Last updated: September 2026
If you are preparing for a payroll interview, there is one question you will almost certainly be asked in 2026: "What does the new wage definition mean for our salary structure?"
Most candidates will answer "basic pay must now be 50% of CTC."
That answer is wrong — or at least imprecise enough that an experienced payroll manager will notice. The rule is an add-back mechanism, not a minimum basic, and a structure built on the shorthand produces the wrong PF and gratuity numbers.
Indian payroll changed twice in five months. The four Labour Codes came into force on 21 November 2025, consolidating 29 central labour laws. Then on 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act, moving salary TDS from Section 192 to Section 392. Almost every payroll interview guide online predates one or both.
This guide covers 35+ questions under the law in force now.
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What changed in Indian payroll
The four Labour Codes
From 21 November 2025, 29 central labour laws were consolidated into four codes:
Code on Wages, 2019 — wages, minimum wages, payment of wages, bonus, equal remuneration
Code on Social Security, 2020 — provident fund, ESI, gratuity, maternity benefit, and coverage of gig and platform workers
Industrial Relations Code, 2020 — trade unions, standing orders, disputes, retrenchment
Occupational Safety, Health and Working Conditions Code, 2020 — working hours, safety, welfare, leave
The codes, the revised definition of wages and gratuity on revised wages are binding. Central rules are being finalised through 2026 and state rules vary by state, so several operational details still depend on where an employee works.
What sets you apart: knowing that the codes are in force but that state rules are still uneven. Candidates who say "it's not applicable yet" are a year behind; candidates who say "everything is settled" have not checked a state notification.
The Income-tax Act, 2025
The Income-tax Act, 1961 was repealed on 1 April 2026. TDS on salary moved from Section 192 to Section 392. The standard deduction for salaried employees moved to Section 63, and the old Chapter VI-A deductions moved under Section 123 read with Schedule XV. Rates and slabs were not changed by the new Act itself.
Employee investment declarations, the payroll software's section references and the salary TDS certificate all had to be updated for the new numbering.
The wage definition question
What is the new definition of wages?
Wages under the Code on Wages broadly include basic pay, dearness allowance and retaining allowance. A list of components is excluded — including HRA, conveyance allowance, overtime, statutory bonus, employer contributions to PF and pension, gratuity and certain other payments.
The critical proviso: if the excluded components together exceed 50% of total remuneration, the amount by which they exceed 50% is added back to wages.
So does basic pay have to be 50% of CTC?
No — not literally. The law does not mandate a minimum basic. It caps the exclusions: anything excluded beyond half of total remuneration is deemed to be wages anyway.
The practical effect is similar, which is why the shorthand spread. Many employers restructured to keep basic plus DA at or above half of total pay, so that no add-back is needed and the payroll is easier to defend. But explaining the add-back mechanism is the precise answer.
What sets you apart: saying "it is an add-back rule, not a minimum basic rule" and then explaining why employers restructured anyway. That single distinction marks you as someone who has read the definition rather than a LinkedIn summary.
Why does the wage definition matter so much?
Because it is now a uniform definition used across the codes. PF, gratuity, bonus eligibility and several other statutory calculations run off the same wage base. Under the old laws, each Act had its own definition and employers could keep basic low to reduce contributions under all of them.
What happens to take-home pay when wages go up?
Total CTC may stay the same, but a higher wage base means higher PF contributions and higher gratuity accrual. Since the employee's PF contribution comes out of their salary, monthly take-home typically falls slightly, while retirement savings and gratuity entitlement rise. Explaining this clearly to employees was one of the main communication challenges of the transition.
Basic payroll questions for freshers
What is payroll?
The process of computing, paying and accounting for employee compensation, including deducting and remitting statutory contributions and taxes, issuing payslips and filing returns. In India it sits at the intersection of labour law, tax law and accounting.
What are the components of a salary structure?
Earnings: basic pay, dearness allowance, HRA, conveyance, special allowance, bonus and incentives. Deductions: employee PF, employee ESI where applicable, professional tax, TDS, and any recoveries such as loans or advances. Employer costs on top: employer PF, employer ESI, gratuity provision and insurance.
What is the difference between gross salary, net salary and CTC?
Gross salary is total earnings before deductions. Net salary is what is credited to the employee after deductions. CTC is the total annual cost to the employer, including employer contributions and benefits that the employee never sees in cash.
What sets you apart: noting that the new wage definition is computed on total remuneration, not CTC as candidates often assume — so read the definition carefully before building a structure from CTC figures.
What is loss of pay and how is it calculated?
A deduction for unauthorised or unpaid absence. It is calculated by dividing monthly salary by a divisor — calendar days, working days or a fixed number such as 30 or 26 — and multiplying by the days of absence. The divisor must be defined in company policy and applied consistently.
What is the difference between arrears and advance salary?
Arrears are amounts owed for a past period but paid later, for example a retrospective increment. Advance salary is paid before it is earned and recovered from future pay. Arrears raise a TDS question because the employee may claim relief where arrears push income into a higher bracket in the year of receipt.
