Running payroll in India

The state governments in India enjoy strong legislative power, also with regard to employment laws and requirements. The resulting regional variation in rules and regulations governing employment relationships has a direct impact on payroll processing which can turn into a real challenge, especially for companies with employees based in different provinces. In fact, India was named as one of the ten most complicated countries in the world to run payroll in by the 2021 Global Payroll Complexity Index. 

When setting up their local payroll in India, businesses need to complete several registration processes with tax and social security authorities both on national and state level. Payroll-related registration processes with the authorities working with the central government include: 

• Registration for a Permanent Account Number (PAN) - needed for tax submission and tax return filing with regard to corporate tax and expenses

• Registration for a Tax Account Number (TAN) - needed for withholding income tax at source 

• Registration with Employee Provident Fund (EPF) and Employee Pension Scheme (EPS) - mandatory for companies with more than 20 employees

Payroll-related registration processes on state level include: 

• Registration for Profession Tax - if applicable in that particular state

• Registration for Employee State Insurance (ESI) - mandatory for companies with more than 10 members of staff

• Registration with the Labor Welfare Fund - if applicable in that particular state

New employees must be registered with the EPF if they fulfill certain criteria which decide whether or not they are liable for contributions. Please note that the registration processes listed here are limited to those directly related to the payroll process and that further registration procedures are necessary when setting up a local legal entity or branch in India. It is recommended to set up a local bank account to issue payments to the authorities. 

Taxation and social security contributions are also subject to regional variation. While the main income tax on employment income is levied at national level, the majority of the provinces levy additional income-related taxes. Tax rates and taxation rules further vary depending on the employee’s residency status. 

Tax considerations

Income tax rates and brackets are set by the central government and are regularly adjusted in the Union Budget. The standard tax system consists of 4 progressive tax rates, the top rate being 30%. Income up to INR 250,000 is exempt from tax.

Employment income is fully taxable after applying the available deductions and tax allowances. Taxable income includes wages and salaries as well as most benefits provided by the employer. A tax rebate of up to INR 12,500 is available for employees earning less than INR 500,000 per year. Social security contributions, payments to complementary pension, health or life insurance as well as employment expenses (INR 50,000 standard deduction) are deductible. Further deductions include charitable contributions and education expenses, among others. 

In April 2020, India introduced a new simplified tax regime which can be chosen as an alternative to the old standard tax regime. The new personal tax regime (NPTR) comprises more tax brackets than the standard regime and tax rates are lower as the system does not allow for tax deductions or exemptions - except for the first INR 250,000 of income which are tax-free in both tax regimes. There also is a 4% health and education cess applicable under both systems which is calculated based on the amount of income tax due. 

In addition to standard income tax (or NPTR, whichever one is chosen), India levies a progressive 10% to 37% surcharge on income exceeding INR 5,000,000. A supplementary profession tax is levied by certain provinces. 

In contrast to most other countries which simply distinguish between residents and non-residents, India’s tax system classifies taxpayers according to 3 different categories with regard to their residential status. The residential status is assessed for each tax year. The three categories are: 

• Residents who are also ordinarily residents in India (ROR)

• Residents who are not ordinarily residents in India (RNOR)

• Non-residents (NR) 

The categorization of a taxpayer as ROR, RNOR and NR has a direct impact on the taxable basis for income tax calculation. While non-residents are only taxed on income received in India and from Indian sources, taxpayers classified as RORs are subject to income tax on their worldwide income. RNORs also only pay tax on India-sourced income - with some exceptions. 

Individuals are considered tax residents of India if they:

• Spend more than 182 days in India in a given year

• Spend more than 60 days in India in a given year after having spent 4 entire years in the country

In order to determine whether an individual is ordinarily a resident in India, the following criteria are taken into account: 

• Individual was a non-resident for 9 out of 10 previous years: RNOR status

• Individual spent less than 730 days in India in the last 7 years: RNOR status

* Please note that the tax rates and bands given are valid for the tax year running from April 2022 till March 2023.

Tax withholding and reporting 

Income tax is calculated and withheld by the employer as part of the payroll process. The withheld amount is then paid to the Indian Government Treasury on a monthly basis. The due date is the 7th of the month following the respective pay period - except for tax payments relating to March which are due by 30 April. If applicable, profession tax (PT) must be withheld and remitted separately to the respective state tax authority. PT is either due once a month or twice a year and remittance dates vary between provinces.

Tax declarations must be filed with the central tax authority once every quarter (Form 24Q). The filing deadline is the end of the month following each quarter. The tax year runs from 1 April to 31 March of the following year. Individuals must submit an individual tax return (no joint filing) for each tax year which is due by 31 July (for the previous year). For this purpose, employers must provide each employee with an annual tax certificate (Form 16) which should be issued by 15 June.

Social security contributions

The Indian social security system mainly consists of one central fund, which is the Employee Provident Fund (EPF). Both employee and employer contribute to the EPF at a rate of 12%. 8.33% of the employer’s share are forwarded to the employee’s account with the Employee Pension Scheme (EPS) and 0.5% go to the Deposit Linked Insurance Scheme. 

It is worth noting that social security contributions are only mandatory for businesses with more than 20 employees. Employees must contribute to the EPF if they earn less than INR 15,000 per month. International workers which are subject to a Social Security Agreement (SSA) between India and their home country may be exempt from paying social contributions in India. 

Employers are responsible for deducting the employee share of the contributions from their wages/salary and submit them to the competent regional provident fund together with their own contributions. Payments must be made on a monthly basis and are due by the 15th of the month following the pay day. Before issuing the payment to the EPF, the employer needs to declare the withheld amounts online. This return is known as ECR. A separate form needs to be filled out for international workers. 

An additional Employee State Insurance (ESI) contribution is levied on employees and employers at rates of 1.75% and 4.75% respectively. Contributions are mandatory for employees earning less than INR 21,000 per month and for employers with more than 10 employees - may vary between states. ESI payments are usually due by the 15th of the following month. Depending on the province, employers and employees may have to contribute to the Labor Welfare Fund at a nominal rate fixed by the respective state.

* The 4% health and education cess is not included in this (see chapter on tax considerations).

Employees in India are entitled to various benefits. These include:

• Annual leave and public holidays: 15 days of paid annual leave; 3 national public holidays, but employers should provide their employees with 10 paid days off to account for regional holidays as well

• Maternity leave: 26 weeks during which the employee receives a statutory allowance equal to her usual wages

• Paternity leave: no legal regulations

• Parental leave: not applicable

• Sick leave: up to 12 days of paid sick leave, depending on state laws 

For more information on employee benefits and other employment requirements in India (including severance pay and termination procedures), check out our Global Hiring Guide.

India does not have a national minimum wage. Minimum wage rates payable to an employee depend on a number of factors, including provincial regulations, qualification and sector. Overtime pay is mandatory if the employee works more than 9 hours in a single day or more than 48 hours in one week. The pay rate for additional hours is usually 200% of the employee’s normal wages.

Employees who have to work on a public holiday are also entitled to double pay - and to an additional day off to compensate for the missed public holiday. Under the Payment of Bonus Act, employees are entitled to an annual bonus which is calculated as a percentage of their wages (minimum 8.33%). The bonus is to be paid out within 8 months after the end of the tax year it relates to. 

It is common to pay employees in India once a month. Payments to employees should be made in the local currency, Indian rupee (INR), and issued via bank transfer. At the end of each pay period, employees should receive a payslip.

In many cases, employers also issue a monthly tax calculation sheet which states the amount of income earned and the amount of paid taxes in relation to the expected annual earnings. Online payslips are legally accepted. All payroll records must be kept for at least 3 years.