Payroll and Tax in India: An Overview for Global Employers

When you think India, you may think curry, chai, and polytheism. While opportunities abound, it should come as no surprise that in a country of 1.4 billion people spread across 28 states and eight union territories that the tax laws can be complex.

One of the biggest challenges for global companies looking to source talent from India's massive, highly skilled workforce is understanding the ins and outs of local payroll.

Companies that hire talent in India must familiarize themselves with federal and state payroll and tax regulations to ensure timely and accurate payroll.

While this may sound overwhelming, with some preparation, global businesses can easily and compliantly hire and pay top Indian talent from anywhere, even without setting up a local entity.

Mandatory payroll taxes and contributions in India

Mandatory payroll taxes and contributions in India include Employees' State Insurance (ESI), the Employees' Provident Fund (EPF), the Employees' Pension Scheme (EPS), and the health and education cess.

Employers must also withhold and remit federal income taxes on their employees' gross pay, as well as a professional tax, depending on the state where their talent resides.

Employees' State Insurance

The Employees' State Insurance (ESI) program provides qualifying employees with medical insurance, upskill training, unemployment allowance, and income support for leave due to life events, including sickness, maternity, and on-the-job injury. ESI also provides financial support for dependents if an employee passes away.

Any employee who earns at least ₹21,000 per month and works for an organization that employs at least 10 to 20 employees, depending on the state, qualifies for ESI benefits. The employer contribution rate is 4.75%, while the employee tax rate is 1.75%.

Employees' Provident Fund

The Employees' Provident Fund (EPF) is an interest-bearing savings fund for employees in India that is only accessible under specific circumstances.

Employees can access their EPF funds to help with certain financial needs, like purchasing a house, repaying a loan, or pursuing higher education. Or they can wait to collect their benefits as an additional pension once they reach 58.

Individuals can withdraw their EPF funds if they have been unemployed for more than 60 days, and EPF benefits also pass on to an employee's dependents if they pass away.

Employees and employers each contribute 12% of the employee's gross monthly earnings to the EPF, with 8.33% of the employer's contribution going towards the Employees' Pension Scheme (EPS), an additional retirement benefits program for qualifying employees.

A unique feature of the EPF is that contributions to this fund go into an interest-bearing account, and the investment amount, returns generated, and redeemed amounts are all exempt from taxation.

Employees' Pension Scheme

As a function of the EPF, the EPS also supports retirement benefits for employees in India.

However, unlike the EPF, which provides a lump sum to employees under qualifying circumstances, the EPS provides individuals with a regular monthly pension once they reach retirement at 58. Individuals can only access their EPS benefits early as a lump sum withdrawal if they are at least 50 years old and have completed less than ten years of service.

Another key difference between EPS and EPF is that EPS benefits are only available to employees who earn under ₹15,000 per month. The EPS fund does not accrue interest, and monthly EPS payments are subject to taxation.

The employer contribution rate for EPS is 8.33% of employee gross earnings, capped at ₹1,250 monthly. Employees do not pay into the EPS fund.

Health and education cess

The Indian government mandates a 4% health and education cess to support the education and healthcare needs of rural communities and families across India living below the poverty line. Employers must withhold and remit this cess from their employees' gross monthly earnings.

This cess is a tax on employee income taxes, not monthly earnings. Consider the following example: an employee in India who pays 30% of their monthly earnings in income taxes must pay an additional 1.2% of their monthly earnings as a health and education cess (calculated as 4% of 30%), effectively raising their income tax rate from 30% to 31.2%.

Employee income taxes

Employers in India must deduct and remit income taxes from employee gross monthly earnings on their employees' behalf.

While payroll taxes help fund public insurance programs, like healthcare and maternity leave, income taxes fund more general public services, like road maintenance, the justice system, and fire services.

Employees in India pay income taxes to the federal government according to their tax bracket, or slab. The table below outlines India's federal income tax brackets and their rates:

Some employers in India must also withhold and remit a state-level professional tax from employee earnings, depending on the state where their employee resides.

