Pay Employees in India: What Global Employers Need to Know

Expanding into India offers global businesses access to a vast talent pool, but paying employees in India involves more than just running payroll. In our experience guiding international companies, we’ve seen that navigating India’s complex regulations and local labor practices can be a real challenge. Understanding statutory requirements and compliance is essential for smooth operations and a positive employee experience. This article is designed to demystify about paying employees in India, providing practical insights and up-to-date information for global businesses looking to hire and manage teams here.

What is the Indian salary structure?[toc=Indian Salary Structure]

In our experience guiding numerous global organizations through the process of hiring in India, we've found that understanding the local salary structure is often the first—and most crucial—step to success. The Indian compensation system is unique and can seem complex, especially for foreign employers. It's essential to grasp the concept of Cost to Company (CTC) and the various components that make up an employee’s compensation package in India. For example, contributions to statutory schemes like the Employees' Provident Fund (EPF) are calculated as a percentage of an employee's basic salary, ensuring social security benefits for the workforce

Cost to Company (CTC) Concept

Based on our extensive research and hands-on experience supporting international companies, we can attest that the CTC model is central to compensation planning in India. CTC represents the total annual amount an employer spends on an employee, encompassing all direct and indirect expenses. Here’s why the CTC concept is so important:

• It provides a comprehensive view of an employee's total compensation package.
• It helps employers budget and plan for workforce expenses more accurately.
• It allows for easier comparison of job offers across different companies.

However, having guided several foreign employers, we have seen that the actual take-home salary is often significantly lower than the CTC figure, as it includes multiple components and benefits not paid directly to the employee.

Curious about how your CTC translates to in-hand pay? Try our Salary Breakdown Calculator for a quick, personalized estimate!

Breakdown of Typical Salary Components

Having analyzed hundreds of Indian employee's salary structures, we can say with confidence that compensation packages here are made up of several distinct components, each serving a specific purpose and often offering tax benefits. The main components include:

Basic Salary

The basic salary forms the foundation of an employee’s compensation and typically constitutes 40–50% of the total salary. In our experience, this is the most critical component, as it is used to calculate various allowances and statutory benefits.

• Primary component for calculating other allowances and benefits
• Subject to income tax as per the applicable tax slab
• Used as the base for calculating retirement benefits like Provident Fund (PF) and Gratuity
• Employer contributions to EPF and other statutory benefits are based on the basic salary

House Rent Allowance (HRA)

HRA is designed to help employees meet housing expenses. We have observed that HRA usually ranges from 40–50% of the basic salary and is a key tax-saving component for many employees.

• Tax-exempt up to certain limits, depending on the city of residence and actual rent paid
• Employees must provide rent receipts to claim tax benefits

Conveyance Allowance

This allowance covers travel expenses from home to work. Currently, it is categorized under 'Standard Deductions' with a cap of ₹50,000 per annum (about $600), helping reduce the employee’s taxable income.

‍Leave Travel Allowance (LTA)

LTA is offered to cover domestic travel expenses for employees and their families. It is tax-exempt for up to two journeys in a block of four calendar years, but only for actual travel costs.

‍Medical Allowance

This component is meant to cover medical expenses and is tax-free up to ₹15,000 per annum (about $180), provided as reimbursement for actual medical expenses.

‍Special Allowance

A flexible component used to balance the CTC after accounting for other elements. It is usually fully taxable.

‍Flexible Benefits Plan

In recent years, we have helped several companies implement Flexible Benefits Plans, which allow employees to customize their compensation package based on individual needs and preferences. This may include:

• Health insurance
• Life insurance
• Employee Stock Options (ESOPs)
• Additional retirement benefits
• Meal vouchers
• Gadget allowances
• Education allowances

These benefits are often tax-efficient and can be tailored to suit individual employee needs.

‍Performance Bonus or Variable Pay

This is a performance-linked component based on individual, team, or company performance. In some roles, it can be a significant portion of the total compensation and is taxed as per the regular income tax slab.

Having guided numerous foreign employers through the process of building competitive and compliant salary structures, we can confidently say that understanding these components is crucial for structuring a tax-efficient and attractive compensation package in India.

