Payroll India 2026: Complete Guide for Global Companies

How do you run payroll in India in 2026? India's payroll landscape changed significantly when new Labor Codes took effect in November 2025. The 50% basic pay rule now affects how you structure salaries and calculate statutory contributions.

This guide covers everything US companies need to know about managing compliant payroll in India, from salary structures to tax obligations and mandatory filings.

What is Payroll in India?[toc=India Payroll]

Payroll in India is the end-to-end process of calculating employee compensation, deducting taxes and statutory contributions, disbursing net salaries, and filing compliance reports with government authorities.

It covers basic salary, allowances, tax deducted at source, employees state insurance, professional tax, and all payroll regulations under the Income Tax Act and new Labor Codes.

Now let's look at how the actual payroll process works month to month.

How does payroll processing work in India?[toc=India Payroll Processing Steps]

India payroll follows a monthly cycle with six key steps from registration to compliance filing.

1. Registration

‍The first step is getting your business registered with tax authorities. You need a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the income tax department. You'll also register with Employees Provident Fund Organisation and Employees State Insurance Corporation if you have eligible employees.

Companies looking to hire employees in India need these registrations regardless of whether they establish an entity or use an EOR.

2. Employee Data Collection

‍Next, collect all employee information including PAN numbers, bank account details, Aadhaar numbers, tax declarations, and investment proofs. You'll also track attendance data and leave records every month to calculate accurate salaries.

3. Salary Calculation

‍Now calculate gross salary by adding basic salary, house rent allowance, dearness allowance, and special allowances. Remember, basic pay plus dearness allowance must be at least 50% of total salary under the new Labor Codes that took effect in November 2025.

4. Apply Deductions

‍After calculating gross pay, deduct provident fund at 12% of basic plus DA, employees state insurance at 0.75% if salary is under ₹21,000, professional tax, and income tax withholding. Subtract any loan repayments or advances to arrive at net pay.

Understanding payroll deductions and how they work ensures you're calculating these correctly.

5. Salary Disbursement

‍Transfer net salaries to employee bank accounts by the 7th of each month. This deadline is mandatory under the new wage regulations. Generate and distribute payslips showing all earnings and deductions so employees see the complete breakdown.

6. Compliance Filings

‍File monthly returns with EPFO and ESIC, deposit tax deducted at source with the income tax department by the 7th, and submit quarterly TDS returns in Form 24Q. Keep detailed payroll records for audits and statutory inspections.

Understanding India's labor laws and the new Labor Codes helps you stay ahead of compliance requirements.

Companies operating in multiple states need to track different professional tax rates and minimum wages for each location. Let's break down what goes into that salary calculation.

What are the key salary components and deductions in India payroll?[toc=Salary Components & Deductions]

India's salary structure includes earnings components that make up gross salary and statutory deductions that arrive at net pay.

Basic Salary

Basic salary must be at least 50% of total CTC when combined with dearness allowance under the new Labor Codes. It's fully taxable and forms the base for calculating provident fund, gratuity, and statutory benefits.

For detailed information on base salary in India and minimum wage requirements, our comprehensive guides explain regional variations and compliance essentials.

House Rent Allowance (HRA)

HRA helps employees cover housing costs and offers partial tax exemption when they submit rent receipts. The exemption is the lowest of actual HRA, rent paid minus 10% of basic, or 50% of basic for metros.

Dearness Allowance (DA)

DA compensates for inflation, common in government jobs, and is fully taxable. Private companies often merge this into special allowances.

Special Allowances and Other Components

Special allowances cover conveyance, meals, and work expenses. Leave Travel Allowance provides tax exemption for domestic travel with bills. Bonuses depend on performance or the Payment of Bonus Act for eligible employees.

Statutory Deductions

After calculating gross salary, employers deduct these mandatory contributions:

• Employees Provident Fund (EPF): 12% from both employee and employer on basic plus DA for retirement savings
• Employees State Insurance (ESI): 0.75% employee and 3.25% employer contribution for workers earning up to ₹21,000 monthly
• Tax Deducted at Source (TDS): Income tax withholding from 5% to 30% based on annual income and tax regime
• Professional Tax: State-level tax of ₹200-₹2,500 annually (varies by location; Delhi and Haryana don't charge it)

These components and deductions determine the employee's net take home pay deposited in their bank accounts each month.

For a deeper dive into pre-tax versus after-tax withholdings, read our guide on understanding post-tax deductions from payroll. Companies should also understand what is a paystub and paystub requirements in India for complete compliance.

