Payroll in India: Employer costs, taxes & more in 2026

Managing payroll in India is not just about the disbursement of salaries. Employers have to handle taxes, social security contributions like 12% EPF, ESI (3.25% employer contribution and 0.75% employee contribution), and additional costs like maternity pay, bonuses, severance etc. These directly impact the employer costs as well as the employees’ take-home pay. 

An Employer of Record is a third-party entity that acts as a company’s legal employer and manages payroll, taxes, and helps the business navigate compliance. It simplifies payroll processing by making sure that all payments are being made correctly after all statutory deductions, adherence to regulations, and accurate currency conversions, all without requiring a local entity. 

For businesses operating and hiring globally, cross-border payments increase the challenge. 

An Employer of Record (EOR) can help handle employee onboarding along with salary disbursements by taking care of the statutory deductions and adhering to the local employment laws, thereby facilitating faster, simpler, and more accurate payroll management. 

Read on to know how an EOR like Payoneer Workforce Management can help with payroll management in the case of international hiring.

Ready to hire and pay employees in India without a local entity? Book a demo today!

India payroll: What are the wages and other payments?

Managing payroll in India requires an understanding of local wage structures, mandatory benefits, and statutory payment schedules.

Here are some key India payroll elements that you should be familiar with in order to manage employee payroll in a compliant manner.

1) Payroll cycle

In India, payroll is typically processed monthly, with employees receiving their payments at the end of each month. 

Employers are expected to provide detailed payslips outlining basic pay, allowances, deductions, and net pay. 

It’s essential to maintain accurate records, as payroll data is subject to regular audits by Indian authorities.

2) 13th-month salary payments

In India, although not mandatory, the 13th-month salary is called an annual bonus under the Payment of Bonus Act. It applies only to eligible employees (with ≥30 days of service and company profitability conditions).

3) Minimum wage

India does not have a country-wide minimum wage. Instead, minimum wage rates vary by state, industry, occupation, and skill level.

That said, India has set a “national floor level minimum wage” of INR 14,637 per month. In practice, actual rates can be significantly higher, especially in major urban centers or for skilled work. 

Employees who work more than their scheduled hours are entitled to overtime pay at twice their ordinary rate. 

4) Sick pay

Most full-time employees are entitled to at least 7 days of paid sick leave per year.

5) Maternity pay

Under the Maternity Benefit Act, 1961, female employees in India are entitled to 100% of their regular salary during maternity leave. There is no government reimbursement. The employer bears the full cost of maternity pay.

For their first 2 children, women are entitled to 26 weeks of paid maternity leave, and 12 weeks for any subsequent children. In the event of a miscarriage, women are eligible for 6 weeks of paid leave. 

Adoptive mothers are also entitled to 12 weeks of paid leave.

To qualify for maternity benefits, an employee must have worked for their employer for at least 80 days in the 12 months preceding their expected delivery date. 

6) Severance packages

In India, severance pay is required when an employee is terminated due to reasons other than misconduct. 

Employees with 5 or more years of continuous service are entitled to 15 days of wages for each year they have been with the company.

India payroll: What are the contributions and deductions?

Payroll in India also involves withholding income tax from employees’ salaries, along with other social security contributions.

Listed below are some of the mandatory deductions that are made on an employee’s salary in India:

1) Income tax (TDS on salary)

Employers in India are legally required to withhold income tax at source (TDS) from employees’ salaries and send it to the tax authorities. The amount depends on the employee’s total income and the income tax slabs set by the government each financial year. 

India offers two tax regimes: old and new. The slabs are listed below. Employees who do not opt for the old regime will be taxed under the new regime by default, where rates range from 0% up to ₹300,000 and gradually increase to 30% for income above ₹1,500,000.

The current income tax slabs for individual taxpayers are as follows:

Old Regime:

New Regime:

2) Employees’ State Insurance (ESI)

Employee’s State Insurance (ESI) provides qualifying employees with medical insurance, upskill training, unemployment allowance, and income support for leave. Registration with ESIC is mandatory for eligible employers.