All Indian states, except Arunachal Pradesh, Rajasthan, and Haryana, impose a professional tax on employees regardless of their profession. Depending on the state, this nominal tax ranges from ₹150 to ₹200 and is capped at ₹2,500 annually.

How is payroll tax calculated in India?

To calculate payroll taxes and contributions in India, first determine your employees' gross pay. Next, calculate employer and employee payroll tax liability for ESI, EPF, EPS, the health and education cess, and employee income taxes as percentages of employees' gross pay.

Remember that payroll taxes are a critical part of calculating total employee cost as you build a distributed workforce in India since these taxes and contributions amount to additional per-employee costs on top of base salaries.

Interested in hiring an employee in India? Use our employee cost calculator below to accurately calculate payroll contributions and annual costs for your talent in India.

Key elements of payroll in India

Global companies that hire employees in India or do business in the country must familiarize themselves with the key elements of local payroll to avoid fines, reputational damage, and other penalties when paying their distributed workforce across the country.

Key aspects of Indian payroll include but are not limited to the following:

• Fiscal year. India's financial year runs from April 1 to March 31 the following year.
• Payroll cycle. The payroll cycle in India is monthly, with employers paying wages on or after the 28th of each month.
• Minimum wage. India's federally recommended minimum wage is ₹178 per day, or roughly US$2.15. However, minimum wages vary drastically between industries, sectors, and occupations in each state, ranging from ₹176 per day for entry-level work in Nagaland to ₹816 per day for skilled labor in Delhi.
• 13th-month pay. Employees are entitled to an annual bonus of 8.33% of their standard monthly earnings if they have worked for their employer for at least 30 days in the past year and earn ₹21,000 or less. Employees who earn more than ₹21,000 per month or whose employer has fewer than 20 employees are subject to a bonus system at the employer's discretion.
• Overtime. Federal law states that employees who work more than nine hours per day or more than 48 hours per week are entitled to overtime pay at twice their regular pay rate. However, states can modify overtime limits for employees in certain industries.
• Termination. India requires employers to give 30 to 90 days' notice to employees in non-managerial or non-supervisory roles before termination. In some cases, like when an employer terminates over 100 employees in a manufacturing plant, the employer must first get government approval.
• Severance. Severance pay in India varies per state and industry. Generally, workmen, or employees who don't perform a managerial, administrative, or supervisory role, receive 15 days' severance pay for each year of service, whereas non-workmen aren't entitled to severance pay.
• Annual leave. While annual leave in India varies per state and industry, most employees receive 15 days' paid leave yearly. Most employees also get 10 extra days of casual leave yearly, depending on the state, which they can use for unexpected situations, like sudden illness.
• Parental leave. Mothers in India are entitled to 26 weeks of paid maternity leave if they have worked for at least 80 days in the year preceding the birth. Fathers working for the central government receive 15 days of paternity leave, but no regulations exist to govern paternity leave in the private sector.
• Sick leave. While sick leave entitlements vary between states, most employees receive about 10 days of paid annual sick leave, usually at 70% of the employee's regular pay rate. Individual employers may offer additional unpaid sick leave at their discretion.
• Holidays. Public holidays also vary between states; however, employees in most states receive about 10 paid annual holidays plus paid time off for voting in elections.

How to set up payroll in India

The payroll processes global companies use to pay distributed workforces in India may vary depending on individual circumstances. However, the following outline provides a general overview of what payroll procedures in the country entail:

1. Apply for TAN (48B). Apply for a TAN number from the Income Tax Department of India, either online or in person. Employers in India must obtain this 10-digit alphanumeric number to deduct and remit taxes from employee salaries.
2. Collect employee details. Collect employee details needed for filing taxes on your employees' behalf, like their name, date of birth, address, PAN number, UAN number, and declaration form 12B, among others.
3. Establish your payroll process and policies. Decide whether you'll manage payroll in-house or outsource it to a third party. Hire qualified, experienced HR staff, if needed, and remember to establish a payroll schedule according to India's monthly cycle.
4. Determine salaries and ensure compliance. Clarify salaries, group employees according to their work classification and salary, and determine applicable employer and employee tax liabilities for each employee.
5. Calculate deductions and pay employees. Calculate relevant taxes and contributions as percentages of employee gross earnings, make timely remittances and payments, and provide employees with a payslip detailing their net earnings and withholdings.