What is a payslip and what must it contain?
A statement of earnings and deductions for the pay period. Beyond the employer's policies, it should show the components, deductions, net pay, and the statutory identifiers. Some labour and state rules prescribe specific contents and a format, so confirm what applies in the relevant state.
PF, ESI and professional tax
What are the PF contribution rates?
12% of PF wages from the employee and 12% from the employer. Of the employer's contribution, a portion goes to the Employees' Pension Scheme — 8.33% of wages, capped by the wage ceiling — and the balance to the provident fund account.
What is the PF wage ceiling?
Contributions are mandatory on wages up to ₹15,000 per month. Employers and employees can voluntarily contribute on higher wages, and many do. The pension contribution is capped on the ceiling regardless.
What sets you apart: explaining that a higher wage base under the new definition only increases PF where the employer contributes on actual wages rather than on the ceiling. For employees contributing on capped wages, the change may have little effect on PF but a large one on gratuity.
When is PF deposited and how is it returned?
Monthly, by the 15th of the following month, through an electronic challan cum return filed on the EPFO portal against each employee's Universal Account Number.
What is ESI and who is covered?
Employees' State Insurance provides medical and cash benefits to employees earning up to the wage threshold, currently ₹21,000 per month. Employee and employer contribute at prescribed percentages of wages, deposited monthly by the 15th. Confirm current rates and threshold before quoting them.
What is contribution period in ESI?
ESI coverage is determined for contribution periods of six months. An employee covered at the start of a period stays covered for the full period even if their wages rise above the threshold during it. This is a favourite detail question.
What is professional tax?
A state-levied tax on professions, trades and employment, deducted from salary in states that impose it. Rates and slabs vary by state, and the Constitution caps the maximum annual amount. Some states do not levy it at all.
Gratuity, bonus and leave
How is gratuity calculated?
For employees covered by the statutory scheme: last drawn wages multiplied by 15, multiplied by completed years of service, divided by 26. Service of more than six months in the final year is generally rounded up.
Under the Labour Codes, "last drawn wages" follows the uniform wage definition — which is why the add-back rule significantly increases gratuity liability for employers who kept basic low.
Who is eligible for gratuity?
Employees on completion of five years' continuous service, with exceptions for death and disablement. The Code on Social Security introduced a major change: fixed-term employees become eligible after one year of service rather than five.
What sets you apart: the fixed-term change. It materially affects the cost of contract-heavy workforces and many candidates do not know it.
How is gratuity taxed?
It is exempt up to a prescribed ceiling for employees covered under the statutory scheme, and under a separate formula for others. The exemption provision was renumbered under the Income-tax Act, 2025. Confirm the current ceiling and section before quoting.
What is statutory bonus?
A bonus payable to employees earning up to a prescribed wage limit, between a minimum and maximum percentage of wages, now governed by the Code on Wages. It is linked to allocable surplus. Confirm current limits before quoting figures.
How is leave encashment treated?
Paid on unused earned leave, commonly at exit and in some organisations annually. The calculation basis should follow policy and applicable law. Leave encashment at retirement or resignation has a tax exemption up to a prescribed limit; encashment during service is fully taxable.
Salary TDS under the new Act
Under which section is TDS on salary deducted now?
Section 392 of the Income-tax Act, 2025, which replaced Section 192 of the 1961 Act from 1 April 2026. FY 2025-26 salary TDS, including the annual certificate and the last quarter's return for that year, stays under the old Act.
What sets you apart: explaining that a payroll team in 2026 is issuing certificates and closing returns for FY 2025-26 under Section 192 while running current-year deductions under Section 392.
Read more: TDS Interview Questions and Answers 2026
How is salary TDS calculated?
Estimate the employee's total annual taxable salary under their chosen regime, subtract eligible exemptions and deductions based on their declaration, compute annual tax including cess and rebate, then deduct it evenly across the remaining months of the year — adjusting monthly as salary changes and proofs come in.
How does regime choice affect payroll?
The employee declares their intended regime to the employer at the start of the year. The new regime is the default. Payroll must compute TDS accordingly and cannot apply old regime deductions to an employee who has not chosen that regime.
Read more: Income Tax Interview Questions and Answers 2026
What is the investment declaration and proof cycle?
At the start of the year employees declare planned investments and expenses. TDS is computed provisionally on that basis. Towards the end of the year employees submit proofs. Anything unproven is disallowed and the shortfall in tax is recovered from the remaining salaries, usually in the last two or three months.
What is the standard deduction?
A flat deduction from salary income without proof of expenditure, now under Section 63 of the new Act. The amount differs between regimes and has been revised in recent Budgets — confirm current figures.
What is the salary TDS certificate?
The annual certificate issued to the employee showing salary paid and tax deducted, historically Form 16, generated through TRACES from the quarterly return. The form numbering changed under the new Act, so confirm which form applies to the year in question.
