Pay Employees in India 2026: What US Employers Must Know

How do you pay employees in India compliantly? The payroll process in India involves navigating state-specific labor laws, mandatory deductions like EPF and ESI, and strict payment deadlines. For US and foreign companies, understanding salary structures, tax withholdings, and compliance requirements is essential. This guide walks you through salary calculations, tax deductions, payment processing, and ongoing compliance requirements.

What are the options to pay employees in India?[toc=Options to Pay]

Paying employees in India requires choosing a legally compliant employment model that aligns with Indian labor, tax, and social security laws.

Based on our hands-on experience helping companies with EOR, payroll, and India compliance operations, these are the main legal options available to pay employees in India safely and compliantly.

1. Set Up a Local Entity

One way to pay employees in India legally is by setting up a local entity, such as a subsidiary or branch office.

This allows you to hire employees directly and retain full legal and operational control over your India team.

However, this approach comes with heavy upfront and ongoing effort. You must register the entity, obtain tax and social security registrations, set up payroll, and stay compliant with Indian labor laws.

Managing employment in a foreign country adds complexity, especially when the core question is simply how to pay employees in India legally.

This option also involves higher costs, longer setup timelines, and continuous compliance obligations.

Timeline: 10-15 weeks
Best for: Large enterprises, manufacturing companies, long-term operations in India

2. Use an Employer of Record (EOR)

An Employer of Record (EOR) is the fastest and most compliant way to hire and pay employees in India without setting up a local entity.

In this model, the EOR becomes the legal employer, while you retain full control over the employee’s day-to-day work and performance.

The EOR handles payroll, tax deductions, statutory benefits, reimbursements, and compliance with Indian labor laws. This removes legal and administrative burden from the parent company.

For most global businesses, this strikes the right balance between speed, compliance, and flexibility.

Timeline: 2-5 days
Best for: Startups, SMBs, and companies testing or scaling teams in India quickly

3. Hire Independent Contractors

If you need short-term support and want minimal setup, hiring independent contractors can be an option.

Contractors are responsible for their own taxes, and payments can be made through international transfer platforms with limited paperwork.

This approach works best for project-based work where control over working hours, tools, and processes is limited.

However, if contractors operate like employees, the parent company may face misclassification and permanent establishment risks under Indian law.

Timeline: 1 day
Best for: Short-term projects, specialized tasks with minimal control over job duties

Once you've chosen your employment model, the next step is understanding what statutory deductions and contributions you'll handle every month, these five components are non-negotiable regardless of which option you pick.

What registrations are required to pay employees in India?[toc=Required Registrations]

Before you can legally pay employees in India, you need several mandatory registrations with the Indian government, we've helped hundreds of foreign employers navigate this compliance maze.

Permanent Account Number (PAN)

• Every legal entity operating in India needs a PAN for all income tax transactions and payroll operations.
• This is your company's basic tax identification number issued by the income tax department.

Tax Deduction Account Number (TAN)

• TAN is mandatory for deducting and depositing income tax (TDS) from employee salaries.
• You cannot process statutory deductions or file tax returns without a TAN.

Employees' Provident Fund (EPF) Registration

• Employees' Provident Fund (EPF) is mandatory if you employ 20 or more Indian employees, register with the EPFO within one month.
• Required for depositing monthly provident fund contributions for your employees in India.

Employee State Insurance (ESI) Registration

• ESI is required if you have 10+ employees and any earn below ₹21,000 gross per month.
• Provides health insurance and social security benefits under Indian labor laws.

Shops & Establishments Act Registration

• State-specific registration required before hiring your first employee.
• Governs working hours, leave policies, and employment conditions under local laws.

Professional Tax Registration

• Mandatory in states that levy professional tax (Maharashtra, Karnataka, Tamil Nadu, West Bengal, etc.).
• Not required in states like Delhi, Punjab, Haryana, or Uttar Pradesh.

Important for Foreign Employers: If you don't have a local legal entity, you cannot obtain these registrations. This is why most foreign businesses use an Employer of Record, the EOR already has all registrations in place, so you skip this entire setup process and achieve legal compliance immediately.

Now that you understand the registration requirements, let's look at what mandatory deductions and contributions you'll handle in payroll.

What are the mandatory payroll deductions and contributions in India?[toc=Mandatory deductions]

When we process payroll in India, we handle five mandatory statutory components. These are legal requirements you can't skip.

1. Income Tax (TDS - Tax Deducted at Source)

• You deduct income tax from employee salaries before paying them. India uses progressive tax slabs, employees earning less pay less tax, higher earners pay more.
• Deposit deadline: 7th of every month. You also file quarterly returns and issue annual tax certificates to employees.

