Payroll Audit Checklist for Indian Companies

A payroll audit checklist gives structure to a review that is easy to do superficially and hard to do well. Payroll touches every employee, several government portals and the company's bank account every month, so small errors repeat and compound. An annual or half-yearly payroll audit (internal or by an external reviewer) catches statutory shortfalls before a notice does, finds control gaps before they are exploited, and gives management confidence in the largest cost line. This checklist covers what to test, how to test it, and what good evidence looks like, updated for the Labour Codes (in force from 21 November 2025) and the Income-tax Act, 2025.

Planning the Audit

Scope: entities, states, employee groups (including fixed-term and contract labour) and the period (typically the last 12 months).
Sample: a risk-based sample of employees (new joiners, exits, high earners, large variances, bank detail changes) plus a random sample.
Data: payroll registers, employee master history, statutory returns and challans, bank files and statements, HR approvals and the general ledger.
Independence: the reviewer should not be the person who runs payroll.

1. Employee Master Data

Check	How to test
Every employee on payroll exists in HR records with an appointment letter	Match payroll headcount to HR list; sample documents
PAN, UAN, ESI number, Aadhaar seeding complete	Exception report of blanks
Date of birth and name match Aadhaar	Sample check against UAN records
Bank details validated; changes authorised	Review change log and approvals
Work location and state correct for PT and LWF	Compare with HR location data
Exits deactivated in payroll on the last working day	Match exit list to payroll for the following month

2. Salary Structures and Wage Rules

Basic plus DA at least 50% of total remuneration, or add-back applied for PF, gratuity and bonus. See our Code on Wages 50% rule guide.
Basic plus DA at or above the applicable minimum wage for each employee's category and area, including the latest VDA.
Salary changes supported by approved increment or promotion letters with effective dates.
Fixed-term employees paid at parity with permanent staff in similar roles.
Components and templates consistent within grades.

3. Attendance, Leave and Overtime

Loss-of-pay days in payroll match approved attendance and leave records.
Overtime paid only with approvals, at twice the ordinary rate of wages.
Leave balances used for encashment match the leave system.
Attendance cut-off method applied consistently, with next-month adjustments made.

4. Recalculation Tests

For each sampled employee and month, recompute independently:

Gross earnings after proration.
PF (employee share, EPS, employer EPF, EDLI) on the correct wage base and policy.
ESI where applicable, with the contribution period rule and upward rounding.
Professional tax for the state and month.
TDS under the declared regime, including rebate, marginal relief and perquisites.
Net pay.

Worked recalculation

Sample: an employee with gross ₹62,000 (basic ₹31,000), 2 LOP days in a 31-day month, PF on actual basic, Karnataka.

Gross: ₹62,000 × 29 ÷ 31 = ₹58,000.
Earned basic: ₹31,000 × 29 ÷ 31 = ₹29,000. Employee PF: 12% = ₹3,480.
PT: ₹200.
If the register shows PF of ₹3,720 (12% of full basic), PF has been computed without proration: a finding affecting every employee with LOP.

5. Statutory Reconciliations

Area	Reconcile	Evidence
TDS	TDS in payroll = challans deposited = quarterly statements = Part A of certificates	Challans, statements, TRACES reports
PF	Payroll PF = ECR = challan; all eligible employees included	ECR files, TRRNs, receipts
ESI	Payroll ESI = portal contributions; coverage correct per contribution period	Portal reports, receipts
PT	State-wise PT = challans and returns; annual cap respected	State challans
LWF	Deductions in the right month; employer share paid	State challans
Timeliness	Every payment on or before its due date	Payment dates vs calendar

For due dates, keep a compliance calendar with an owner for each deadline, and test actual payment dates against it.

6. Tax Declarations and Proofs

Regime declaration on file for each employee; default regime applied where none.
Old-regime deductions supported by verified proofs; landlord PAN where annual rent exceeds ₹1 lakh.
Previous employer income considered for mid-year joiners.
Perquisites (loans, cars, ESOPs) valued and included.
Salary certificates issued by 15 June and consistent with the Q4 statement.

7. Bank Payments

Bank file totals equal approved net pay each month.
Files generated from the system, not edited; maker-checker on the bank portal.
No payments to exited employees after their last working day (except settlements).
Returned credits tracked and resolved.
No duplicate account numbers without explanation.