The exact composition can vary based on company policies, industry standards, and individual negotiations.

What are the mandatory deductions and contributions in the Indian payroll system?[toc=Mandatory Deductions]

Based on our extensive experience working with international employers entering the Indian market, we have seen that understanding mandatory deductions is critical for compliance and smooth payroll operations. Here is the updated list of key statutory deductions and contributions in India for 2025, along with practical tips and the latest figures:

Employees' Provident Fund (EPF)

Having guided numerous companies through EPF compliance, we can attest to its importance as a pillar of India’s social security landscape. The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, and managed by the Employees’ Provident Fund Organisation (EPFO). It applies to establishments with 20 or more employees.

• Contribution Rate: Both employer and employee contribute 12% of the employee’s basic salary plus dearness allowance (DA).
• Salary Threshold: Mandatory for employees with a basic salary plus DA up to ₹15,000 per month; optional above this threshold with approval.
• Interest Rate: For FY 2024-25, the government has set the EPF interest rate at 8.25%, unchanged from the previous year.
• Tax Benefits: Contributions are eligible for deductions under Section 80C of the Income Tax Act.
• Practical Note: The employer’s contribution is divided, with 8.33% going to the Employees’ Pension Scheme (EPS) and 3.67% to the EPF account for eligible salaries.

In our experience, timely registration with the EPFO and accurate monthly contributions are essential to avoid penalties and ensure employee trust.

Employee State Insurance (ESI)

We have observed that ESI compliance is a common challenge for new market entrants, but it is vital for worker welfare and legal compliance. The Employees’ State Insurance (ESI) scheme is a comprehensive social security program administered by the Employees' State Insurance Corporation (ESIC).

• Applicability: Mandatory for establishments with 10 or more employees, covering those earning up to ₹21,000 per month (₹25,000 for disabled employees).
• Contribution Rates: Employer contributes 3.25% and employee 0.75% of wages.
• Coverage: Medical, sickness, maternity, and disability benefits for employees and their dependents.

We recommend employers register promptly with ESIC and maintain regular contributions, as non-compliance can lead to significant legal and financial consequences.

Professional Tax

Professional Tax is a state-level tax imposed on salaried individuals in most Indian states. The rates and slabs vary by state, with a maximum annual limit of ₹2,500.

• Employer Responsibility: Employers must deduct professional tax from salaries and remit it to the state government.
• Example (Maharashtra):
  • Up to ₹7,500/month: Nil
  • ₹7,501–₹10,000/month: ₹175/month
  • Above ₹10,000/month: ₹200/month (maximum)
• Note: Some states, like Delhi, do not currently levy professional tax.

Efficient payroll operations are crucial for managing professional tax and ensuring compliance across multiple states.

‍Income Tax

‍‍Income tax in India is a progressive direct tax imposed on individuals' earnings. Taxpayers can choose between two tax regimes: the Old and the New. The new tax regime has seven different levels of tax rates. If you earn up to INR 4,00,000, you don’t have to pay any tax. For every additional INR 4,00,000 you earn, the tax rate goes up by 5% for the next slab, and so on.

‍‍Surcharge for New Tax Regime:

• ‍10% if income exceeds INR 50 lakhs but not INR 1 crore
• 15% if income exceeds INR 1 crore but not INR 2 crore
• 25% if income exceeds INR 2 crore
  (Note: The highest surcharge rate under the new regime is capped at 25%.)

In comparison, the old tax regime offers 4 levels of tax rates with a 0% tax rate for income of up to INR 2,50,000. It allows various deductions and exemptions. The common deductions include Section 80C (investments), HRA, LTA, and health insurance premiums. This is suitable for those with significant eligible investments and expenses

Surcharge for Old Tax Regime:

• 10% if income exceeds INR 50 lakhs but not INR 1 crore
• 15% if income exceeds INR 1 crore but not INR 2 crore
• 25% if income exceeds INR 2 crore but not INR 5 crore
• 37% if income exceeds INR 5 crore

Additionally, a 4% Health and Education Cess is applied to the tax amount after adding surcharges in both regimes.