2. Provident Fund (EPF)

• Both you and your employee contribute 12% of basic salary to this retirement fund. It's mandatory if you have 20 or more employees.
• Deposit deadline: 15th of every month. This deadline is strictly enforced with heavy penalties for delays.

3. Employee State Insurance (ESI)

• This provides medical benefits to lower-wage employees. Both employer and employee contribute a small percentage of wages.
• It only applies if you have 10+ employees and only for those earning below a specific monthly threshold. Deposit deadline: 21st of every month.

4. Professional Tax (PT)

• This is a state-level employment tax. Some states charge it, others don't. States like Delhi and Punjab don't have it at all.
• Where it exists, you deduct a small monthly amount from employee salaries and pay it to the state government.

5. Gratuity

• This is a retirement benefit you pay employees after they complete five years with you. You don't pay it monthly, but you should budget for it from day one.
• It's calculated based on years of service and last drawn salary. Most companies set aside funds monthly even though the actual payment happens at exit.

What This Means for Your Budget? Your total employment cost includes the employee's salary plus your EPF contribution and gratuity provision. We typically see total employer costs run 12-15% above the employee's gross salary. Employee take-home is lower than their gross salary because of EPF, income tax, and professional tax deductions.

Want to understand exactly how each deduction is calculated, when they apply, and how they impact employee take-home pay? Read our comprehensive guide on how payroll deductions work in India.

What does a salary structure in India include?[toc=Salary Structure]

Indian salaries use a Cost-to-Company (CTC) model with specific components that affect taxes and take-home pay.

• Basic Salary: This is the fixed core of compensation. Basic salary plus dearness allowance must be at least 50% of total CTC under 2026 wage rules. All statutory contributions EPF, gratuity, and bonus are calculated based on basic salary. It's fully taxable.
• House Rent Allowance (HRA): HRA is provided to employees who pay rent. It's partially tax-exempt if employees submit rent receipts. The exemption amount depends on the city, actual rent paid, and basic salary.
• Dearness Allowance (DA): DA is mainly used in public sector jobs to offset inflation. It's fully taxable. When applicable, DA is included in EPF and gratuity calculations along with basic salary.
• Special Allowances: Flexible salary components like transport or meal allowances that bridge basic and total CTC, fully taxable unless documented as reimbursements.
• Bonuses and Incentives: Variable pay paid quarterly or annually, some are statutory requirements, all are taxable when paid.
• Reimbursements: Work expenses like travel, fuel, or medical costs can be reimbursed tax-free with proper bills and receipts. This increases employee take-home without raising your tax liability.

Structuring salary components correctly reduces your tax withholdings while maximizing employee take-home pay under Indian tax laws.

What is the step-by-step payroll process in India?[toc=Step-by-Step Payroll Process]

We've run payroll for hundreds of global companies in India, and here's how the monthly cycle works in practice:

Step 1: Collect employee information

Gather each employee's PAN card, Aadhaar, bank account details, EPF number, and tax declaration forms. You need these before you can process their first payroll.

Step 2: Calculate gross salary

Add up basic salary, HRA, special allowances, and any performance bonuses. This total is the gross salary before any deductions.

Step 3: Deduct statutory contributions

Subtract the mandatory deductions:

• EPF: 12% of basic salary
• Income Tax (TDS): Based on employee's tax bracket
• ESI: 0.75% if employee earns under ₹21,000/month
• Professional Tax: Varies by state
• Any loan repayments or advances

Step 4: Calculate net salary

Gross salary minus all deductions equals net salary. This is what the employee actually receives.

Step 5: Pay employees

Transfer the net salary to each employee's Indian bank account in INR. Payment must be made by the 7th of the following month.

Step 6: Issue payslips

Send detailed payslips showing all earnings, deductions, and net pay. This is legally required for every payment.

Step 7: Deposit statutory payments

Pay EPF by the 15th, ESI by the 21st, and TDS by the 7th of each month. File the required monthly and quarterly returns with authorities.

Want to understand the complete monthly payroll cycle with timelines and best practices? Read our detailed guide on India's payroll cycle for a deeper dive into each phase.

What compliance rules affect payroll in India?[toc=Compliance Rules]

Beyond payroll mechanics, you must follow strict rules on currency payments and data protection.

FEMA Compliance (Foreign Exchange Rules)

• All payments to resident employees must be in Indian Rupees (INR), not foreign currency.
• You cannot pay from foreign currency accounts directly, even if contracts show USD, final payment must be INR.
• This applies whether you have a local entity or use a payroll service.