Want to see exactly how these components affect take-home pay? Use our free CTC to in-hand salary calculator India to instantly compute net salary after all statutory deductions including EPF, ESI, TDS, and professional tax.

Let's look at the actual payroll calculation process next.

How to calculate payroll in India?[toc=Calculate Payroll]

As an Indian payroll expert with extensive experience advising global businesses, we can confirm that  calculating payroll in India follows a systematic approach from gross salary to net pay.

Here's how the calculation works step by step.

The basic formula is:

Net Pay = Gross Salary - Total Deductions

Step 1: Calculate Gross Salary

Add basic salary, house rent allowance, dearness allowance, special allowances, and any bonuses or incentives for that month. This gives you total earnings before deductions.

Step 2: Apply Statutory Deductions

Deduct 12% of basic plus DA for provident fund. If gross salary is under ₹21,000 monthly, deduct 0.75% for employees state insurance. Apply professional tax based on the employee's state (typically ₹200-₹250 monthly where applicable).

Step 3: Calculate Income Tax (TDS)

Use the employee's projected annual income, chosen tax regime, declared investments, and claimed exemptions. Divide the annual tax by 12 to get monthly TDS amount.

Step 4: Subtract Other Deductions

Include any loan repayments, salary advances, or voluntary contributions like additional provident fund or National Pension System.

Step 5: Arrive at Net Salary

Subtract all deductions from gross salary. This is the net take home pay credited to the employee's bank account.

Example: An employee with ₹50,000 basic and ₹30,000 HRA has ₹80,000 gross salary. After ₹6,000 PF (12% of ₹50,000), ₹200 PT, and ₹5,000 TDS, the net salary is ₹68,800. Under the 50% wage rule, this employee's basic must increase to at least ₹40,000, automatically raising PF deductions to ₹4,800 monthly.

Planning to hire employees in India? Use our employee cost calculator to estimate total employment costs including employer PF contributions, insurance, and all statutory benefits.

Understanding tax regimes helps employees optimize their take-home pay through proper tax planning.

What's the difference between old and new tax regimes?[toc=Old vs New Tax Regime]

India offers two tax regimes and employees choose one annually based on their financial situation. Union Budget 2026 announced no changes to tax slabs, so the existing rates continue for FY 2026-27.

The new tax regime became the default option in 2023 with lower tax rates but fewer deductions. Income up to ₹12 lakh is practically tax-free due to the ₹60,000 rebate. For salaried employees, the effective tax-free limit reaches ₹12.75 lakh after the ₹75,000 standard deduction.

The new regime allows only standard deduction of ₹75,000 and employer NPS contribution under Section 80CCD(2). No house rent allowance exemption, no Section 80C investments deduction, no leave travel allowance, and no home loan interest claims.

The old tax regime offers traditional tax rates but allows numerous deductions and exemptions. Employees can claim HRA exemption, Section 80C deductions up to ₹1.5 lakh for provident fund and life insurance, Section 80D for medical insurance premiums up to ₹25,000-₹1,00,000, home loan interest deduction up to ₹2 lakh, leave travel allowance, and professional tax paid.

Which regime works better?

Employees earning under ₹10 lakh annually typically benefit from the new regime's lower rates and higher rebate. Higher earners with house rent expenses, home loans, or substantial Section 80C investments often pay less tax under the old regime.

Employees without business income can switch between regimes every year when filing income tax returns. Those with business income can switch only once in their lifetime. Your payroll team collects employee declarations at the start of each financial year and calculates tax deducted at source based on their chosen regime.

Understanding these tax calculations helps determine accurate statutory deductions each month. For companies managing both US and India payroll, understanding differences like W9 vs W2 forms, W-4 form purposes, and 1099-NEC filing for contractors ensures global tax compliance.

US employers comparing India's tax structure to domestic requirements should review our employer payroll taxes guide and understanding payroll tax definitions.

What statutory benefits must employers provide?[toc=Statutory Benefits]

Indian law mandates several employee benefits that employers must include in payroll planning and cost calculations.

1. Gratuity

Employees completing five years get 15 days' wages for every completed year of service. The new Labor Codes changed this for fixed-term employees who now qualify after just one year instead of five, significantly increasing employer liability. Companies offering equity should also understand vesting periods and how they work for comprehensive compensation planning.

