Labour Law Compliance For Service Sector/IT Companies in India

Labour law compliance for service sector is an essential component of effective human resource management in the service sector industry. It ensures that employees receive fair treatment, statutory benefits, and protections while aligning organizational practices with the prevailing legal framework. 

After the enactment of the new Labour Code in India, the Code on Wages, 2019, effective from November 21, 2025, it has become important for service sector organizations to review and update their policies to maintain the necessary applicable compliance. The Code on Wages, 2019, amalgamates four wages and payment-related labour laws. It aims to balance the rights of workers and facilitate ease of compliance for employers. The Code introduces key reforms to streamline and strengthen labour regulations.

Adherence to the Code on Wages not only safeguards employee rights but also reduces legal risks for employers, enhances transparency in salary structures, statutory deductions, leave policies, working hours, and social security benefits, and ultimately fosters a motivated, healthy, and productive workforce. We’ll discuss some important factors and compliance under Labour laws.

How Should Salary Structures Be Designed Under the New Wage Code for Service Sector Companies?

Basic pay must be at least 50% of CTC under the new wage code. HRA ranges from 20 to 25% of basic pay for non-metro cities and 30 to 35% for metro cities. Remaining components cover conveyance, insurance, and other allowances as a balancing figure. Bonuses, incentives, and commissions fall under other payments and are determined by company policy and performance criteria.

Salary includes all kinds of emoluments and benefits extended to employees by the employer for their services. It consists of both monetary payments and non-monetary facilities. Monetary payments refer to components such as basic salary, bonus, commission, allowances, & other similar components. At the same time, non-monetary facilities mean benefits like housing accommodation, medical facilities, interest-free loans, cab facilities, & other similar components. Labour law compliance for service sector plays a crucial role in ensuring structured and legally sound HR practices.

❖ Components of Salary Structure

Accurate salary structuring and deductions are essential for maintaining payroll compliance India standards. As per the new wage code, the following are the components covered under the salary structure with their calculation:

❖ Sample Calculation of the above Salary Structure: 

Let’s consider the total Package of an employee is INR 1,00,000

❖ Deductions from Employees’ Salary

Gross salary refers to all the money an employee earns in employment with an entity or company. However, this is the amount before any tax and other deductions. Labour law compliance for service sector also includes proper handling of EPF and ESI contributions.

The deductions from the CTC of an employee include:

Companies that follow labour law compliance for service sector build stronger employee trust and transparency. Organisations must ensure payroll compliance India to avoid financial discrepancies and regulatory issues.

What Are the Professional Tax Rates and Filing Requirements Across India?

Professional tax is a state-level deduction varying by salary slab. Employees earning below INR 15,000 pay nil, INR 15,001 to 20,000 pay INR 150 to 200 monthly, and INR 20,000 and above pay INR 200 to 400 monthly. Monthly returns are due by the 20th of the following month and annual returns by 30th April. Rates and thresholds vary by state and PT is not applicable in states like Delhi and Gujarat.

Professional Tax (PT) is a state-level tax levied on individuals earning a salary, practicing a profession, or running a business. It is generally deducted from salary by the employer and is governed by the Professional Tax Act of each state, so rates vary across states. PT applies to salaried employees earning above the state-specified exemption limit, self-employed professionals, and businesses in states that have enacted the PT Act, such as Maharashtra, Karnataka, West Bengal, Tamil Nadu, and Kerala, while some states like Delhi and Gujarat do not levy it. Professional tax regulations are an important aspect of labour law compliance for service sector.

❖ Rate of Professional Tax (Overall India Basis)

Note:

• This table represents a general structure; actual rates and slabs may differ slightly depending on the state government.
• Some states have higher slabs or different thresholds.
• Professional Tax is applicable only in states where it is levied.

❖ Date of filing the PT return

• Monthly Returns: Most states require employers to file monthly Professional Tax returns by the 20th of the following month. For example, the PT return for January must be filed by 20th February.
• Annual Returns: Some states also require an annual return to be filed by 30th April of the following financial year, consolidating the monthly payments.
• State Variations: Exact due dates may vary depending on the state’s Professional Tax Act and notifications. Employers must check the relevant state tax department website or regulations.