Data Protection Requirements

• India's Digital Personal Data Protection Act of 2023 requires strict security for payroll records and employee information.
• You need proper consent protocols and data protection measures, non-compliance carries heavy penalties.

Getting these compliance rules right protects you from legal issues and regulatory penalties down the road.

What are the mandatory statutory benefits and employer obligations in India?[toc=Statutory Benefits]

Beyond monthly salary, Indian labor law requires you to provide specific statutory benefits and maintain ongoing compliance, we help companies navigate these to avoid costly surprises.

• Gratuity: Pay employees 15 days' wages for each year of service after they complete five years, payable at resignation, retirement, or termination.
• Maternity Benefit: Provide 26 weeks of fully paid maternity leave for the first two children (12 weeks for subsequent children), and arrange crèche facilities if you employ 50 or more people.
• Statutory Bonus: Pay a minimum 8.33% annual bonus to employees if you have 20 or more staff, this is a legal requirement under the Payment of Bonus Act, not optional.
• Leave Entitlements: Grant 12-15 days earned leave, 12 days sick leave, and 10-20 public holidays annually depending on your state, and pay out unused earned leave when employees exit.
• Severance and Retrenchment: Pay 15 days' wages per completed year of service as severance when terminating employees, and obtain government approval for layoffs in larger establishments.
• Ongoing Compliance Responsibilities: Deposit all statutory contributions by deadlines, file periodic labor and tax returns, maintain employment records for audits, and issue detailed payslips every month.

For a complete breakdown of all mandatory and optional employee benefits in India, including health insurance, retirement plans, leave policies, and competitive perks that attract top talent, explore our detailed employee benefits guide.

With these statutory benefits and compliance obligations covered, the final step is actually paying your employees.

How do you pay employees in India?[toc=Payroll Process]

Here's how we handle salary payments in India:

In India, employees are paid through bank transfers such as NEFT, RTGS, or IMPS.

• Salaries must be paid monthly by the 7th of the following month.
• All payments must be made in Indian Rupees (INR), not foreign currency.
• Cash payments are legally restricted and should be avoided.
• Every salary payment must be accompanied by a detailed payslip.
• The payslip should show the salary breakup, all deductions, and the final take-home pay.
• Mandatory deductions like EPF, ESI, Professional Tax, and TDS must be calculated correctly.
• You're responsible for depositing these deductions with the authorities by specific deadlines.
• Maintaining proper payroll records is essential for audits and legal compliance.

Get these payment mechanics right, and you'll stay compliant while building trust with your India team.

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 statutory payments and filings must employers complete?[toc=Statutory Payments & Filings]

Running payroll in India means more than just paying your employees, you must deposit statutory deductions and file returns with the Indian government on strict deadlines.

Monthly Payment Deadlines:

• Employees Provident Fund (EPF): deposit by the 15th of every month
• Employee State Insurance (ESI): deposit by the 21st of every month
• Income Tax (TDS - Tax Deducted at Source): deposit by the 7th of every month
• Professional Tax: deposit by the last day of the month (state-specific)

Filing Requirements Under Indian Labor Laws:

• Withholding income tax returns: file quarterly on TDS (July 31, October 31, January 31, April 30)
• Provident Fund monthly returns: file ECR (Electronic Challan cum Return) each month
• Employee State Insurance half-yearly returns: file twice annually
• Form 16 (annual tax certificate): issue to all Indian employees by May 31

Penalties for Missing Deadlines:

• Late EPF deposit: 12% annual interest plus 1% monthly damages on statutory deductions
• Late tax filing: ₹200 per day penalty (minimum ₹10,000) under Income Tax Act
• Late ESI deposit: 12% annual interest on payroll deductions
• Repeated violations under Indian laws can trigger labor department inspections and business penalties

Record Keeping for Legal Compliance:

• Maintain accurate payroll records and wage registers for minimum 3 years
• Keep Provident Fund and ESI documentation for 5 years
• Store all tax deduction documents for 7 years
• Retain payslips, payment challans, and filing acknowledgments for government audits

Foreign employers often struggle with these complex payroll operations and tax regulations, we handle all statutory payments and filings automatically to keep you compliant with Indian labor laws.

Missing these deadlines costs you heavily in penalties and interest, we automate all deposits and filings for our clients to maintain 100% compliance.

For a comprehensive checklist of all compliance requirements, deadlines, and penalties to avoid, refer to our complete payroll compliance guide for India.

What are the minimum wage and overtime rules in India?[toc=Minimum Wage & Overtime Rules]

When you pay employees in India, understanding minimum wage is critical, India doesn't have a single national rate, and each state sets its own under Indian labor laws.

