India Payroll 2026: Cost, Compliance & Setup Guide

How do you run payroll in India as a US company in 2026? Payroll in India is the monthly process of calculating salaries, deducting statutory contributions like EPF, ESI, TDS, and professional tax, disbursing net pay, and filing compliance returns with government authorities.

The rules changed significantly this year. India's four Labor Codes replaced 29 older laws on November 21, 2025, and the Income Tax Act 2025 takes effect April 1, 2026.

This guide covers everything you need to manage compliant Indian payroll, from salary structures and tax calculations to deadlines and your options for managing payroll without a local entity.

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

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

It covers basic salary, allowances, and mandatory deductions including employees provident fund (EPF), employees state insurance (ESI), tax deducted at source (TDS), and professional tax. Employers must also maintain digital payroll records, generate pay slips, and submit returns to the income tax department, EPFO, and ESIC.

Two major legal frameworks govern payroll in India as of March 2026:

Four Labor Codes (effective November 21, 2025, replacing 29 older laws):

• Basic salary plus dearness allowance must be at least 50% of total CTC under the Code on Wages.
• Social security coverage now extends to gig workers, platform workers, and fixed-term employees.
• Employers must maintain fully digitized wage registers, attendance data, and statutory records.
• Full and final settlement of wages is required within two working days of an employee's exit.

Income Tax Act 2025 (effective April 1, 2026, replacing the 1961 Act):

• TDS calculation methods and reporting formats change under new rules.
• "Tax year" replaces the old "previous year" and "assessment year" terminology.
• Form 24Q and Form 16 must follow revised formats with stricter audit requirements.

For US companies, the key difference from American payroll is the CTC (Cost to Company) model. CTC includes every component of compensation: base salary, employer provident fund contributions, gratuity provisions, insurance, and all allowances. Think of it as total employer cost per employee.

India also has both central and state-level payroll laws. Professional tax rates, minimum wages, and leave entitlements all vary by state, which makes managing payroll across multiple Indian cities more complex than single-state operations.

For a broader view of payroll compliance and statutory obligations in India, see Payroll Compliance in India 2026: Everything You Must Know.

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

How does the payroll cycle work in India?[toc=Payroll Cycle in India]

India follows a monthly payroll cycle with six steps, from initial registration to compliance filing. Here's how each step works.

1. Register with statutory authorities

Get a PAN and TAN from the income tax department. Register with EPFO (mandatory for 20+ employees) and ESIC (for 10+ employees). Add state-level Shops and Establishments registration and professional tax registration wherever you operate.

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

2. Collect employee data

Gather each employee's PAN, Aadhaar number, bank details, UAN for provident fund, and tax regime declaration. Track attendance data and leave records monthly since these directly affect salary calculations.

3. Calculate gross salary

Add basic salary, house rent allowance, dearness allowance, special allowances, and any bonuses. Under the 2025 Labor Codes, basic pay plus DA must equal at least 50% of total CTC.

4. Apply statutory deductions

Deduct EPF at 12% of basic plus DA, ESI at 0.75% for employees earning under ₹21,000, professional tax by state, and TDS based on the employee's chosen tax regime. Subtract loan repayments or voluntary contributions to arrive at net pay.

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

5. Disburse salaries

Transfer net pay to employee bank accounts by the 7th of each month. This deadline is mandatory under the Code on Wages. Generate pay slips showing every earning, deduction, and employer contribution.

6. File compliance returns

Deposit TDS by the 7th. Remit EPF and ESI by the 15th. File quarterly returns in Form 24Q and issue annual Form 16 by June 15. Maintain digitized wage registers and statutory receipts as required under the new Labor Codes.

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

Companies operating across multiple states need to track different professional tax rates, minimum wages, and leave entitlements for each location.

Let's break down what goes into that salary calculation.

What are the key salary components in India payroll?[toc=Key Salary Components]

India uses a CTC (Cost to Company) model to structure employee compensation. Think of CTC as the total annual cost your company spends on one employee, including salary, benefits, and employer contributions.

Here's what makes up a typical Indian salary structure.

1. Basic Salary

The fixed core of every paycheck. Under the 2025 Labor Codes, basic salary plus dearness allowance must be at least 50% of CTC. Every statutory calculation, from provident fund to gratuity, runs off this number.

2. House Rent Allowance (HRA)

Helps employees cover housing costs. Partially tax-exempt: 50% of basic for metros like Mumbai and Delhi, 40% for other cities.

3. Dearness Allowance (DA)

Compensates for inflation, mostly in government roles. Most private sector companies merge this into special allowances instead.