What Are the TDS Obligations on Salary for Employers in the Service Sector?

Under the old tax regime TDS applies on salaries above INR 5,00,000 annually. Under the new regime the threshold is INR 12,00,000. TDS must be deposited by the 7th of the following month. Quarterly returns are due on 31st July, 31st October, 31st January, and 31st May respectively.

The Employers are obligated to deduct tax from the salaries payable to employees, where the salary exceeds the basic exemption limit prescribed by the Finance Act. TDS obligations must be carefully managed to ensure labour law compliance for service sector organizations. The ‘TDS on Salary’ is deposited to the government by the employer.

❖ TDS Applicability:

The TDS on Salary of employees shall be applicable if the salary exceeds the basic exemption limit as prescribed below:

• Old Regime

• New Regime

❖ Due Date to deposit TDS:

The TDS shall be deposited to the Government on monthly basis and the due date to deposit the same is 7th day of the next month. 

❖ Due Date of TDS Return:

The reporting of TDS deposited with government needs to be done on quarterly basis as follows: 

What Are the Gratuity Fund Contribution Requirements for Service Sector Employers?

Gratuity is governed by the Payment of Gratuity Act 1972 and applies to establishments with 10 or more employees after a minimum of 5 continuous years of service. Companies must create annual provisions in their books of accounts for gratuity liability. Employers are also required to obtain Gratuity Insurance from an insurance company to systematically fund long-term obligations and provide financial stability during employee exits or retirements.

Gratuity is a lump sum benefit paid by employers to employees in gratitude for their services during employment. The Payment of Gratuity Act, 1972 governs this payment. Gratuity provisions are a critical component of labour law compliance for service sector employers.

❖ Applicability

The requirement of Gratuity is applicable on every establishment in which 10 or more persons are employed; and the employee who completed a minimum of 5 continuous years of service or more with the company.

❖ At the time of preparation of books of accounts, the company needs to create the provision for payment of gratuity to its employees in the end of each financial year.

Since the obligation has to be accounted for future years, a valuation for each financial year to make the provision of gratuity payment is required by the company.

 ❖ The Employer is also required to obtain Gratuity Insurance from any insurance Company.  It is a financial tool designed to help employers manage their long-term statutory liability toward employees. By partnering with an insurance provider, employers can systematically fund their gratuity obligations through regular contributions rather than facing sudden, large pay-outs during employee exits or retirements. This setup not only ensures legal compliance and financial stability for the business but also provides a layer of security for the workforce, often including additional life cover.

What Does the Shop and Establishment Act Require from Service and IT Companies?

The Shops and Establishment Act is a state-level labour law that regulates the working conditions of employees in shops, commercial establishments, offices, and other non-factory establishments. It applies to all shops and commercial establishments in states where the Act is enacted, covering entities such as restaurants, hotels, theatres, offices, and warehouses. Key provisions include mandatory registration of establishments, working hours and overtime limits, weekly offs and festival holidays, annual leave, and proper maintenance of employee records. The Act also prohibits the employment of children below 14 years of age in most states, ensuring employee welfare and standardized work conditions across non-factory workplaces.

How Should Employee Reimbursements Be Structured for Tax Compliance in India?

Reimbursement to employees refers to the repayment or compensation provided by an employer for expenses incurred by employees during the course of their work. These expenses can include travel, medical, telephone, internet, fuel, or other business-related costs. Reimbursement structures should be aligned with labour law compliance for service sector requirements.

Reimbursements are typically made against valid bills or proofs of expenditure and are not considered part of the employee’s taxable salary if they meet the conditions specified under the Income Tax Act. Employers may have policies defining eligible expenses, limits, and submission procedures, and reimbursements are usually processed monthly or as per company policy. This system ensures that employees are not financially burdened while performing official duties.

