Payroll Tax in India: A Complete Guide for US Employers (2026)

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

Payroll tax in India refers to the mandatory tax deductions and statutory contributions that employers must calculate, withhold, and remit on behalf of their employees every month.

Unlike the US, India doesn't have a single "payroll tax" line item. Instead, the obligation splits into four distinct components: income tax withheld at source (called TDS), provident fund contributions, health insurance contributions, and a small state-level professional tax. Employers are responsible for both the employee-side deductions and their own employer contributions.

When global companies first start hiring in India, this is often the piece that catches them off guard. The compliance isn't complex once you understand the system, but it does require monthly action, statutory registrations, and accurate filings with multiple government agencies.

If you're looking at the full picture of paying employees in India, our complete guide on how to pay employees in India walks you through every step.

For a deeper look at how payroll works in India end to end, our guide on payroll in India covers everything from salary structures to compliance requirements.

What are the components of payroll tax in India?[toc=Components of Payroll Tax in India]

Indian payroll tax has four core components. Each has its own rate, applicability threshold, and remittance deadline.

Income Tax (TDS on Salary)

TDS (Tax Deducted at Source) is the Indian equivalent of income tax withholding. Employers must estimate each employee's total annual income at the start of the year, calculate the projected tax liability, divide it by 12, and deduct that amount from every monthly paycheck.

The new tax regime is the default from FY 2024-25 onward. Employees can opt into the old regime if they want to claim deductions like HRA, LTA, or 80C investments, but they must inform the employer at the start of the year.

New Tax Regime slabs (FY 2026-27):

• Up to ₹4,00,000: Nil
• ₹4,00,001 to ₹8,00,000: 5%
• ₹8,00,001 to ₹12,00,000: 10%
• ₹12,00,001 to ₹16,00,000: 15%
• ₹16,00,001 to ₹20,00,000: 20%
• ₹20,00,001 to ₹24,00,000: 25%
• Above ₹24,00,000: 30%

A 4% Health and Education Cess applies on top of the calculated tax. Employees earning up to ₹12,00,000 per year effectively pay zero tax due to the Section 87A rebate.

Employers also get a standard deduction of ₹75,000 for employees under the new regime, which reduces the taxable income before calculating TDS.

TDS must be deposited with the government by the 7th of the following month. Quarterly TDS returns (Form 24Q) must be filed, and annual Form 16s must be issued to employees.

Want to see exactly how much income tax your India employee will owe this year? Run the numbers with our free Income Tax Calculator India for 2025-2026.

Employees' Provident Fund (EPF)

EPF is India's mandatory retirement savings scheme. Think of it as India's equivalent of a 401(k), where both the employer and employee contribute every month.

How the contribution works:

• Both employer and employee contribute 12% of the employee's basic salary plus dearness allowance (DA).
• Out of the employer's 12%, a portion (8.33%, capped at ₹1,250/month) goes to the Employees' Pension Scheme (EPS).
• The remaining employer contribution goes into the employee's EPF account.
• Contributions are usually calculated on a wage ceiling of ₹15,000/month unless the employer and employee agree to contribute on the full salary.

EPF applies to all establishments with 20 or more employees. Once a company crosses that threshold, enrollment is mandatory for all employees earning up to ₹15,000/month in basic wages. Employers can voluntarily enroll higher earners too.

The employee's EPF balance earns tax-free interest (currently 8.25% per annum) and is accessible for specific needs like home purchase or medical emergencies. At retirement (age 58), the full corpus is paid out tax-free.

EPF contributions must be deposited by the 15th of the following month. Late deposits attract interest at 12% per annum and a penalty of up to ₹5,000 per day.

Employees' State Insurance (ESI)

ESI is India's social health insurance program. It covers eligible employees for medical treatment, maternity benefits, disability, and dependent benefits in case of the employee's death.

Applicability:

• Applies to establishments with 10 or more employees (20 in some states).
• Only employees earning up to ₹21,000 per month (₹25,000 for employees with disabilities) are covered.

Contribution rates:

• Employer: 3.25% of gross wages
• Employee: 0.75% of gross wages

ESI contributions must be deposited by the 15th of the following month. The employer is responsible for enrolling all eligible employees, generating ESI cards, and filing half-yearly returns.

One thing to note: if an employee gets a salary revision mid-year and crosses the ₹21,000 threshold, they remain covered until the end of that contribution period. ESI is assessed in April-September and October-March cycles.

Professional Tax (PT)

Professional Tax is a state-level tax on employment income. Not all Indian states levy it, but several major ones do, including Maharashtra, Karnataka, West Bengal, Andhra Pradesh, Telangana, and Tamil Nadu.

PT is a small fixed amount, typically between ₹150 and ₹200 per month depending on the salary slab and state. The maximum annual PT per employee is capped at ₹2,500 under the Constitution.

PT is deducted from the employee's salary, so it's technically an employee-side deduction. But the employer is responsible for deducting it correctly, registering with the state government, and remitting on time. Filing frequency varies by state, with some requiring monthly and others quarterly filings.

