Payroll in India: A Complete Guide for US Businesses

India’s payroll system is layered, technical and shaped by both national law and state-level rules. The dynamic employment market has a large talent pool, digital public infrastructure like Aadhaar and UPI, and rising global hiring demand, which all contribute to India becoming a key destination for businesses expanding their workforce.

To operate successfully, employers must understand the payroll process in India, including how to calculate wages, handle statutory deductions, comply with tax law and deliver mandatory benefits. This guide breaks it down step by step. We'll also talk about how BatchTransfer can help your team do international payroll.

The Payroll Process In India: An Overview

The payroll process in India involves income tax withholding, social security contributions, timely filings, and employee documentation. Employers are responsible for:

• Registering with key authorities like the Income Tax Department, Employees’ Provident Fund
• Organisation (EPFO), and Employees’ State Insurance Corporation (ESIC)^1,2,3
• Computing gross and net salary after factoring in leave, bonuses and reimbursements
• Deducting and remitting applicable taxes and contributions
• Disbursing salaries through registered Indian bank accounts
• Issuing payslips and filing compliance documents on schedule

Most companies follow a monthly payroll cycle, with payments typically made at the end of each month. In the IT and outsourcing sectors, bi-weekly payroll is also common.

Salary Structure And Compensation In India

For both employers and employees, the way compensation is broken down affects tax obligations, compliance with statutory laws, and the employee’s net take-home pay. In India, companies typically express compensation as Cost-to-Company (CTC), which includes every component of an employee’s pay.⁴

A well-structured salary is designed to optimize tax efficiency for employees while minimizing India employer payroll taxes. Below are the major components found in most Indian salary structures:

• Basic Salary: This is the fixed core of an employee’s earnings and usually makes up 35% to 50% of the total CTC. It forms the foundation for calculating other elements like Provident Fund (EPF), bonuses, and gratuity.⁵ Basic salary is always fully taxable and directly impacts the amount of India payroll taxes that both employer and employee must pay.
• House Rent Allowance (HRA): Offered to employees who live in rented accommodation, HRA is partially tax-exempt under Section 10(13A) of the Income Tax Act, provided the employee pays rent and submits proof.⁶ The exemption depends on the city of residence, basic salary, and actual rent paid.
• Dearness Allowance (DA): Commonly paid to public sector employees and some private sector roles with union agreements, DA is a cost-of-living adjustment to offset inflation.⁷ It is 100% taxable and must be included when calculating employer contributions to EPF and other benefits.
• Special Allowances: These are fully taxable allowances meant to cover additional job-related expenses such as transportation, telephone bills or meals. Employers often use this category to balance out the rest of the CTC once the statutory components are allocated.
• Bonuses and Performance Incentives: While not fixed monthly payments, these are often paid quarterly or annually. Bonuses may be performance-linked or governed by statutory requirements such as the Payment of Bonus Act. They are taxable in the year they are received.
• Reimbursements: Legitimate work-related expenses like travel, fuel, meals and medical costs may be reimbursed on a tax-free basis, provided the employee submits valid supporting documents. These are not considered part of taxable salary if structured properly.

Employers must ensure that their salary structures align with regulatory expectations, reduce unnecessary tax burdens, and reflect fair and transparent compensation practices.

India Payroll Taxes: What Employers Must Withhold And Pay

India’s tax system requires employers to deduct and remit several taxes and contributions. These are governed by federal and sometimes state-specific laws.

Income Tax

Employers must deduct Tax Deducted at Source (TDS) under the Income Tax Act, based on the employee’s projected annual income and tax declarations. The rates follow a progressive tax slab, with 5%, 10%, 15%, 20% and 30% brackets under the old regime. The new regime offers lower rates but removes most exemptions.⁸

Employees' Provident Fund

EPF is a mandatory retirement fund under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.

• Employee contribution: 12% of basic + DA
• Employer contribution: 12%, split between EPF (3.67%) and Employee Pension Scheme (EPS) (8.33%)
• Additional admin charges apply (0.5% to 1%)

Employees’ State Insurance (ESI)

Applicable to employees earning up to ₹21,000 per month, ESI provides medical and social protection benefits.