4. Special Allowances

Flexible components like conveyance, meals, and medical that bridge basic salary and total CTC. Fully taxable unless documented as actual expense reimbursements.

5. Bonuses and Variable Pay

Employees earning up to ₹21,000/month (basic + DA) are eligible for statutory bonus at a minimum rate of 8.33%. For employees earning above ₹7,000/month, the bonus is calculated on ₹7,000 or the applicable minimum wage, whichever is higher.

6. Employer Contributions (not paid to employee directly)

CTC includes provident fund (12% of basic plus DA), gratuity (4.81% of basic), and group health insurance. Employees don't see these as cash, but they add 15-20% to your payroll budget.

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.

Use our free CTC to in-hand salary calculator to see the exact breakdown for any salary level.

Now let's look at the mandatory deductions that reduce gross salary to net pay.

What are the statutory payroll deductions and contributions in India?[toc=Statutory Deductions and Contributions]

Five statutory deductions reduce every employee's gross salary to net take-home pay in Indian payroll. Miss any of these tax deductions, and you face penalties from multiple government authorities.

1. Employees Provident Fund (EPF)

India's mandatory retirement savings. Both employee and employer contribute 12% of basic salary plus DA monthly. Applies to establishments with 20+ employees. Remit to EPFO by the 15th.

2. Employees State Insurance (ESI)

Government health insurance covering medical care, maternity, and disability for employees earning up to ₹21,000 per month. Employee pays 0.75%, employer pays 3.25% of gross wages. The Employees State Insurance Corporation now covers all of India under the 2025 Labor Codes. Due by the 15th monthly.

3. Tax Deducted at Source (TDS)

Income tax withheld from salary based on the employee's tax slab and chosen regime. Rates range from 5% to 30%, plus 4% health and education cess. Deposit with the income tax department by the 7th monthly, file quarterly via Form 24Q.

4. Professional Tax

State-level employment tax capped at ₹2,500/year. Rates differ by state, and some states like Delhi and Haryana don't charge it at all. Requires state-specific payroll configuration to avoid payroll errors.

5. Labor Welfare Fund (LWF)

Small state-specific contribution for worker welfare. Not levied everywhere. Where applicable, amounts are nominal, typically ₹20-₹40 per employee annually.

Together, these payroll taxes add 16-20% to basic salary in employer-side contributions, a significant additional cost for global companies building teams in India. Factor this into your budget before your first hire.

Now let's walk through how the actual payroll calculation works step by step.

How do you calculate payroll in India? Step-by-Step Process[toc=Steps to Calculate Payroll in India]

From our experience managing payroll for 300+ global companies, the calculation of payroll in India follows one formula:

Net Pay = Gross Salary minus Total Deductions.

Getting this right every month is what separates accurate payroll processes from costly payroll errors.

Here are the five steps.

Step 1: Gather employee details and attendance data.

Pull each employee's salary structure, tax declarations, leave records, and attendance data for the month. Missing or incorrect employee details are the top reason for manual errors in Indian payroll. Your payroll software or payroll management system should capture this in real-time access dashboards.

Step 2: Calculate gross salary.

Add basic salary, HRA, dearness allowance, special allowances, and any applicable bonuses. For a mid-level developer on ₹15 lakh CTC (~$16,500/year), monthly gross salary after removing employer contributions comes to approximately ₹1,07,500 (~$1,180).

Step 3: Apply statutory deductions.

Subtract EPF at 12% of basic plus DA, ESI at 0.75% if monthly wages are under ₹21,000, and professional tax based on the employee's state. These tax calculations are non-negotiable and must match current payroll regulations exactly.

Step 4: Calculate and deduct TDS.

Project the employee's annual taxable income based on their chosen tax regime, apply the applicable slab rates plus 4% health and education cess, then divide by 12 for the monthly TDS amount. This is where most global payroll teams need local payroll expertise because the old and new regime math differs significantly.

Step 5: Arrive at net salary.

Subtract any voluntary deductions like NPS contributions or loan repayments. The remaining amount is what employees receive in their bank accounts each month.

The 50% basic pay rule under the 2025 Labor Codes pushes more of the salary into the basic component. This means higher provident fund deductions, lower immediate take-home, but better long-term retirement benefits for employees. Factor this when structuring offers.

Want exact numbers for any salary level? Use our free CTC to in-hand salary calculator to compute net pay instantly after all statutory deductions.

For a visual breakdown of each payroll step, including statutory filings and deadlines, check out Understanding the Indian Payroll Process in 8 Steps.

The TDS step above depends entirely on which tax regime the employee chooses. Here's how the two options compare.