As an employer, you are responsible for calculating the income taxes based on every employee’s preferred tax regime and remitting them accordingly

By partnering with an Employer of Record (EOR) service like Wisemonk, companies can efficiently manage tax compliance and other employment-related responsibilities in India.

What is the step-by-step payroll process in India?[toc=Steps]

In our experience guiding global companies through Indian payroll, we’ve found that following a clear, step-by-step process not only ensures compliance but also builds employee trust. Here’s how we typically see payroll handled in India:

The Indian payroll process involves several crucial steps to ensure accurate calculation of employee compensation and compliance with local regulations. Here's a brief overview of the key stages in the payroll processing in India:

Step 1: Calculating Gross Salary

The first step in the payroll process is determining the employee's gross salary, which includes all earnings before deductions:

1. Start with the basic salary, typically 40-50% of the Cost to Company (CTC).
2. Add allowances such as House Rent Allowance (HRA), Dearness Allowance (DA), and special allowances.
3. Include any performance-based incentives or bonuses for employees in India for the pay period.
4. Factor in overtime pay, if applicable, calculated as per the Factories Act or relevant state laws.

Based on our extensive work with international employers, we can attest that getting this step right sets the tone for the entire payroll cycle.

Step 2: Applying Deductions

After calculating the gross salary, various statutory and non-statutory deductions are applied:

1. Statutory Deductions:
   • Provident Fund (PF): Typically 12% of basic salary plus DA.
   • Professional Tax: Varies by state, usually a fixed amount based on salary slab.
   • Income Tax: Calculated based on the employee's tax slab and declared investments.
2. Non-Statutory Deductions:
   • Health insurance premiums
   • Loan repayments
   • Voluntary contributions to additional savings schemes

We’ve seen that clear communication about these deductions helps employees understand their payslips and reduces confusion.

Step 3: Determining Net Pay

The net pay is calculated by subtracting all deductions from the gross salary:

1. Subtract all statutory deductions (PF, Professional Tax, Income Tax).
2. Deduct any non-statutory deductions.
3. The resulting amount is the employee's net pay or take-home salary.

Having guided several companies, we recommend double-checking all calculations to avoid payroll disputes and maintain employee satisfaction.

Step 4: Issuing Payslips

In our experience, providing clear, timely payslips not only fulfills legal requirements but also boosts transparency and trust among your team. The final step is generating and distributing payslips to employees:

1. Create a detailed payslip including:
   • Employee details (name, employee ID, designation)
   • Pay period and date of payment
   • Breakdown of earnings (basic salary, allowances, bonuses)
   • List of all deductions
   • Net pay amount
2. Ensure the payslip complies with local regulations, such as the Payment of Wages Act.
3. Distribute payslips to employees, either physically or electronically, maintaining confidentiality.
4. Maintain payroll records for at least 3 years, as required by the Payment of Wages Act.

It's crucial to note that the payroll process in India must adhere to various labor laws and regulations, including the Payment of Wages Act, Minimum Wages Act in India, and state-specific labor laws. Employers must also ensure timely deposit of statutory deductions with the appropriate authorities to avoid penalties.

For foreign employers, navigating this complex process can be challenging. Many choose to partner with local payroll service providers or use best payroll software for India to ensure compliance and accuracy in their Indian payroll operations.

What are the rules for overtime and working hours in India?[toc=Overtime Rules]

In India, standard working hours are usually 9 hours per day or 48 hours per week, with any extra time counted as overtime. Staying updated on both central and state labor laws is important for compliance.

Key Points:

• Overtime is paid at twice the regular wage.
• Maximum overtime is generally 50 hours per quarter, but varies by state and industry.
• Employees get regular rest breaks and at least one day off per week.
• Managers and supervisors may be exempt from overtime pay.
• Keeping accurate records of hours worked is essential to avoid penalties.

Clear communication and fair overtime pay help build trust with employees. From our experience, good record-keeping and knowing the rules keep payroll smooth and compliant.

