Payroll Year-End Checklist for Indian Employers: FY 2026-27 Compliance Guide

Closing payroll for the financial year is a high-stakes stretch on the HR calendar. A TDS mismatch, an unfiled PF return, a Form 16 that doesn’t match Form 26AS, any of these can turn into employee grievances, tax department notices, or penalties that carry into the new year. This payroll year-end checklist covers what Indian employers need to close out FY 2026-27, including the four Labour Codes, which are now rolling out state by state.

Quick Summary: What Needs to Close Before FY 2026-27 Ends

Here’s the shortlist:

• Reconcile TDS on salary for the full year
• Confirm each employee’s final tax regime choice
• Verify all pending investment proofs
• Generate accurate Form 16s
• Close out PF and ESI compliance, including annual and half-yearly returns
• Reconcile professional tax across every state of operation
• Audit salary structures against the Labour Codes’ new wage definition
• Settle Payment of Bonus Act obligations
• Review gratuity liability
• Process leave encashment correctly
• Clear pending full and final settlements
• Lock compliance parameters for the year ahead

Reconcile TDS on Salary for the Full Year

Start by matching what was actually deducted each month against what should have been deducted, based on final income, submitted investment proofs, and any mid-year salary or regime changes. Drift here is common: a raise in Q2, an 80C proof submitted late, an employee who switched tax regimes without formally notifying payroll. All of this needs correcting before the final quarter’s TDS return goes in, because once Form 24Q for Q4 is filed, fixing an error means filing a revised return, and revised returns tend to draw closer scrutiny from the tax department.

Confirm Final Tax Regime Elections

FY 2026-27 requires employees to formally confirm whether they’re continuing with the new tax regime or opting into the old one, and this confirmation has to be captured before the final payroll run, not assumed from last year’s default. A large share of payroll errors trace back to exactly this: an employee who switched regimes mid-year in conversation but never filed the declaration, so TDS ran on the wrong slab structure for months. Cross-check against signed declarations, not verbal confirmations.

Verify Investment Proofs and Deductions

The main categories that need verification before Form 16 can be finalized:

• Section 80C — PF, ELSS, life insurance, PPF
• Section 80D — health insurance premiums
• HRA — rent receipts and landlord documentation
• Section 24 — home loan interest certificates

This is usually where the bulk of payroll hours go in January and February. The single biggest time-saver: enforce a hard proof-submission cutoff. Extending it for a handful of employees usually means redoing TDS calculations for the entire cohort, since slab math isn’t isolated to one person.

Generate and Verify Form 16

Form 16 generation can’t happen cleanly until TDS reconciliation and proof verification are both settled. Form 16 needs to reflect correct gross salary, exemptions, deductions, and TDS deposited, matching quarter by quarter what’s reflected in Form 26AS and the AIS on the income tax portal. The statutory deadline to issue Form 16 is June 15 for the previous financial year, but the internal target for having it ready should sit closer to early May, which leaves room for the corrections employees inevitably flag.

Close PF and ESI Compliance

PF and ESI compliance closing means reconciling contributions against actual wages paid for the year, confirming the wage ceiling and contribution rates applied correctly for anyone who crossed salary thresholds mid-year, and filing the annual PF return and ESI half-yearly returns without discrepancy. This is also the point to confirm that new joinees from the year were enrolled correctly and that UAN and ESI numbers are properly linked. Gaps here often surface much later, usually when an employee tries to withdraw PF or claim an ESI benefit and finds holes in their contribution history.

Reconcile Professional Tax Across States

Professional tax reconciliation matters more than it used to, simply because more companies now operate across multiple states, and professional tax slabs and payment schedules differ by state. Maharashtra, Karnataka, West Bengal, and Telangana each run their own structures and deadlines. A checklist built for one state falls apart the moment a company adds a second location, so it’s worth building state-specific sub-checklists rather than working off one generic list.

Audit Salary Structures Against the Labour Codes

The part that’s actually new this cycle is the ongoing rollout of the four Labour Codes: Code on Wages, Industrial Relations Code, Code on Social Security, and Occupational Safety, Health and Working Conditions Code. States are notifying rules at different speeds, and the revised wage definition under the Code on Wages has a direct effect on PF and gratuity calculations, since basic pay must now be at least 50% of total compensation for most salary structures. Employers who haven’t yet audited their pay structures against this definition should treat it as a year-end priority, since it determines contribution calculations for the new financial year, not just the one closing out.

Settle Bonus and Gratuity Obligations

Bonus payments under the Payment of Bonus Act need a year-end review covering:

• Confirming eligible employees
• Calculating minimum and maximum bonus based on allocable surplus
• Paying within the statutory window, typically within eight months of the financial year closing

Gratuity liability also deserves a review, particularly for employees who crossed the five-year threshold during the year, since gratuity calculations feed into both statutory obligations and financial provisioning for the coming year.

Process Leave Encashment Correctly

Wherever leave encashment is tied to the financial year rather than the calendar year, payroll needs to calculate accrued balances, apply the correct tax treatment, and reflect it accurately in Form 16. Leave encashment is only partially exempt for private sector employees, unlike government employees, and missing this at year-end usually means a messy correction in the first quarter of the new year.

Clear Pending Full and Final Settlements

Every employee who exited during the year needs a separate settlement review covering:

• TDS treatment
• Gratuity eligibility
• Leave encashment
• Pending reimbursements

Each of these should be cross-verified against what was actually reported in the quarterly TDS returns filed while the employee was still on payroll. An FnF settlement processed mid-year can easily end up out of step with the annual Form 16 reconciliation if nobody circles back to check it.

Lock Parameters for the New Financial Year

Before FY 2027-28 opens, payroll teams should lock the new year’s salary structure and compliance parameters:

• Updated PF wage ceilings, if revised
• State-specific professional tax changes from state budgets
• Updated TDS slab rates from the Union Budget
• Confirmation of which Labour Code provisions now apply in each state of operation

Starting a new year with the previous year’s parameters still active in the system is a common mistake, and an easy one to avoid.

When to Bring in Outside Help

All of this is manageable for a single-location employer with a few hundred people. It gets harder once a company operates across five or six states, each with its own professional tax rules, PF regional-office quirks, and its own pace of Labour Code adoption. That’s usually the point where companies start evaluating payroll compliance services or a broader payroll outsourcing arrangement, not because year-end closing is impossible internally, but because there’s more compliance ground to cover than one internal team can track without something slipping through.

If your team is heading into FY 2026-27 year-end closing and wants a second set of eyes on the checklist, or is weighing outside support for the compliance-heavy parts of it, Transparian’s payroll services team works through exactly this closing process with employers across multiple states and can help flag gaps before they turn into penalties.

FAQ’s