What is the difference between old and new tax regimes?[toc=Old vs. New Tax Regime Difference]

India offers two income tax structures. Every employee chooses one each financial year, and your payroll system must calculate TDS accordingly.

The new regime is the default. It has lower slab rates but allows almost no deductions. Income up to ₹12.75 lakh (~$14,000) is effectively tax-free for salaried employees after the ₹75,000 standard deduction and Section 87A rebate.

The old regime has higher rates but lets employees claim HRA, Section 80C (up to ₹1.5 lakh), home loan interest, and medical insurance deductions. It works better for employees with heavy tax-saving investments.

A 4% health and education cess applies on top under both regimes.

Most employees now pick the new regime for its simplicity. But your payroll software must support both since employees can switch yearly. HR teams collect regime declarations at the start of each financial year and adjust TDS accordingly.

The Income Tax Act 2025, effective April 1, 2026, keeps these slab rates unchanged but introduces revised Form 24Q, Form 16 formats, and new "tax year" terminology. Make sure your payroll system is updated before April.

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.

Beyond income tax, Indian statutory laws require employers to provide several mandatory benefits. Here's what they include.

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

Beyond monthly salary, Indian statutory laws require employers to provide these mandatory benefits. Non-compliance triggers penalties under relevant regulations.

1. Gratuity. Paid after five years of continuous service for permanent employees, or one year for fixed-term employees under the 2025 Labor Codes. Companies offering equity should also understand vesting periods and how they work for comprehensive compensation planning.
   Estimate amounts with our gratuity calculator.
2. Maternity leave. 26 weeks paid leave for the first two children. 12 weeks for the third child, adoptive mothers, and commissioning mothers. Parental leave for fathers isn't mandated nationally but most private sector companies offer 7-15 days.
3. Statutory bonus. 8.33% minimum annual bonus for eligible workers earning up to ₹21,000/month under the Payment of Bonus Act. Applies to establishments with 20+ employees.
4. Leave entitlements. Annual leave (15-18 days), sick leave (12 days), and public holidays (10-15 days) vary by state. Define these in employment contracts based on the employee's work location.
   Read more: Understanding Leave Policy Laws and Holidays in India
5. Full & final settlement. Full and final settlement of wages owed at separation is required within two working days. Other dues like gratuity and leave encashment must follow as soon as practicable.
   Read more: Severance Pay in India | Comprehensive Guide
6. Health insurance. ESI covers employees earning under ₹21,000/month. For higher earners, group health insurance isn't legally required but directly drives employee satisfaction and retention.

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 in India?[toc=Payroll Deadlines in India]

From our experience processing payroll for 300+ global companies, missing even one deadline triggers automatic penalties. Here's every date your payroll team needs to track.

Monthly

1. By the 7th. Deposit TDS with the income tax department. Pay employees their monthly salary. Late TDS attracts 1.5% monthly interest plus ₹200/day penalty for delayed tax filing.
2. By the 15th. Remit taxes for EPF and ESI contributions to EPFO and ESIC respectively. Deposit professional tax with state relevant authorities. Late EPF payment attracts 12% annual interest plus damages up to 25% of the amount due.
3. By month-end. Generate and distribute pay slips showing earnings, deductions, and net pay to all employees.

Quarterly

File Form 24Q (TDS return) by July 31, October 31, January 31, and May 31 for each quarter. Submit ESI returns within 15 days after the quarter ends.

Annually

Issue Form 16 (tax documents) to all employees by June 15. File EPF annual return by April 30. Complete LWF deposits per state-specific schedules.

On exit

Complete full and final settlement within two working days under the 2025 Labor Codes. Delays here are now a direct compliance violation.

One missed date can cost more than months of payroll service fees. That's exactly why statutory compliance in India demands either a dedicated local team or a reliable payroll partner. Let's look at how to stay compliant.

How do you stay compliant with India payroll laws?[toc=Payroll Compliance in India]

Payroll compliance in India requires employers to track central laws, state-specific payroll regulations, and frequent updates all at once. Here's what that looks like in practice.

• Enforce the 50% wage rule. Basic salary plus DA must be at least 50% of CTC, and non-compliant salary structures trigger retrospective PF dues during inspections.
• Digitize all records. The 2025 Labor Codes mandate digital records for employee data, attendance data, wages, pay slips, and statutory contributions, as manual registers are now rejected in audits.
• Track state-level variations. Minimum wage, professional tax, leave entitlements, and LWF rules differ across states, so employees in Mumbai, Bangalore, and Delhi mean three separate compliance frameworks.
• Update systems for Income Tax Act 2025. Effective April 1, 2026, your payroll software needs revised Form 24Q, Form 16 formats, and the new "tax year" terminology.
• Reconcile quarterly. Match TDS deposits against filings, verify EPF/ESI challans against actual deductions, and catch manual errors before they compound into penalties.
• Issue proper employment contracts. Every employee needs a written appointment letter specifying wages, leave policies, notice periods, and applicable statutory benefits.

