One in two Indian companies plan to adopt artificial intelligence (AI)-powered payroll systems over the next 12 months as employers increasingly use automation and predictive analytics to manage workforce costs, compliance and compensation decisions, according to a report by payroll and workforce management company ADP.

However, companies are also becoming more cautious about the risks associated with using AI in payroll, particularly as payroll systems handle sensitive employee data, according to the report, titled Future of Pay 2026: India. ADP noted that the implementation of the Digital Personal Data Protection (DPDP) Act, 2023, will require organisations to strengthen data governance, cybersecurity safeguards and transparency around how AI-generated insights are used.

“Organisations must ensure AI systems comply with strict data protection norms such as purpose limitation, data minimisation and secure storage. This means that payroll systems will need tighter governance, transparent data usage policies, robust cybersecurity measures and addressing bias in automated decisions,” the report said.

The report, based on a survey of 344 senior human resource (HR), finance and payroll executives, comes at a time when companies are grappling with uneven labour markets, evolving regulations and the growing impact of AI on jobs and skills. More than 43 per cent of respondents identified workforce planning as a key challenge, highlighting the growing reliance on payroll data for hiring, retention and cost-management decisions.

Compliance emerged as another major concern. About 45 per cent of organisations cited payroll compliance across regions as a significant challenge, particularly amid changing labour regulations and preparations for the labour codes. Taxation, statutory benefits and wage regulations were identified as some of the most difficult compliance areas.

“The new Code on Wages has made employers rethink the way they have been doing payroll for many years. There is a near-term need to rebalance employee salaries in such a way that they are compliant with regulations, maximise employee experience and optimise costs,” the report said.

The report said employers are increasingly investing in governance frameworks and automation tools to reduce compliance risks and improve audit readiness. The Code on Wages has also prompted organisations to reassess salary structures and payroll processes as they prepare for eventual implementation.

Technology spending is increasingly focused on integrated HR and payroll systems, automated compliance tracking, employee self-service portals and AI-enabled payroll platforms. However, adoption remains uneven, with one-third of organisations saying innovation in HR and payroll technology continues to be constrained by legacy systems, integration challenges and data security concerns, the report showed.

Beyond technology and compliance, employee financial well-being is emerging as a key payroll priority. More than half of the organisations surveyed said financial wellness initiatives would be a focus area in the near term, while 42 per cent pointed to rising employee expectations around flexibility and transparency. Salary advances, flexible benefits and financial education programmes are increasingly being incorporated into broader rewards strategies.

The survey also found that managing remote and hybrid employees remains a challenge for 51.8 per cent of organisations, highlighting the continued operational complexity of distributed workforces.