What are the compliance requirements for employers in India?[toc=Compliance Requirements]

In our experience supporting international companies entering India, we’ve seen that staying compliant with local regulations is one of the most important factors for long-term success. Missing a filing deadline or neglecting a required registration can lead to costly penalties and operational headaches. Here’s what you need to know:

Essential Registrations

1. PAN (Permanent Account Number): Mandatory for all businesses, used for tax-related purposes.
2. TAN (Tax Deduction and Collection Account Number): Required for entities deducting or collecting tax at source.
3. EPF (Employees' Provident Fund): Mandatory for establishments with 20 or more employees.
4. ESI (Employees' State Insurance): Required for businesses with 10 or more employees (20 in some states).

We’ve guided several global employers through these registrations, and can attest that getting them in place early makes later payroll and compliance tasks much smoother.

Monthly Obligations

TDS Deposit: Due by the 7th of the following month.

Quarterly Filings

TDS Returns (Form 24Q): Due dates:

• Quarter 1 (April-June): 31st July
• Quarter 2 (July-September): 31st October
• Quarter 3 (October-December): 31st January
• Quarter 4 (January-March): 31st May

Annual Filings

Form 16 (TDS Certificate): Due by 31st May of the following financial year.

Record-Keeping Obligations

Employers must maintain various records as per Indian labor laws:

1. Payroll Records: Must be preserved for at least 3 years after the date of the last entry, as per the Payment of Wages Act.
2. PF Records: While not explicitly stated, it's recommended to keep records for 7-10 years due to the financial nature of PF.
3. ESI Records: Should be maintained as per ESI Act requirements.
4. Employee Records: General employee data should be kept for at least 3 years after the last payroll entry.
5. Attendance Records: Must be maintained as per applicable labor laws.

Based on our extensive research and hands-on experience, we recommend maintaining digital backups of all statutory records to simplify audits and ensure quick access when needed.

It's important to note that record-keeping requirements may vary based on specific state laws and the nature of the business. Employers should consult with legal experts to ensure full compliance with all applicable regulations.

What should employers know about banking and currency in India?[toc=Currency Regulations]

Based on our extensive experience assisting foreign businesses with payroll in India, we can attest that navigating local banking and currency regulations is a key step for smooth and compliant operations. Here’s what global employers need to know:

Paying in Indian Rupees (INR)

Employers are required to pay their employees in Indian Rupees (INR). Key points to consider include:

• Payments must be made in INR unless the employee has a special foreign currency account.
• Currency amounts in India use a different notation system. For example, one million rupees is written as 10,00,000.00 instead of 1,000,000.00.
• Employers should be aware of the current exchange rates and factor in potential fluctuations when budgeting for payroll.

It is also important to have a written employment agreement to ensure clarity and enforceability of payment terms.

Setting up Local Bank Accounts

Establishing local bank accounts is crucial for efficient payroll management in India:

• Foreign companies can open local bank accounts through their Indian subsidiary or branch office.
• For companies without a local entity, partnering with an Employer of Record (EOR) service can provide access to local banking infrastructure.
• Local bank accounts facilitate easier compliance with tax regulations and statutory deductions.

Foreign businesses can either collaborate with an Employer of Record (EOR) to avoid setting up their own legal entity or go through the process of establishing their own legal entity to directly employ workers.

Managing Currency Exchange

Effective currency exchange management is essential for international employers:

1. Real-time monitoring: Continuously track exchange rates to make timely adjustments to payroll calculations.
2. Global payroll software: Utilize specialized software to automate currency conversions and streamline calculations across international locations.
3. Collaboration with financial experts: Partner with financial advisors or EOR services to develop effective currency exchange risk mitigation strategies.
4. Guaranteed exchange rates: Consider establishing pre-determined exchange rates for converting foreign earnings to reduce volatility.
5. Funding options: When using global payroll services, explore options to fund payroll in your preferred currency while the service provider handles local currency disbursements.

By carefully considering these banking and currency aspects, foreign employers can ensure accurate and compliant payroll operations in India while minimizing risks associated with currency fluctuations.