If your employees work in multiple states or your company operates across India, you'll need separate PT registrations in each applicable state.

EDLI (Employees' Deposit Linked Insurance)

EDLI is a life insurance scheme linked to the EPF. It provides a lump sum payment to the employee's nominee if the employee passes away during active service.

The employer contributes 0.5% of the employee's basic wages (capped at ₹15,000) toward EDLI. This is paid alongside the EPF contribution. Employees pay nothing toward EDLI.

The maximum EDLI benefit is ₹7,00,000.

What is the total employer payroll tax rate in India?[toc=Total Employer Payroll Tax rate in India]

The total employer-side payroll contribution in India comes to approximately 13.36% of gross salary, broken down as follows:

Note: Exact employer cost depends on the ratio of basic salary to total CTC, and whether the employee is ESI-eligible. For roles above ₹21,000/month gross, ESI doesn't apply.

In practice, most mid-to-senior Indian tech roles sit above the ESI threshold, so the effective employer payroll tax burden on those employees is closer to 12.5% (EPF + EDLI only).

How does India's CTC structure affect payroll tax?[toc=CTC Structure & Payroll Tax]

CTC (Cost to Company) is how Indian employers express total compensation. It includes base salary, employer PF contribution, gratuity accrual, health insurance premiums, and any other allowances.

The reason the CTC structure matters for payroll tax is that EPF is calculated on basic salary, not on the full CTC. Many companies set basic salary at 40-50% of CTC to manage EPF obligations. Under the new Wage Code (pending full implementation), basic salary must be at least 50% of total CTC, which would increase EPF and gratuity liabilities.

Here's a simplified example for a ₹15,00,000/year (~$18,000) CTC hire:

• Basic + DA: ₹6,00,000/year (~$7,200)
• Employer EPF: ₹72,000/year (~$865)
• Employer ESI: Not applicable (salary above threshold)
• EDLI: ~₹900/year (~$11)
• Gratuity accrual (for accounting purposes): ~₹28,846/year

This is why US companies are often surprised when they see the full cost breakdown. The sticker salary is not the total cost.

Curious what a specific salary actually costs you as an employer? Use our free India Salary Calculator to get a full CTC breakdown in seconds.

Use Wisemonk's free Employee Cost Calculator to get an accurate breakdown of what hiring an employee in India actually costs you at different salary levels.

Want to know what your India employee actually takes home after all deductions? We broke it down in detail in our guide on take-home pay in India.

What are the payroll tax filing deadlines in India?[toc=Payroll Tax Deadlines]

Missing a deadline in India isn't just an administrative inconvenience. Late payments attract interest and penalties, and repeated non-compliance can escalate to legal action.

One complexity worth flagging: TDS requires a separate calculation for each employee based on their chosen tax regime, investment declarations, and salary structure. It's not a flat percentage. Errors in TDS calculation are common and lead to mismatches when employees file their own returns.

What are the penalties for payroll tax non-compliance in India?[toc=Non-Compliance Penalties]

Indian payroll compliance is enforced by multiple agencies, including the Income Tax Department, EPFO (Employees' Provident Fund Organization), and ESIC. Each has its own penalty framework.

TDS penalties:

• Interest of 1% per month for failing to deduct TDS on time.
• Interest of 1.5% per month for deducting but failing to deposit TDS.
• Late filing of TDS returns attracts ₹200 per day.
• Incorrect TDS can trigger notices from the Income Tax Department, which employees then have to reconcile in their personal filings.

EPF penalties:

• Damages at 5% to 25% per annum on the unpaid amount depending on the delay period.
• Late deposit interest at 12% per annum.
• Persistent non-compliance can lead to prosecution under the Employees' Provident Funds Act.

ESI penalties:

• Interest at 12% per annum on delayed contributions.
• Criminal prosecution for willful non-payment under the ESI Act.

The practical implication for US companies hiring directly: without a dedicated Indian payroll function, non-compliance is almost inevitable in the early months, especially for TDS. Employee salary structures change, investment declarations come in late, and regime choices shift. This is exactly where mistakes happen.

Simplify Your India Payroll Tax Compliance with Wisemonk EOR[toc=Wisemonk EOR]

Wisemonk EOR is a leading India-specialist Employer of Record that becomes the legal employer of your India team, taking full ownership of every payroll tax obligation, from TDS calculations and EPF deposits to ESI filings and Professional Tax remittances.

Whether you need full EOR coverage, managed payroll for your existing India entity, or compliant contractor payments through our Agent of Record service, we handle the complete payroll tax stack for your India team. We have managed payroll for 300+ global companies and processed $20M+ in Indian payroll. Every employee gets a dedicated HR manager. Every filing hits its deadline. And at $99/employee/month, no India EOR comes close on price or depth of local expertise.

Talk to our India hiring experts today and get your first India hire on payroll within 48 hours.