State-Level Minimum Wage for Indian Employees

• Minimum wage varies by state, industry, and skill classification (unskilled, semi-skilled, skilled)
• What's compliant for Indian workers in Maharashtra may violate local laws in Karnataka for the same role
• Each state updates minimum wage rates annually, check your state labor department for current schedules
• Foreign employers violating minimum wage face penalties, back-payment of basic salary, and legal disputes

For detailed state-wise minimum wage rates in USD and how they impact your hiring budget, read our comprehensive India minimum wage guide.

Working Hours and Overtime Pay Under Indian labor laws

• The standard workweek is 48 hours for full time employees under Indian labor laws
• Indian employees working beyond 48 hours are legally entitled to overtime pay
• Overtime rate must be at least twice the regular hourly rate of the employee's basic salary
• Clearly document working hours and overtime terms in the employment contract or employment agreement

Need to understand overtime regulations in detail? Check out our complete guide to overtime laws in India and learn how to calculate overtime pay correctly to stay compliant.

Getting wages right protects you from compliance risks with local laws and builds trust with your employees in India, we help foreign businesses structure compliant wage policies across all states.

What are the common challenges foreign employers face with India payroll?[toc=Indian Payroll Challenges]

Managing payroll in India comes with unique challenges that trip up most foreign businesses, we've seen these issues repeatedly across hundreds of companies.

Different Rules in Every State

• Professional tax, minimum wages, and leave policies vary by state, managing remote workers across multiple locations means tracking different compliance calendars for each.
• Solution: Use payroll software that handles multi-state compliance automatically.

Constantly Changing Tax Regulations

• Income tax slabs, EPF limits, and ESI thresholds change frequently, payroll systems need regular updates to stay compliant with Indian labor laws.
• Solution: Partner with providers who monitor regulatory changes and update calculations automatically.

Contractor Misclassification Risks

• Treating full time employees as independent contractors to avoid statutory benefits leads to heavy penalties and back-payment of EPF and ESI.
• Solution: Get professional classification assessments before engaging workers.

Complex Record-Keeping Requirements

• You must maintain detailed payroll records for 3-7 years, missing documentation during audits equals non-compliance even if you paid correctly.
• Solution: Use cloud-based systems that automatically store and organize all payroll documentation.

Managing Statutory Deadlines

• Tracking the 7th for TDS, 15th for EPF, and 21st for ESI across multiple employees is challenging without automated payroll operations.
• Solution: Automate deposits and filings to ensure you never miss critical deadlines.

Understanding Local Laws

• Each state has different employment laws governing working hours, holidays, and termination rules, foreign employers often miss these nuances.
• Solution: Work with local experts or an EOR who understand state-specific labor regulations.

These compliance challenges are why most foreign businesses partner with an EOR or payroll provider instead of managing everything themselves.

Why Choose Wisemonk for your payroll operations in India?[toc=Why Choose Wisemonk]

Wisemonk is a leading Employer of Record helping companies pay employees in India compliantly without establishing a local entity. We handle complex payroll calculations, statutory compliance, and benefits administration so you can focus on building your team and growing your business in India.

Key Services for Simplified Payroll & Compliance:

• End-to-End Payroll Management: We process payroll for 300+ global companies with 100% accuracy, managing everything from EPF and ESI contributions to TDS calculations and remittance by the 15th of each month, with the industry's lowest FX markup at less than 0.6 percent compared to competitors charging up to 10 percent.
• Industry's Lowest FX Rates: Pay employees in INR with just 0.6% FX markup versus 5-10% competitors charge, saving thousands monthly. We disburse salaries and handle expense reimbursements and bonuses at no extra cost through NEFT, RTGS, and UPI.
• Tax-Optimized Salary Structuring: Our experts design salary components that increase employee take-home pay by 15-20% while maintaining full compliance. We manage provident fund, health insurance, and pension contributions to keep you competitive in India's talent market.
• Rapid Compliant Onboarding: We onboard employees in just 2 days, 3-5x faster than global EOR providers, handling employment agreements, background verification, PAN and TAN registration, and all documentation while ensuring compliance with Indian labor laws across all 28 states.
• Dedicated Indian HR Experts: Get 24/7 support from our expert HR team rated 4.9/5 stars by 150+ verified users on G2, Capterra, and Clutch. We handle leave policies, terminations, and employee relations so you stay compliant and conflict-free.

Wisemonk 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 →

Beyond payroll, we can also help you with recruitment, contractor management, and onboarding in India. Whether you need to hire employees in India, 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 hire & pay employees in India effortlessly? Contact us today and let’s get started.