Any employee earning up to INR 21,000 per month, who is employed at a company with at least 10 to 20 employees, qualifies for ESI benefits. Both employers and employees are required to contribute:

• Employers contribute 3.25%
• Employees contribute 0.75%

3) Employees’ Provident Fund (EPF)

The Employees’ Provident Fund (EPF) is a long-term, interest-bearing savings fund for employees in India. It’s designed to help employees build financial security and is accessible only under specific conditions, such as retirement, resignation, or unemployment lasting more than 2 months. 

In some cases, it can be approved to be used for expenses like medical emergencies, higher education, or purchasing a home.

Employers must contribute 12% of an employee’s basic monthly salary and dearness allowance, capped at INR 15,000, to the EPF. Of that amount:

• 8.33% is directed to the Employees’ Pension Scheme (EPS) (covered below)
• 3.67% goes into the employee’s EPF account

Employees also contribute 12% of their basic salary and DA to EPF.

4) Employees’ Pension Scheme (EPS)

The Employees’ Pension Scheme (EPS) is India’s primary retirement benefits program, providing monthly payments to eligible employees once they reach the age of 58.

EPS is available only to employees earning INR 15,000 or less per month at the time of joining the scheme. Unlike EPF, employees do not contribute directly to EPS.

Employers pay 8.33% into EPS (as part of the EFP fund). 

5) Health and education cess

The Indian government mandates a 4% health and education cess on total income tax amount to support education and healthcare in rural communities and people in India living below the poverty line.

Unlike other payroll deductions, the cess is not applied directly to an employee’s earnings, but rather to the amount of income tax they owe; it’s a tax on the income tax. Employers are responsible for withholding this cess from regular monthly earnings.

What is the employee salary structure in India?

Let us understand the employee salary structure in India with an example. 

Let us say that an employee earns an annual package of 6,00,000 INR. The table below shows the breakdown of the employee’s monthly salary with the help of Payoneer Workforce Management’s employee cost calculator. 

Amount paid by the employer: 

Amount the employee receives: 

How do employee payments work in India with and without an EOR in India?

Payroll management and payment disbursement are more than just transferring salaries. Employers have to carefully manage taxes, handle the statutory deductions, and take the currency considerations into account. 

All these factors differ significantly depending on whether an employer is paying directly or through an EOR. The table below sheds light on the difference: 

What are some of the best practices of India’s payroll compliance?

In India, payroll regulations are complex, and staying current is crucial. Here are a few best practices companies should follow to keep their India payroll compliant:

• Regularly monitor changes to income tax rates, social security contributions, and state-specific labor laws that may impact payroll.
• Audit your payroll processes and records to help identify and correct errors before they become serious issues.
• Provide your team with ongoing payroll training. 

Or, you can use a global payroll provider or an Employer of Record (EOR). Partnering with an EOR like Payoneer Workforce Management helps simplify the process with compliance support.

How do I pay employees in India?

Businesses hiring employees in India can pay employees in three main ways:

• Set up a local entity: While this is a valid option for larger businesses with long-term plans, it’s often costly, time-consuming, and complex, especially for companies new to the region. Not only that, but cross-border payments can also create challenges related to payroll compliance. 
• Use international payment platforms or do a wire transfer.
• Use an Employer of Record (EOR): An EOR is a faster alternative that acts as a legal employer. It helps in onboarding, contracts, payroll processing, tax deductions, statutory contributions, and salary disbursements while maintaining alignment with Indian labor laws. This helps reduce administrative burden, reduces the risk of non-compliance, and facilitates timely payment disbursement. 

One way to pay employees in India and simplify compliance support is to partner with an Employer of Record such as Payoneer Workforce Management. Book a demo today!

Frequently asked questions (FAQs)

About the author

Linh Pham

Lead, Global HR Operations

Linh Pham serves as the Lead for Global HR Operations at Payoneer Workforce Management (formerly Skuad) and is based in Ho Chi Minh City, Vietnam. She brings over a decade of HR experience across the Asia-Pacific region, with expertise in international talent acquisition, employee relations, and employment compliance. Linh oversees HR operations in more than 50 countries, supporting efficient onboarding, payroll processes, and alignment with local regulatory requirements for distributed teams.