• Employer share: 3.25% of gross salary
• Employee share: 0.75%

Professional Tax (PT)

Levied by individual state governments, PT is a nominal monthly deduction (usually ₹200–₹250) with thresholds and slabs varying by state. Not all states charge PT.⁹

Labour Welfare Fund (LWF)

Applicable in select states like Maharashtra, Tamil Nadu and Karnataka. Contributions are made periodically by both employer and employee to fund welfare schemes.

Failing to deposit any of these taxes and contributions on time can trigger fines, interest and even prosecution.

Statutory India Benefits And Employer Responsibilities

Indian labour law requires employers to provide a range of statutory benefits that safeguard employee welfare and contribute to workforce stability. These benefits are a critical part of the payroll process in India and must be integrated into HR policies, employment contracts and payroll systems. Failure to provide or account for these legally mandated benefits can lead to fines, labour disputes, or reputational harm.

Here’s a closer look at the key India benefits that employers are legally obligated to offer:

• Gratuity: Gratuity is a statutory retirement benefit governed by the Payment of Gratuity Act, 1972.¹⁰ Employees who have completed at least five years of continuous service are eligible to receive a lump-sum payout upon resignation, retirement or death. The amount is calculated as 15 days’ wages for every completed year of service. Employers must account for this liability in advance and include it in their long-term financial planning.
• Maternity Benefit: Under the Maternity Benefit (Amendment) Act, 2017, eligible female employees are entitled to 26 weeks of fully paid maternity leave for their first two children. For subsequent births, the entitlement is 12 weeks. The law also requires companies with 50 or more employees to provide crèche facilities and allow nursing breaks.¹¹
• Statutory Bonus: The Payment of Bonus Act, 1965 applies to all factories and to other establishments that employ 20 or more workers. Under the Act, eligible employees must receive a minimum bonus of 8.33% of their annual wages. To qualify, an employee must earn a monthly salary of ₹3,500 or less. However, employees earning up to ₹10,000 per month are still eligible for the bonus, but their bonus will be calculated as if their salary were ₹3,500.¹²
• Leave Entitlements: Leave policies in India are governed by state-specific Shops and Establishments Acts or applicable labour laws for factories. Standard entitlements usually include:Employers must track leave balances, include payouts for unused leave where applicable, and reflect this in payroll calculations at termination or resignation.
  • Earned/Annual Leave: Typically 12-15 days per year.
  • Public Holidays: 15-20 per year.
  • Sick Leave: Typically 12 days per year for health-related absences.¹³
• Severance Pay: When terminating employees due to retrenchment, redundancy, or company closure, employers are generally required to offer severance compensation. The amount varies based on tenure and local law, but common standards include 15 days’ wages per completed year of service.¹⁴

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Payroll Compliance And Reporting Obligations

Every employer, regardless of size, must ensure that all statutory deductions and filings are accurate and submitted on time. Non-compliance can result in penalties, interest charges or even legal proceedings.

Employers are required to:

• Deposit statutory contributions such as TDS, EPF, ESI, PT and LWF within specified deadlines. Each contribution has its own payment schedule, and delays can lead to substantial fines.
• File monthly, quarterly, and annual returns with the relevant authorities, including the Income Tax Department, EPFO and ESIC. These filings provide details of deductions, contributions and salary payments made during the reporting period.
• Maintain accurate payroll registers and employee records such as attendance data, salary slips and tax declarations, which are often reviewed during statutory audits or labour inspections.

Common compliance filings include:

• Form 24Q: Quarterly TDS returns summarizing tax deductions for all employees.¹⁵
• Form 16: An annual TDS certificate provided to employees, outlining total salary and taxes deducted.¹⁶
• EPFO and ESIC Returns: Monthly returns and electronic challans that confirm contributions have been made to retirement and medical schemes.
• PT Returns: State-specific professional tax returns filed either monthly, quarterly or annually, depending on local regulations.

A company’s ability to issue error-free payslips, remit taxes on time and provide transparent reporting is often seen as a reflection of its professionalism and financial integrity.

Payslips and Employee Documentation

Payslip must be issued to every employee during each pay cycle, whether monthly, bi-weekly or otherwise. Payslips serve as a formal breakdown of an employee’s salary, highlighting both earnings and deductions, and are essential for financial transparency, tax reporting and dispute resolution.