Payroll options for employers in India

When administering payroll to a distributed workforce in India, global employers generally take one of the following approaches: internal payroll administration, local payroll outsourcing, and global payroll outsourcing.

Each approach has its benefits and drawbacks, depending on individual circumstances and preferences.

Internal payroll

Global companies with established entities in India may choose to build an in-house finance team to run payroll internally for their Indian workforce.

If you choose this route, remember that internal payroll leaves you responsible for payroll compliance and exposes you to hefty payroll noncompliance penalties.

Employers who use internal payroll must familiarize themselves with the nuances of federal and state employment and payroll regulations and often obtain legal counsel to reduce risk exposure.

Local payroll outsourcing

Many global companies with Indian entities choose to outsource payroll to an in-country payroll vendor instead. A third-party vendor handles the entire payroll process on your behalf, from calculations and payments to reporting and filing.

However, what you gain in time and cost savings by outsourcing payroll to a local vendor, you often lose in terms of transparency and scalability.

Local payroll outsourcing offers limited visibility into your payroll processes, making it difficult to correct payroll errors and delays. In addition, if you plan to hire talent in multiple countries, you'll end up partnering with a different payroll vendor in each jurisdiction, further siloing your payroll information and decreasing visibility even more.

Global payroll outsourcing

Lastly, global companies with entities in India may outsource payroll to a global payroll partner instead. A global payroll partner is a third-party organization with expertise in international payroll and tax laws, including in India, that runs payroll for your international employees on your behalf.

Partnering with a global payroll partner comes with many benefits. A global payroll partner coordinates with local payroll vendors worldwide, streamlining payroll operations and data into a single platform to reduce errors, ensure compliance, and maintain transparency when paying a distributed workforce.

With international expertise, a global payroll provider allows global companies to keep payroll administration simple, accurate, and on budget while hiring and paying talent in several countries.

How to administer payroll in India

To directly hire and pay talent in India, global businesses have to first establish a legal entity in the country. However, by partnering with an employer of record (EOR), you can avoid this hassle altogether.

An EOR is a third-party entity that allows businesses to quickly and compliantly hire and pay talent internationally without first undergoing entity establishment.

With expertise in international employment and payroll laws, an EOR serves as the legal employer of your distributed workforce in India and beyond while handling payroll administration on your behalf-allowing you to continue owning your team's day-to-day responsibilities as you build a distributed team.

In addition to running compliant global payroll, an EOR relieves your HR team of onboarding, global benefits administration, talent relocation, and immigration responsibilities while providing ongoing HR support so you can build distributed teams or expand globally with ease.

Need payroll in Punjab?

With 22 governmentally recognized languages (and at least another 100 major languages) India is nothing if not a melting pot. There are vast opportunities (not the least of which is a massive customer base) but the sheer size and complexity of the place can be intimidating.

That's why it's smart to partner with a local expert like Pebl.

Need to hire talent? Our Employer of Record service allows you to hire in India (and 185+ countries worldwide) without setting up a separate legal entity. We take care of visa sponsorship and make sure your talent is legally able to work.

Once they're hired, our Global Payroll service handles the rest. Our country-specific experts make sure every rupee is paid, whether you set up shop in Gujarat or Bihar. With a single centralized payroll, your employees all over the world can access their information in near real-time.

Contact us to learn more.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided "as is," and no representations are made that the content is error-free.

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