Calculate gratuity obligations instantly: Our gratuity calculator computes the exact amount employees are entitled to based on years of service and last drawn salary, helping you budget for this long-term liability accurately.

2. Maternity Benefit

Female employees get 26 weeks of fully paid leave for their first two children and 12 weeks for subsequent births. Companies with 50+ employees must provide crèche facilities and allow nursing breaks during work hours.

3. Statutory Bonus

Establishments with 20+ workers must pay minimum 8.33% annual bonus to employees earning up to ₹21,000 monthly under the Payment of Bonus Act. This applies to factories and other eligible establishments.

4. Leave Entitlements

Employees typically receive 12-15 days earned leave, 15-20 public holidays, and 12 days sick leave annually. Leave policies vary by state under Shops and Establishments Acts, so track state-specific requirements.

Read more: Understanding Leave Policy Laws and Holidays in India

5. Severance Pay

Employees terminated due to retrenchment or redundancy receive 15 days' wages per completed year of service. This compensation is mandatory for layoffs, dismissals, or company closures.

Read more: Severance Pay in India | Comprehensive Guide

Additional 2026 Benefits

Women can now work night shifts with consent and mandatory safety measures. All employees over 40 years get free annual health checkups. Gig and platform workers receive social security coverage for the first time.

For comprehensive coverage of employee benefits in India including statutory and voluntary benefits, our complete guide explains costs and requirements.

Meeting these filing deadlines is critical to avoid penalties and maintain compliance.

What are the critical payroll deadlines?[toc=Deadlines]

Missing payroll deadlines in 2026 triggers immediate penalties and compliance issues with tax authorities. Here are the dates you cannot miss.

Understanding how to pay employees in India includes managing these critical payment windows, and companies managing international employee payments need systems that handle multi-country deadlines.

Monthly Deadlines

By the 7th of each month: Deposit TDS with the income tax department. Pay salaries to employees (mandatory under new wage regulations). Late TDS payment attracts 1.5% monthly interest plus ₹200 per day penalty.

By the 15th of each month: Remit EPF contributions to EPFO (by 25th for establishments with 20+ employees). Pay ESI contributions to ESIC. Deposit professional tax with state authorities in applicable states. Late EPF attracts 12% annual interest plus damages up to 25%.

By month-end: Generate and distribute payslips to all employees showing earnings, deductions, and net pay breakdown.

Quarterly Deadlines

TDS Returns (Form 24Q): File by July 31 (Q1), October 31 (Q2), January 31 (Q3), and May 31 (Q4). This reconciles all tax deducted at source with actual deposits made.

ESI Returns (Form 6): Submit within 15 days after quarter ends, reporting total wages paid and contributions made for that period.

Annual Deadlines

Form 16 to employees: Issue by June 15 following the financial year. This TDS certificate shows total income and tax deductions employees need for tax filing.

Annual EPF Return: File by April 30 each year covering the previous financial year's contributions and employee pension scheme details.

Penalty Impact:

The Income Tax Department charges ₹200 daily for late Form 24Q filing. EPFO imposes 12% interest on delayed contributions plus potential damages. Companies with repeat violations face fines up to ₹50,000 and get listed publicly as defaulting employers.

Staying compliant requires more than just meeting deadlines, you need proper systems and processes in place.

How do you maintain payroll compliance in India?[toc=Payroll Compliance in India]

Payroll compliance in India requires proper registration, accurate calculations, timely filings, and complete documentation to avoid costly penalties.

1. Register with all statutory authorities: Get PAN and TAN from the income tax department, EPF registration from EPFO, ESI registration from ESIC, and professional tax registration in applicable states where you operate.
2. Verify the 50% wage rule compliance: Every salary structure must have basic pay plus dearness allowance equal to at least 50% of CTC under the new Labor Codes that took effect in November 2025.
3. Maintain centralized employee data: Store payslips, tax declarations, investment proofs, attendance data, statutory payment receipts, and compliance filings digitally for easy access during audits and inspections.
4. Process payments before deadlines: Pay salaries and deposit TDS by the 5th instead of the 7th to avoid technical failures. Submit EPF and ESI by the 13th to create buffer time for any issues.
5. Track state-specific regulations: Professional tax rates, minimum wages, and labor laws vary across states, so configure your payroll system for multi-state compliance if you operate in multiple locations.
6. Use automated payroll software: 67% of Indian companies now use payroll software to calculate statutory deductions, track filing deadlines, and update regulations automatically, reducing manual errors that trigger penalties.
   Explore global employment platforms for comprehensive solutions.
7. Conduct quarterly audits: Review payroll calculations, reconcile statutory payments with government records, and verify employee details match across all systems to catch errors before authorities do.

