Top 10 Common HR Compliance Mistakes Made by Indian MSMEs

Indian MSMEs are the backbone of the economy — but managing HR & payroll compliance is often one of their biggest pain points.

With changing labor laws, complex payroll rules, and limited HR resources, even well-meaning MSMEs often make compliance mistakes that lead to:

Penalties & interest from EPFO, ESIC, Income Tax, State PT offices
Payroll disputes with employees
Audit risks
Reputational damage

In this blog, we’ll cover the top 10 HR compliance mistakes Indian MSMEs commonly make — and how you can avoid them using smart HRMS & Payroll automation like PagarAi’s Compliance Engine.

Table of Contents

Why HR Compliance is Challenging for MSMEs ?

MSMEs often face unique compliance challenges:

✅ Rapid business growth → processes can’t keep up
✅ Complex mix of full-time, part-time & contractual staff
✅ Frequent regulatory updates → hard to track manually
✅ Limited HR & finance bandwidth → manual processes prone to errors
✅ Lack of centralized visibility across locations

Top 10 HR Compliance Mistakes Made by Indian MSMEs ?

1️⃣ Missing PF Applicability Updates

Many MSMEs fail to update PF wage limits or apply PF for eligible staff.
Incorrect PF deductions → penalties + employee dissatisfaction.

👉 PagarAi auto-tracks PF applicability & generates ready PF reports.

2️⃣ Incorrect ESI Eligibility Handling

ESI wage eligibility limit (₹21,000/month) must be tracked dynamically.
Employees moving across ESI eligibility line must be auto-updated.
Manual errors → compliance gaps.

👉 PagarAi automates ESI eligibility checks & compliance.

3️⃣ TDS Deduction Errors

TDS must be deducted accurately per salary slabs & declarations.
Manual mistakes → under-deductions → notices from Income Tax Dept.

👉 PagarAi auto-calculates monthly TDS & prepares Form 24Q & Form 16.

4️⃣ Missing or Incorrect Bonus Calculations

Statutory Bonus (under Bonus Act, 1965) → often miscalculated or missed for eligible employees.
Non-payment → legal risk.

👉 PagarAi’s Bonus Module auto-tracks bonus eligibility & ensures accurate payout.

5️⃣ Professional Tax (PT) Non-compliance

PT rules vary across states → manual errors common.
Late PT filings → penalties + interest.

👉 PagarAi applies correct PT slab per state & automates PT report generation.

6️⃣ Overtime Calculation Errors

Overtime must be calculated as per Factories Act & labor laws.
Manual overtime calculations often incorrect → payroll disputes.

👉 PagarAi integrates with AI Attendance & Shift Management → accurate overtime calculation.

7️⃣ Incorrect Leave & Holiday Treatment in Payroll

Non-compliance with leave encashment rules / incorrect holiday pay → legal risk.
Many MSMEs lack system-driven leave tracking.

👉 PagarAi’s Leave Management ensures compliance-aligned leave & holiday treatment.

8️⃣ Inconsistent Payslip Practices

Many MSMEs do not issue compliant payslips → violates statutory requirement.
Non-transparent payslips erode employee trust.

👉 PagarAi generates professional, compliant payslips automatically.

9️⃣ Lack of Audit-Ready Records

MSMEs often can’t produce historical compliance records on demand
Poor audit readiness → penalties & brand damage.

👉 PagarAi stores full audit trail → always audit-ready.

10️⃣ No Compliance Calendar in Place

Many MSMEs miss key deadlines → late PF, ESI, TDS, PT filings → fines.
No visibility on upcoming compliance tasks.

👉 PagarAi’s Compliance Engine includes smart Compliance Calendar → tracks all key due dates.

How PagarAi’s Compliance Engine Helps MSMEs Stay 100% Compliant ?

PagarAi’s Compliance Engine is built specifically to help Indian MSMEs manage compliance effortlessly:

✅ Integrated with Payroll Software → auto-calculates compliance deductions
✅ Generates ready-to-upload reports for:

PF
ESI
TDS
PT
LWF
Bonus
✅ Provides real-time dashboard visibility → across all compliance areas
✅ Maintains full audit trail → reduces audit risk
✅ Includes Compliance Calendar → ensures no missed deadlines