Your guide to India payroll

Complying with local India payroll laws is essential to attracting and retaining top talent in India. 

Partnering with an Employer of Record (EOR) in India may assist you with managing onboarding, payroll, taxes, and compliance without setting up a local entity.

Here’s everything you need to know to pay employees in India.

India payroll: 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 to be familiar with.

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, 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 178 per day (around $2.10). 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. 

5) 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: Contributions and deductions

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

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

Annual salary	Tax rate
Income up to INR 250,000	0%
INR 250,001 to INR 5,00,000	5%
INR 500,001 to INR 1,000,000	20%
Above INR 1,000,000	30%

New Regime

Annual salary	Tax Rate
Up to 3,00,000	Nil
3,00,001 – 6,00,000	5%
6,00,001 – 9,00,000	10%
9,00,001 – 12,00,000	15%
12,00,001 – 15,00,000	20%
Above 15,00,000	30%

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.

India payroll compliance best practices

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 to pay employees in India

If you’re hiring in India, there are three main ways to legally pay your team:

• 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.

• Using international payment platforms or doing a wire transfer.

• Use an Employer of Record (EOR): An EOR acts as the legal employer on your behalf, handling payroll, taxes, benefits, and compliance, so you can focus on building your team without needing to set up a local entity.

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

FAQs

1) How is payroll calculated in India?

Payroll in India is typically calculated using the formula: Net Pay = Gross Income – Gross Deductions

The result is the amount actually paid to the employee each month.

2) What is the payroll period in India?

The standard payroll period in India is monthly, typically paid monthly; the date varies by employer. A standard workweek in India is 48 hours, spread over 5 or 6 days, depending on the company.

3) What is the Indian minimum wage?

India’s minimum wage varies by state, industry, and skill level, but the national floor level is INR 178 per day. Overtime is typically paid at double the regular hourly rate for work beyond 48 hours per week.