixed-term employees).

Importance: Since it's a statutory benefit, you have to consider it for future calculations.

What is Gig Worker Compliance?

Gig worker compliance covers rules for gig and platform workers, incl. aggregator contributions under the Social Security Code.

• Importance: Due to the growing popularity of gig workers, it is important to follow all regulations in this area to avoid any penalties.

What is Labour Law Compliance?

Labour law compliance means following all relevant employment laws, including the four labour codes. It involves:

• Wage law compliance
• Workplace conditions and safety
• Employee welfare

Importance: Protection of the interests of the employer and employees and smooth workflow.

What is Leave Encashment?

Leave encashment is compensation that the employee receives for unused leave balance.

• Importance: Usually included in Full and Final Settlement.

What is the Labour Welfare Fund (LWF)?

The Labour Welfare Fund is a state-level contribution by employers and employees for workers' welfare; amounts and due dates vary by state.

Importance: It applies only in certain states; missing it leads to penalties.

What is Payroll Processing?

Payroll processing is the procedure of calculating salary, taking statutory deductions, and providing payslips.

Processes involved:

• Computing salaries
• Making necessary statutory and tax deductions
• Reporting

Importance: The accuracy of this procedure contributes to higher employee satisfaction and compliance.

What is Payroll Outsourcing?

Outsourcing payroll to professionals who provide calculations, deductions, and reports.

Reasons to outsource payroll:

• Decrease errors
• Avoid non-compliance
• Save time

What is Professional Tax (PT)?

Professional tax is a state tax on employment, deducted from salary; capped at ₹2,500 a year.

Importance: The amount varies from one state to another, but the correct deduction is crucial.

What is Provident Fund (PF)?

Provident Fund (EPF) is a retirement scheme run by EPFO. Employer and employee each usually contribute 12% of basic wages plus DA; part goes to pension (EPS).

Importance: Mandatory; essential for employees' welfare.

What is a Payslip?

A payslip is a detailed statement of an employee's earnings for a month.

Importance: Allows the employee to see earnings and make appropriate financial plans.

What is Salary Structuring?

Designing an optimal salary structure for an employee according to statutory norms.

Importance: Salary structuring helps maximise take-home salary while staying compliant.

What is Statutory compliance?

Statutory compliance involves following government-mandated laws and making necessary reports to authorities.

Importance: Missing reports or making mistakes results in penalties and audits. 👉Learn More: Compliance Management Services

What is Salary Slip vs Payslip?

These terms mean the same thing and can be used interchangeably.

ESOP (Employee Stock Ownership Plan)

• ESOP is a scheme rewarding employees with shares of the company.

Importance: ESOP is often used for employee retention and motivation purposes.

What is Tax Deducted at Source (TDS)?

TDS is the income tax the employer deducts from salary each month, based on projected annual income and tax regime, reported quarterly in Form 24Q.

Importance: Makes sure that the tax has been paid to the government on time.

What is Take-Home Salary?

Take-home salary is the salary employees receive after all mandatory deductions and taxation have been made.

Importance: It is of prime interest to employees.

What is Timesheet?

A timesheet is a record of the time spent working by the employee.

Importance: Time is a basis for calculating payroll.