What are the main challenges in managing payroll in India?[toc=Challenges]

Based on our extensive experience guiding global companies through Indian payroll, we can attest that managing payroll in India presents a unique set of challenges that require constant vigilance and adaptability:

• Complex and Frequently Changing Tax Laws and Labor Regulations: India’s tax and Indian labor laws are intricate and evolve regularly, making it difficult for employers to keep up with compliance requirements across central and state levels.
• Accurate Calculation of Diverse Employee Benefits and Deductions: Employers must navigate a maze of statutory benefits, allowances, and deductions, each with its own calculation rules, which can be especially challenging for organizations with varied employee categories.
• Managing Multiple Pay Schedules and Employee Types: Handling different pay frequencies and classifications—such as permanent, contractual, and gig workers—adds complexity, particularly with the rise of remote work and the gig economy.
• Ensuring Data Security and Confidentiality: With payroll data being highly sensitive, maintaining robust data security protocols is essential to prevent breaches and comply with India’s IT and data protection laws.
• Timely Filing of Statutory Returns and Compliance Reports: Missing deadlines for statutory filings like TDS, PF, and ESI can result in heavy penalties and reputational damage, making timely compliance a top priority.
• Handling Payroll Across Different States: Each Indian state may have its own payroll, tax, and labor regulations, requiring employers to adapt processes for multi-state compliance.

In our experience, having a well-drafted employment contract is crucial—it clearly defines employment terms, helps ensure compliance, and protects both the employer and employee in case of disputes.

How do payroll services help overcome payroll challenges in India?[toc=Payroll Solutions]

Having worked with numerous companies navigating Indian payroll, we’ve seen firsthand how modern payroll services and technology can transform complex processes into streamlined, compliant operations:

• Automated compliance updates: Payroll software is regularly updated to reflect the latest changes in tax laws and labor regulations, ensuring your business always stays compliant without manual tracking.
• Precise calculation of taxes, benefits, and deductions: Advanced algorithms handle complex calculations for income tax, PF, ESI, professional tax, and other deductions, minimizing errors and ensuring employees are paid accurately.
• Flexible systems for various employee types and pay schedules: Modern payroll platforms are built to manage diverse workforces—including permanent, contractual, and gig workers—across multiple pay frequencies, making it easier to handle varied employment scenarios.
• Robust data security: Leading payroll solutions use end-to-end encryption, access controls, and regular security audits to protect sensitive employee information and comply with India’s data protection laws like the DPDP Act.
• Automated generation and filing of statutory returns: Payroll services automatically generate and file compliance reports (such as TDS, PF, ESI, and professional tax returns), reducing the risk of missed deadlines and penalties.
• Centralized data management for multi-state operations: Centralized payroll systems simplify management across different states, accommodating state-specific rules and making it easier to maintain compliance nationwide.

In our experience, companies that invest in robust payroll services not only reduce compliance risks and administrative burdens but also gain valuable insights through advanced reporting and analytics—freeing up time to focus on business growth.

What are the best practices for payroll management in India?[toc=Best Practices]

In our experience advising international companies, adopting best practices to pay employees in India is key to ensuring compliance, minimizing risk, and building employee trust:

• Keep up with all payroll laws like the Payment of Wages Act and Income Tax Act to stay compliant.
• Clearly separate full-time employees from contractors to avoid legal issues.
• Maintain accurate records of pay, deductions, and benefits for audits and compliance.
• Run regular internal audits to catch and fix any errors quickly.
• Work with payroll experts and use trusted payroll software to automate and simplify your process.

By following these best practices and leveraging specialized payroll services, businesses can navigate the complexities of Indian payroll management with greater accuracy, efficiency, and peace of mind.

