The role of finance in payroll can be classified into four core pillars: Labour Law Compliance, Tax Law Compliance, Payroll Accounting, and Financial Controls & Provisions.
We shall discuss Tax law compliance in this article
The finance department’s payroll responsibilities under the Income Tax Act revolve around ensuring correct tax deduction, deposit, reporting, and certification.They are detailed and discussed below.
TDS Processing
Key responsbility is to ensure correct tax deduction from employee salaries in line with statutory provisions, which involves the following steps.
- Employee declarations: Collect and Evaluate employee declarations (investments, exemptions, deductions).
- Regime choice: Apply correct regime (old vs. new) based on employee choice/declaration. If no intimation is given, employers default to the new regime (as per CBDT circular, April 2023).
- TDS under Sec 192: Must be deducted monthly based on estimated annual income, considering perquisites (Rule 15 of the 2026 Rules) and allowances. Employers must adjust TDS in later months if declarations change.
Filing
This section deals with filing of Returns that report deducted taxes and challan deposits accurately to the IT dept, which includes the following processes.
- PAN Validation: During Form 24Q filing (quarterly TDS return for salaries), the employer must ensure the PAN quoted for each employee matches the Income Tax Department’s database.
TRACES/NSDL systems run a PAN validation check and if the PAN is invalid, inactive, or misquoted, the return will flag errors. If PAN isn’t validated, the system treats it as “no PAN furnished,” and under Section 206AA, TDS must be deducted at 20%.
- Form 24Q filing: Quarterly returns must be filed on TRACES/NSDL portal within statutory deadlines (e.g., Q4 by May 31).
- Form 26AS reconciliation: Mismatches between employer filings and Form 26AS cause employee grievances and IT notices. Because, If the employer’s deduction/deposit doesn’t match what’s reported in Form 24Q, or if challan details are wrongly quoted, then the credit may not flow correctly into the employee’s Form 26AS.
Form 16 Issuance
Issue form 16 to employees: Part A: Generated from TRACES portal, digitally signed and Part B: Prepared by employer with salary breakup, exemptions, deductions and deliver it to employees by June 15, so as to enable them file their IT returns.
Annual Reconciliation
While monthly reconciliations ensure that payroll deductions and challan deposits are accurate on a month‑to‑month basis, they do not capture cumulative discrepancies that may arise across the financial year.
Therefore, an annual reconciliation must be carried out to match payroll records with tax challans, Form 24Q, and Form 16, and to confirm consistency with government records such as Form 26AS. This full‑year check is essential because even small monthly mismatches can accumulate, and if left unresolved, they may lead to discrepancies during tax audits or result in notices being issued.
Tax Audit
Supporting tax audit from the payroll side means readiness to demonstrate that all tax compliance has been followed correctly. It includes
- Providing salary registers, payroll ledger, TDS workings, challans copies, 24Q acknowledgements, Reconciliation statements during statutory audits or IT assessments.
- Demonstrating that no defaults occurred or if it happened (short deduction, late deposit), explain corrective actions taken if any.