8. Exits and Settlements

Final wages paid within two working days of separation, as required by the Code on Wages.
Gratuity computed correctly (wage base, rounding of service, fixed-term rules) and paid within 30 days.
Leave encashment exemption computed with the four limits.
Loan recoveries authorised and within limits.
Exit dates marked on EPFO.

9. Access and Change Controls

Role-based access to payroll: preparers cannot approve their own runs or upload bank files.
Changes to salary, bank details and statutory settings logged with who and when.
Access removed promptly for people who changed roles or left.
Payroll data shared only through secure channels; sensitive fields masked in reports.

10. Accounting

Salary expense equals register gross; employer contributions recorded separately.
Statutory payables clear to zero after payments.
Gratuity, bonus and leave provisions supported by schedules or actuarial reports.
Employee loan balances agree with the loan register.

Findings Auditors Commonly Raise

Patterns that show up repeatedly in Indian payroll reviews:

Wage base below 50%: structures not updated after 21 November 2025, so PF, gratuity and bonus are computed on too low a base.
Stale minimum wages: April or October VDA revisions applied late or not at all.
TDS projections not refreshed: bonuses, arrears and perquisites added to pay but not to the annual projection, leaving a March shortfall.
Regime errors: old-regime deductions applied to employees on the default regime.
Exit gaps: settlements paid well after two working days; exit dates not marked on EPFO.
Bank change controls: bank details changed on email requests without call-back.
Contractor compliance: contractor invoices paid without PF and ESI evidence.
Unreconciled payables: small balances in PF or TDS payable accounts carried for months.

Sample audit timeline

Week	Activity
1	Agree scope, request data, select samples
2	Master data, structure and minimum wage tests
3	Recalculations and statutory reconciliations
4	Bank, exits, access and accounting tests; draft findings
5	Discuss findings with payroll and finance; agree actions; final report

Rating and Reporting Findings

Rating	Example	Expected action
High	Short deduction of TDS across employees; PF not paid for a group; wages below minimum	Correct and pay with interest immediately; root-cause fix
Medium	LOP not prorated for PF; late PT payments; missing landlord PAN	Fix within the next payroll cycle
Low	Inconsistent component names; minor documentation gaps	Fix in the next quarter

For each finding, record the condition, the rule, the impact in rupees where possible, the cause and the agreed action with an owner and date.

Quantifying a Finding

Management acts faster on findings with a rupee value. Take the PF proration error above. Suppose 60 employees on PF-on-actual had an average of 1.5 LOP days a month over 12 months, with average basic of ₹30,000 in 30-day months. Over-deducted employee PF per LOP day is 12% × ₹1,000 = ₹120, so the annual over-deduction is 60 × 1.5 × 12 × ₹120 = ₹1,29,600 from employees, matched by the same amount of excess employer contribution. Stating the finding this way (who is affected, by how much, and what correction is needed, such as refunds through payroll or adjustments under EPFO procedures) turns it into a decision rather than a note.

Correcting past periods

Some findings need retrospective correction: short TDS (deposit with interest and file correction statements), missed PF (supplementary ECR with interest and damages), wages below minimum (arrears). Others need only a fix going forward. Agree which applies before closing the audit.

How Often to Audit

Run a full audit annually, ideally before the year-end TDS close. Add a lighter quarterly review of statutory reconciliations and bank changes. After a major change (new payroll system, new state, restructuring for the 50% rule), run a targeted audit within two or three months. The monthly controls in our payroll processing guide make each audit faster.

Audit-Ready Payroll in Fininvo

Fininvo Payroll provides payroll registers, PF and ESI reports, TDS reports, YTD and variance reports that auditors typically request. See payroll reports and pricing.

Frequently Asked Questions

What is a payroll audit?

A review of payroll data, calculations, statutory compliance, payments and controls over a period, to find errors, compliance gaps and control weaknesses.

How often should payroll be audited?

A full audit annually, with quarterly reviews of key reconciliations and targeted audits after major changes.

What documents are needed for a payroll audit?

Payroll registers, employee master data and change logs, statutory returns and challans, bank files and statements, approvals and the general ledger.

Who should conduct a payroll audit?

Someone independent of payroll processing: internal audit, finance leadership or an external professional.

Is this legal or audit advice?

No. This is general information. Adapt the checklist to your organisation and applicable laws, and consult professionals where needed.