Why Choose Wisemonk for Your Payroll Operations in India?[toc=How Wisemonk helps]

Wisemonk is a specialized Employer of Record (EOR) and payroll service provider that enables global companies to hire, pay, and manage employees in India—without the need to set up a local entity. we handles every aspect of payroll, compliance, and HR, making it easy and risk-free for foreign employers to pay employees in India

Here’s how we make paying employees in India simple and compliant:

• We ensure full compliance with Indian labor laws, tax regulations, and statutory benefits, so you never have to worry about legal risks.
• Our onboarding is lightning-fast—your new hires can be set up and paid in as little as 2 days, helping you tap into Indian talent quickly.
• We manage all payroll calculations, deductions, and salary disbursements in Indian Rupees (INR), including Provident Fund, ESI, and TDS.
• Our team takes care of equipment procurement and delivery, so your employees have everything they need from day one—no cross-border hassles.
• You get access to dedicated, India-based HR support for your employees, ensuring smooth communication and a positive local experience.

Beyond payroll, we can also help you with recruitment, contractor management, and onboarding in India. Whether you need to hire full-time employees, pay freelancers, or build a compliant offshore team, we’ve got you covered with transparent pricing and deep local expertise. If you’re looking to expand further, we offer services like background verification, benefits administration, company registration and even support for setting up a Global Capability Center—making Wisemonk your one-stop partner for all things workforce in India.

Ready to pay employees in India effortlessly? Contact us today and let’s get started.

FAQs

How often is salary paid in India?

Salaries in India are typically paid on a monthly basis, though some companies may use weekly, bi-weekly, or semi-monthly cycles depending on their policies and employee agreements.

What is the formula for payroll in India?

The formula for payroll calculation is:

Net Pay = Gross Salary - Deductions

Where Gross Salary includes Basic Salary + Allowances + Bonuses, and Deductions include taxes and statutory contributions.

How is payroll processing done in India?

Payroll processing in India involves several steps: Pre-payroll activities include collecting attendance data and calculating gross salary; Payroll processing involves calculating deductions (like TDS and PF); Post-payroll activities include disbursing salaries and filing statutory returns.

What happens if you fail to adhere to statutory compliances?

Failure to adhere to statutory compliances can result in penalties, fines, and legal action against the company. It can also lead to reputational damage and loss of employee trust.

To understand this better, check out "Payroll Compliance in India: A Comprehensive Guide for 2025"

How to choose the best payroll service?

To help you make an informed decision, we have a comprehensive article on the "Best Payroll Software for India." This guide will assist you in evaluating your options effectively.

How much does it cost to run payroll in India?

The cost of running payroll in India varies depending on factors such as the number of local employees and the complexity of payroll calculations. While exact costs differ, using a specialized service like Wisemonk can often be more cost-effective than managing payroll in-house. For detailed pricing information, visit Wisemonk's Pricing page.

What is the minimum wage in India?

Minimum wages in India vary by state, industry, and skill level. Wisemonk stays updated with these variations and ensures that all employee compensations comply with the applicable minimum wage laws.

Can I manually run payroll for workers in India?

While it's possible to manually run payroll in India, it's time-consuming and prone to errors due to complex tax regulations and frequent changes in labor laws. Many businesses find it more efficient and compliant to use specialized services like Wisemonk, which handle all aspects of payroll processing and ensure adherence to local regulations.

Is 13th month pay mandatory in India?

No, 13th month pay is not mandatory in India. However, some companies offer bonuses for employees in India or ex-gratia payments during festivals or at the end of the financial year as part of their employee benefits package.

How do you pay contractors in India?

Contractors in India are typically paid through bank transfers based on submitted invoices. It's crucial to have clear contracts and comply with tax regulations, including withholding tax (TDS) where applicable. Wisemonk offers contractor payment services that manage these complexities, ensuring compliant and timely payments.

How do foreign businesses pay remote employees in India?

Foreign businesses can pay remote employees in India through services like Wisemonk, which handle currency conversion, compliance with local regulations, and ensure payments are made in Indian Rupees (INR). Wisemonk's Employer of Record (EOR) services simplify this process, managing all aspects of employment and payroll for remote workers in India.

What is TDS and how is it calculated?

TDS (Tax Deducted at Source) is a method of collecting income tax from employees' salaries by deducting it directly at the time of payment. It is calculated based on the employee's taxable income slab as per the Income Tax Act. Employers must remit TDS to the government monthly and issue Form 16 annually.