Even with all this in place, most foreign companies find managing payroll in India overwhelming. Here's why.

What are the biggest payroll challenges for global companies?[toc=Payroll Challenges for Global Companies]

From our experience helping 300+ global companies pay employees in India, the same issues come up every time.

• Multi-state complexity. Professional tax, minimum wage, and leave entitlements differ by state, so employees across three cities means three compliance frameworks to manage.
• Worker misclassification. Indian courts side with workers, and classifying employees as contractors triggers retroactive EPF, ESI, gratuity, back wages, and heavy fines.
• Frequent regulatory changes. The 2025 Labor Codes and Income Tax Act 2025 landed in the same cycle, and without local payroll expertise, global companies miss critical updates.
• Incompatible payroll software. Western systems don't handle India's EPF splits, dual tax regimes, state-wise professional tax, or the 50% wage rule, creating manual errors and compliance gaps.
• Unexpected costs. The 50% basic pay rule increased PF and gratuity liabilities overnight for companies that kept basic salary low, catching many small businesses off guard.
• Data security and records. India now requires 7-10 years of digitized payroll records covering employee details, tax documents, and statutory filings.

These challenges are why most global companies choose a specialized partner over building international payroll in-house. Here are your options.

What are your options for managing payroll in India?[toc=India Payroll Options]

A foreign company can't legally run payroll in India without a local entity or a local partner. Here are your three paths.

1. Set up an entity and run payroll in-house. Full control, but 3-6 months to incorporate, high setup costs, and you own 100% of compliance across every state. Best for large-scale, long-term operations.
2. Set up an entity and outsource payroll. A payroll service provider handles processing and filings, but your company remains the legal employer and carries all compliance risk. Payroll outsourcing services typically cost $7-$30 per employee per month.
3. Use an Employer of Record (Recommended). The EOR (Employer of Record) becomes the legal employer, owns payroll compliance, manages employment contracts and benefits, and handles all statutory filings. No local entity needed. Onboard employees in days.

To understand how an Employer of Record simplifies compliance and payroll processing without a local entity, visit Employer of Record in India: A Complete Guide.

If you want a concise summary of EOR benefits tailored for international companies, see Benefits of Using an Employer of Record (EOR) in India.

For most global companies hiring their first 5-50 employees in India, an EOR is the fastest, safest path with built-in payroll expertise from day one.

Now let's look at what India payroll actually costs in dollars.

How much does payroll cost in India?[toc=Cost of Payroll in India]

Total employer cost in India goes beyond monthly salary. Statutory contributions alone add 15-20% on top of basic salary.

Employer-side statutory costs:

EPF: 12% of basic salary plus DA. ESI: 3.25% of gross wages (employees earning up to ₹21,000/month). Gratuity: 4.81% of basic salary. Statutory bonus: 8.33% minimum annually. Professional tax: up to ₹2,500/year (state-specific).

Including group health insurance and leave provisioning, total CTC runs 1.25 to 1.4 times the base salary. For competitive tech roles, budget 25-30% above gross salary.

Payroll management costs:

Outsourcing payroll services cost $7-$30 per employee per month, but you still need a local entity. EOR services range from $99 to $599 per employee per month, with Wisemonk EOR starting at $99.

Get your exact numbers with our free Employee Cost Calculator.

For a comparison between fully managed payroll services and traditional systems in India, check What Is Fully Managed Payroll in India?

Now let's look at how Wisemonk EOR simplifies all of this.

Simplify India Payroll with Wisemonk EOR[toc=Wisemonk 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:

• Automated Payroll: We calculate salaries, apply the right tax regime, generate pay slips, and deposit on time, every cycle.
• Full Compliance: EPFO, ESIC, TDS, Form 16, professional tax, and digital records, all filed automatically across states.
• Dedicated HRBP: Your team gets one point of contact for onboarding, contracts, benefits, leave, and employee queries.
• Recruitment: We source, screen, and onboard Indian talent end to end so you skip the hiring complexity.
• Contractor Payments: Compliant classification, TDS, and INR payments handled from $19/month.
• Managed Payroll: Have an entity? We run your payroll, filings, and HR operations compliantly.
• Equipment Management: We procure, ship, track, and recover devices for your India team from day one.
• GCC and Entity Setup: Company formation, registrations, and workforce planning when you're ready to scale.

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.