Payroll errors cluster. Across audits the same nine issues account for most of the money lost, and each has a specific, cheap control that prevents it.
1. Structuring most of the package as a universal special allowance
What goes wrong: Basic is set low and the bulk of the package is paid as a special allowance to every employee, reducing PF liability.
What it costs: The Supreme Court held that allowances paid universally and ordinarily form part of PF wages. A retrospective demand can cover years, with 12% interest and damages up to 25%.
The control: Keep basic at a defensible 40–50% of CTC. Get an opinion on your structure if most of the package sits in a universal allowance.
2. Stopping ESI the moment wages cross ₹21,000
What goes wrong: An employee is raised above the ceiling in July and ESI is stopped immediately.
What it costs: Shortfall plus interest. ESI coverage continues to the end of the contribution period — April–September or October–March — on the actual higher wages.
The control: Configure contribution periods in payroll and let the system handle the continuation rule rather than deciding per employee.
3. Treating TDS as a monthly calculation
What goes wrong: Tax is computed on each month's income rather than as an annual projection, so a mid-year bonus or revision is not reflected across the year.
What it costs: Large February and March deductions that wipe out take-home, employee grievances, and interest if the shortfall was the employer's to deduct.
The control: Recompute the annual projection on every salary event. Send employees a projection statement mid-year.
4. Allowing declared deductions without proof
What goes wrong: April declarations are accepted and never verified against documents in January.
What it costs: Under-deduction for which the employer is liable, plus the February crunch when it is recovered.
The control: A hard proof deadline in December, and an exception report of employees with declared but unproven deductions.
5. Forgetting the EPFO exit date
What goes wrong: An employee leaves, payroll stops, nobody marks the date of exit in the EPFO portal.
What it costs: The ex-employee cannot withdraw or transfer their PF. Resolution later is slow and generates complaints and bad reviews.
The control: Make the EPFO exit update a blocking item on the exit checklist, with a named owner.
6. Calculating overtime on basic only, at 30 days
What goes wrong: The hourly rate is derived from basic alone, divided by 30 days.
What it costs: Systematic underpayment. Ordinary wages for overtime is a wider base than basic, and the divisor is 26, not 30.
The control: Configure the overtime base and divisor correctly once, and verify against a manual calculation for one employee.
7. Letting managers regularise attendance without limits
What goes wrong: Missed punch regularisation has no cap or review, so attendance data stops reflecting reality.
What it costs: Unreliable LOP, overpayment, and no defensible record during an inspection or dispute.
The control: Cap regularisations per employee per month and report on the heaviest users.
The control: Every rupee paid to an employee goes through payroll. No exceptions, including for senior staff.
9. No independent verification of bank detail changes
What goes wrong: A bank account change request is actioned on an email alone.
What it costs: This is the most common payroll fraud vector, and the money is usually gone by the time it is noticed.
The control: Verify every bank change by a second channel — a call to a known number — and maintain an audit trail. Flag changes made within a few days of payroll.
The five controls that prevent most of this
- Monthly variance report — every employee compared to last month, with anything over 10% investigated
- Headcount reconciliation — opening + joiners − leavers = closing, every month
- Statutory reconciliation — payroll totals to filed returns, to zero
- Exception reports — zero or negative net pay, employees near minimum wage, declared-but-unproven deductions
- Audit trail review — who changed salary, bank details and attendance