What Leave Entitlements Must Service Sector Companies Provide to Employees in India?

Annual earned leave entitlement is 12 to 15 days with carry-forward provisions and encashment at full and final settlement. Casual leave is 7 to 10 days annually and is non-cumulative. Sick leave is 7 to 12 days per year. Maternity leave extends to 26 weeks for the first two children and 12 weeks for the third child, with a maximum of 8 weeks before delivery for the first two.

Leave is a period off from work or duty. Thereby, Earned Leave or Paid leave is that leave period during which the employee is still paid by the employer, even in the absence of work performance. Unutilised earned leaves may be carried forward and paid during the Full and Final Settlement. Labour law compliance for service sector extends to leave policies and employee benefits as well.

A company can make a flexible leave policy for its employees.

What Working Hours and Overtime Rules Apply to Service Sector Companies in India?

Normal working hours are capped at 8 to 12 hours daily and 48 to 50 hours weekly. A mandatory 30-minute rest break applies after 5 or more continuous hours of work. Overtime must not exceed 144 hours per quarter under the Factories Act and is paid at twice the ordinary rate. Total spread-over hours including breaks cannot exceed 10 to 12 hours per day. Working hours and overtime rules must align with labour law compliance for service sector guidelines.

The following are the compliances to be followed:

What Key Changes Do the New Labour Codes 2025 Introduce for Service Sector Companies?

Basic pay must now be at least 50% of total remuneration. A universal minimum wage replaces the earlier scheduled employment-only coverage. Social security coverage extends to gig, platform, and unorganised workers. Gratuity eligibility for fixed-term employees reduces from five years to one year. Women workers are permitted on night shifts with safety measures. A single PAN-India registration and return replaces multiple earlier registrations across states. Regular audits help organisations maintain labour law compliance for service sector effectively.

Below are the brief key changes under new labour code.

CONCLUSION

The introduction of new labour codes 2025 has significantly reshaped compliance requirements for employers. The Compliance with labour laws in the service sector is the legal obligation. Following labour laws in the service sector is not just a legal requirement it also helps create a fair and transparent workplace. When companies properly manage salaries, deductions, leave, reimbursements, and working conditions as per the law, they avoid penalties and build trust with employees. Strong internal policies are essential to sustain labour law compliance for service sector in the long term.

By regularly checking compliance and updating practices as laws change, companies can run smoothly, keep employees happy, and maintain a positive work environment. In the long run, this leads to better business growth and a stronger reputation in the market. Connect with out team at CorporateLegit to know more.

FAQs

Q1. Is it mandatory for service sector and IT companies to follow the new Labour Codes 2025?

Yes. The Code on Wages 2019 became effective from November 21, 2025, making it mandatory for all service sector organisations to review and update their salary structures, statutory deductions, leave policies, and working hour frameworks to align with the new requirements. Non-compliance exposes employers to legal risk and financial penalties.

Q2. What happens if an employer fails to deposit EPF or ESI contributions on time?

Late deposits attract interest and damages under the respective Acts. ESI late payments carry 12% annual interest plus escalating damage charges based on delay duration. EPF defaults can attract penalties and legal proceedings. In serious cases, non-payment of employee contributions can be treated as a criminal offence under the IPC, carrying imprisonment and fines.

Q3. Does the new wage code change how gratuity eligibility works for fixed-term employees?

Yes. Under the old labour laws, gratuity required a minimum of 5 continuous years of service for all employees. Under the new Labour Codes 2025, fixed-term employees become eligible for gratuity after completing just 1 year of service. Permanent employees continue to require 5 years of continuous service before becoming eligible.

Q4. Are reimbursements paid to employees taxable under Indian income tax law?

Reimbursements are generally not taxable provided they are paid against valid bills for genuine business expenses and meet the conditions prescribed under the Income Tax Act. However, flat allowances paid without supporting documentation may be treated as taxable salary. Companies must maintain clear reimbursement policies with defined eligible expenses and submission procedures to avoid tax exposure during audits.