Under Indian labour law and best practice guidelines, a payslip must contain the following elements:

• Earnings: This includes components like basic salary, House Rent Allowance (HRA), special allowances, overtime payments and any bonuses or incentives paid during that pay period.
• Deductions: Payslips must list all statutory and voluntary deductions, such as TDS, EPF, ESI, PT and any salary advances or loan repayments.
• Net Take-Home Pay: The final amount credited to the employee's bank account after all deductions.
• Employer Contributions (optional but recommended): While not mandatory on the payslip, many companies choose to disclose the employer’s contributions to EPF, ESI and other benefits for transparency and employee awareness.

In addition to monthly payslips, employers must issue Form 16 to employees after the end of each financial year. This document acts as a consolidated TDS certificate, summarising the total income paid and tax deducted over the course of the year. Employees use Form 16 to file their personal income tax returns.

Proper documentation goes beyond issuing payslips. Employers must maintain payroll registers, proof of tax payments and filings, signed employee declarations, and accurate leave and attendance records.

Common Challenges In Managing Payroll In India

Even with advanced payroll software and outsourced solutions, managing payroll in India remains a complex task. Here are the most common obstacles businesses face when managing the payroll process in India:

• Multi-State Variability: One of the most distinct features of Indian payroll is the variation in rules from state to state. PT rates and thresholds differ by state, with some states charging flat monthly amounts and others using income slabs. LWF applicability and contribution frequencies also vary widely; some states require annual contributions, while others demand quarterly or monthly remittances. In addition, leave entitlements and holidays are governed by state-specific Shops and Establishments Acts, making it necessary for multi-state employers to manage separate compliance calendars and payroll configurations for each location.
• Frequent Regulatory Changes: India’s tax and labour framework is highly dynamic. Income tax slab rates may change with each annual Union Budget. Updates to EPF wage ceilings, ESI thresholds or digital filing requirements may be introduced mid-year. Keeping pace with these shifts requires close monitoring of legal updates and the ability to adjust payroll systems and policies quickly.
• Contractor Misclassification: With the rise of remote work and project-based roles, many employers engage freelance or contract workers. However, incorrectly classifying a full-time employee as an independent contractor to avoid statutory benefits can result in penalties from the EPFO or labour enforcement authorities. Such misclassification may also lead to back pay of benefits and tax liabilities. It's critical to assess the actual working relationship, not just the title or agreement terms.
• Record-Keeping and Audit Readiness: Employers must store extensive payroll documentation for audits or legal disputes; everything from payslips and tax remittance proofs to leave balances and resignation settlements. Inadequate or inconsistent records may lead to compliance issues or employee grievances.

In a country as large and diverse as India, it’s crucial to tailor systems and policies to the geographic and contractual mix.

Final Thoughts

Payroll in India is complex, but getting it right is non-negotiable. Use the right tools and partners to stay up to date on regulations, and you’ll reduce risk, control costs and support long-term growth.

FAQs About Payroll In India

What Is the Frequency of Payroll in India?

Most companies pay employees monthly, but bi-weekly or semi-monthly payroll cycles are also used in certain industries.

Are Employers Required to Offer Health Insurance?

While not mandated for all, health coverage is strongly encouraged. Employees under ESI are already covered. Many employers offer group health insurance as a benefit.

Can a Foreign Company Run Payroll in India Without a Local Entity?

Yes, through an Employer of Record (EOR) or Professional Employer Organisation (PEO) model. These firms handle compliance and payroll on behalf of foreign companies.

Is the Gratuity Amount Taxable for the Employee?

Gratuity is tax-exempt up to ₹20 lakhs if paid under the Payment of Gratuity Act and other conditions are met.

What Are the Penalties for Delayed Tax Deposits?

Late payment of TDS or EPF can result in interest, penalties and disqualification from government contracts.

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Sources:

1. Income Tax India – FO Portal
2. Employees’ Provident Fund Organisation (EPFO)
3. Employees’ State Insurance Corporation (ESIC)
4. CTC Calculator (India)
5. Groww – Employees Provident Fund (EPF)
6. ClearTax – House Rent Allowance (HRA)
7. ClearTax – Dearness Allowance
8. Income Tax Slabs – ClearTax
9. ClearTax – Professional Tax in India
10. Payment of Gratuity Act, 1972 (PDF)
11. Maternity Benefit (Amendment) Act, 2017 (PDF)
12. Payment of Bonus Act (India)
13. e-Days – Holiday Compliance Guide: India
14. Talent500 – Severance Pay in India
15. Income Tax India – TDS Form 24Q (PDF)
16. ClearTax – What is Form 16