Despite strong systems, managing India payroll comes with persistent challenges that even experienced companies face.

What are the common payroll challenges in India?[toc=India Payroll Challenges]

From our experience managing payroll for 300+ companies in India, we've seen businesses consistently struggle with these compliance and operational challenges.

1. Multi-state complexity creates calculation errors. Professional tax rates differ across states, minimum wages vary significantly, and leave policies change by location. Avoid this by using payroll software configured for state-specific calculations and maintaining separate compliance calendars for each operating location.
2. Frequent regulatory changes disrupt payroll cycles. Income tax slabs update annually, EPF wage ceilings change mid-year, and the 50% wage rule forced complete salary restructuring in November 2025. Stay current by subscribing to government notifications and using automated systems that update tax laws automatically.
3. Contractor misclassification triggers penalties. Incorrectly classifying full-time employees as independent contractors leads to back pay of provident fund, gratuity liabilities, and fines up to ₹50,000. Prevent this by evaluating actual working relationships not contract labels and conducting annual classification audits.
   Learn the differences in our independent contractor vs EOR employee guide and understand who qualifies as an independent contractor under Indian law.
4. Manual record-keeping causes audit failures. Inadequate documentation of payslips, tax proofs, and employee declarations creates issues during statutory inspections. Solve this by maintaining centralized cloud-based records and generating audit trails for every payroll transaction.
5. Salary restructuring increases costs unexpectedly. The 50% basic pay rule increased PF contributions and gratuity liabilities for companies that kept basic at 30-40% previously. Budget accurately by calculating total employer costs including statutory contributions and provisioning gratuity liabilities monthly.

These challenges explain why many US companies choose specialized partners like Wisemonk to handle India payroll instead of building in-house systems from scratch.

Our what is an Employer of Record guide explain how this model works.

Simplify India Payroll with Wisemonk EOR[toc=Wisemnk EOR]

Wisemonk is a leading Employer of Record (EOR) trusted by 300+ international companies to hire, pay, and manage employees in India without establishing a local entity. We handle complete payroll processing including salary calculations under the 50% wage rule, statutory deductions, tax withholdings, compliance filings, and timely salary disbursements.

Managing $20M+ in annual payroll for 2,000+ employees across India, we've built systems that adapt to regulatory changes automatically and ensure zero compliance gaps.

Why US companies choose Wisemonk for India payroll:

• End-to-End Recruitment: We handle candidate screening, technical assessments, interview coordination, and final selection so you access top Indian talent without the hiring complexity.
• Automated Payroll Processing: Our platform calculates salaries under the 50% wage rule, applies correct tax regimes, generates payslips, and ensures deposits by the 7th without manual intervention.
• Dedicated HR Support: We manage onboarding, document collection, background verification, employment contracts, and policy setup while handling employee queries and compliance updates.
• Contractor Management: We ensure proper contractor classification, handle TDS calculations, issue Form 16A, and provide dashboards to track agreements and payment schedules.
• Complete Compliance Management: We handle statutory registrations, monthly EPFO and ESIC filings, quarterly TDS returns, annual Form 16 issuance, and audit preparation automatically.
• Equipment & Asset Management: We lease, track, and recover laptops and work equipment for your India teams so everyone stays productive from day one.

Client review/feedback:

“I love their payroll feature, which allows me to pay my workforce easily without any errors. In just a few seconds, I can see the invoices generated for all of the payouts”

- Mithun V.
Mid-Market
Read the full review on G2 →

“Wisemonk has successfully hired high-quality candidates, which has impressed the client. The team is responsive to the client's requests and changes via Slack. The team also collaborates through a hiring tracker in Google Sheets. Wisemonk communicates via email and virtual meetings.”

- Dan Sampson
VP of Engineering, Cobu
Read the full review on Clutch →

Wisemonk provides a one-stop solution for companies looking to build and manage teams in India. Whether you're a startup or an established company, Wisemonk simplifies the complexities of Indian Payroll management, allowing you to focus on growth and innovation.

For comprehensive guidance on choosing the right EOR provider, our selection framework helps you evaluate options. We also offer insights on staffing agencies in India and hiring solutions for different business needs.

Talk to our India payroll experts to see how Wisemonk can simplify your India operations.