The monthly payroll process
Walk me through the monthly payroll cycle.
Freeze inputs at cut-off — attendance, leave, overtime, new joiners, exits, variable pay, and salary revisions. Validate the inputs. Compute gross pay, statutory deductions and TDS. Run variance checks against the previous month. Get approvals. Generate the bank transfer file and release salary. Issue payslips. Deposit statutory dues by their due dates and file the associated returns. Reconcile payroll to the general ledger.
What sets you apart: the variance check. Comparing each employee's net pay to the previous month and investigating anything that moved is the control that catches most errors before salary is released.
What are the key statutory due dates?
TDS by the 7th of the following month, PF and ESI by the 15th, professional tax per the state schedule, and quarterly TDS returns and annual certificates on their respective dates. Confirm the current calendar, as extensions and state-level differences apply.
How do you reconcile payroll?
Match the payroll register to the bank transfer total, the statutory challans to the deductions in the register, and the payroll journal to the general ledger. Investigate any difference before the next cycle, not at year end.
Which payroll software have you used?
Name real systems — Keka, greytHR, Zoho Payroll, Darwinbox, SAP SuccessFactors, or a Tally payroll module — and say what you did in them. "I configured salary structures, ran monthly payroll for 400 employees and generated PF and ESI returns" beats "I know payroll software."
Full and final settlement
What does a full and final settlement include?
Unpaid salary to the last working day, leave encashment, gratuity if eligible, pro-rated bonus or variable pay, reimbursement claims, less notice pay shortfall, recoveries of loans, advances or company property, and TDS on the taxable components.
What is the timeline for paying full and final dues?
The Code on Wages requires wages to be paid within two working days of separation. There has been debate on whether this covers every component of a full and final settlement or wages specifically, and state rules can affect practice. Confirm the current interpretation before stating a timeline categorically.
What sets you apart: knowing that the timeline tightened dramatically and that the scope is still being interpreted. Most employers used to run F&F in 30 to 45 days.
How is notice period shortfall handled?
Recovered from the settlement at the rate defined in the employment terms, or waived where management approves. Payroll should not recover it without the policy or approval supporting the amount.
Practical scenario questions
An employee says their salary this month is lower than last month. How do you investigate?
Pull both payslips and compare component by component. Check for loss of pay, a TDS change from a declaration update or unproven investments, a change in professional tax slab, a one-off component last month that did not recur, or a PF change from restructuring. Explain the difference to the employee in writing, component by component. If there is an error, correct it in the next cycle or through an off-cycle run if it is material.
An employee's CTC has HRA and special allowance totalling 65% of total remuneration. What is the payroll impact?
The excluded components exceed half of total remuneration by 15 percentage points, so that excess is added back to wages. PF, where contributed on actual wages, and gratuity are computed on the increased wage base. The options are to restructure so that the add-back is not needed, or to compute correctly on the added-back figure — but not to ignore it.
You discover PF was deposited late last month. What do you do?
Deposit immediately with the applicable interest and damages, report the reason to your manager, and identify what caused the delay so it cannot recur. Late PF deposits carry both interest and damages, and repeated delays attract scrutiny.
An employee submits investment proofs after the payroll cut-off in March. What do you do?
TDS for the year is effectively closed with the final payroll run. The employee can claim the deduction when filing their own return and receive a refund if excess tax was deducted. Explain this clearly rather than promising a correction that the payroll cycle cannot deliver.
A fixed-term contract employee is leaving after fourteen months. Is gratuity payable?
Under the Code on Social Security, fixed-term employees are eligible after one year of service, so gratuity is payable on a pro-rata basis. Under the old regime they would not have been eligible. Check the employment contract, the date of joining against the code's effective date, and any applicable state rule before finalising.
An employee asks you what a colleague earns. How do you respond?
Decline, clearly and politely. Salary information is confidential and payroll access is a position of trust. Interviewers ask this to test judgement, not knowledge, and there is only one right answer.
How to prepare
Master the wage definition. It is the question of 2026. Explain the add-back mechanism rather than the 50% shorthand and you will be ahead of most candidates.
Know which law applies to which year. FY 2025-26 salary TDS is under the old Act; current-year deductions are under the new one. The same logic applies to labour law — the codes apply from 21 November 2025.
Be precise about what is settled and what is not. The codes are in force; central and state rules are still arriving. Saying "I would check the state rule for this employee's location" is a sign of competence, not uncertainty.
Learn the calculations by doing them. Work through a salary structure, a PF computation, an ESI computation, a gratuity calculation and a TDS estimate on paper before your interview.
Practise explaining a payslip. Much of payroll is explaining numbers to employees who are unhappy about them.
Practise with a role-specific AI mock interview on BeSkill — browse the finance and accounting interviews or the Taxation interview library.
Related reading: TDS Interview Questions 2026 · Income Tax Interview Questions 2026 · Accounts Executive Interview Questions 2026