Payroll in India: 2026 Complete Guide for US Companies

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

Payroll in India is the comprehensive process of calculating employee compensation, deducting statutory contributions (EPF, ESI, TDS, Professional Tax), and ensuring timely salary disbursement while maintaining compliance with central and state labor laws. Unlike simple wage calculations, Indian payroll requires adherence to multiple regulatory frameworks, mandatory filings, and state-specific variations that directly impact both employers and employees.

If you are a US or UK-based founder expanding your team, you might think payroll in India is just about multiplying hours by hourly wages and hitting "send." In reality, it is a bit more intricate than that.

At its simplest, payroll in India is the total administration of your employees' financial records. This includes calculating their gross salary, subtracting mandatory statutory deductions, and ensuring the final net salary hits their bank accounts on time. But unlike many Western regions, India's payroll system is heavily regulated by both central and state governments. Think of it as a monthly compliance cycle. It is not just about paying your team; it is about navigating the Income Tax Act, adhering to labor laws, and meeting statutory requirements to ensure financial stability for both your company and your workforce.

What is India’s payroll salary structure and compensation?[toc=Payroll Salary Components]

When you look at an offer letter in the US, you typically see a single gross annual figure. However, the salary structure in India works a bit differently. It is often referred to as "CTC" or Cost to Company, which is a comprehensive bundle of salary components designed to optimize tax benefits for the employee while covering statutory contributions for the employer.

Here is how a typical Indian compensation package breaks down:

1. Basic Salary

This is the core of the pay structure. The basic salary is a fixed amount, typically ranging from 40% to 50% of the total CTC. It is fully taxable and serves as the basis for calculating other statutory components like the provident fund and gratuity.

2. Allowances (The Variable Stack)

To help employees save on taxes and cover living costs, the remaining salary is split into various allowances:

• House Rent Allowance (HRA): This is paid to meet accommodation expenses. It is a favorite among employees because it offers significant tax exemptions if they are paying rent.
• Dearness Allowance (DA): While this is more common in government jobs to offset inflation, it is legally recognized under the Minimum Wages Act. In the private sector, this is often merged into the "Special Allowance" or kept minimal.
• Medical Allowance: A fixed amount paid to cover medical expenses. While tax exemptions here have evolved, it remains a standard part of the structure.
• Leave Travel Allowance (LTA): Covers travel expenses for domestic leave, offering tax relief under specific conditions.
• Special Allowance: This is essentially a balancing component. Whatever is left of the gross salary after allocating basic and specific allowances goes here. It is fully taxable and often used to calculate drawn salary adjustments.

3. Statutory & Retirement Benefits

These are the long-term employee benefits that you, as an employer, contribute to (we will dive deeper into these in the next section):

Employees' Provident Fund (EPF): A retirement savings scheme.

Gratuity: A lump-sum benefit paid to employees on exit.

• Permanent employees: Eligible after 5 years of continuous service (same as before). Calculated on “wages” (not just last drawn basic), as defined under the new 50% wage rule.
• Fixed-term employees: Eligible after 1 year of service (major change under the new law).

Understanding these components is crucial for structuring a competitive and tax-efficient compensation package while paying employees in India. The exact composition of these components can vary based on company policies, industry standards, and individual negotiations.

13th Month Pay

In India, the concept of a 13th-month salary is not mandatory but some companies offer it as an additional benefit. It's typically equivalent to one month's basic salary and is often paid as a festive bonus or performance incentive. While not legally required, it has become a common practice in many sectors to boost employee morale and retention.

What are India’s mandatory payroll deductions & employer contributions?[toc=Mandatory Payroll Deductions]

For a global company transitioning to India payroll, perhaps the most significant structural difference is the nature of mandatory withholdings and the additional social security costs levied on the employer. These are the statutory deductions and employer contributions you simply cannot skip.

Compliance with the relevant authorities regarding these deductions is non-negotiable. Here are the three main pillars you need to manage every typical monthly cycle:

A) Statutory Deductions (Employee’s Share)

These amounts are legally taken directly from the employee’s gross pay before calculating their net salary.

1. Income Tax (TDS): The employer calculates and deducts the income tax based on the employee’s income, investments, and tax regime choice.
2. Employees' Provident Fund (EPF): The employee contributes 12% of their basic salary (and Dearness Allowance, if applicable) to their Provident Fund.
3. Professional Tax (PT): Levied by state governments, professional tax is based on income slabs, with a maximum of Rs 2,500 per year.

B) Employer Contributions (The Added Cost)

These are costs borne by your company in addition to the employee's gross salary. They form a crucial part of the overall cost to company (CTC).

1. Employees' Provident Fund (EPF): The employer also contributes 12% of the employee's basic salary, split as:
   • 8.33% into the Employee Pension Scheme (EPS) (subject to a ceiling of Rs 15,000/month).
   • 3.67% into the EPF account, in addition to any administrative charges.
2. Employees’ State Insurance (ESI): The employer contributes 3.25% of the employee’s gross salary (for employees earning up to Rs 21,000/month), while the employee contributes 0.75%.

ESI is governed by the Employees State Insurance Act and provides workers with social security benefits, including free medical care (health insurance) for themselves and their dependents, as well as compensation for illness, employment injury, and maternity benefits for female employees.

Mandatory Contribution Snapshot

To provide clarity on these statutory contributions, here is a brief comparison of the most common rates (based on the statutory minimum wage ceiling):

How to process payroll in India?[toc=Payroll Processing Stages]

The payroll process in India is not a one-time calculation; it is a meticulous, typically monthly cycle built on three distinct stages. For global companies, viewing payroll as an integrated workflow, rather than just a list of payments, is key to effective payroll management.

Here are the three essential stages that make up the monthly payroll workflow:

Stage 1: Pre-Payroll Activities (Data Gathering and Policy Check)

This initial stage focuses entirely on accurate data collection and preparation. Getting this right is crucial because mistakes here compound throughout the cycle.

1. Policy Implementation: First, ensure all company policies (pay cycles, leave, attendance, and benefits) are integrated into the process. Compliance begins with clear, defined internal rules.
2. Gather Employee Information: This is where you gather all variable employee data.
   The critical inputs include:
   • PAN, Aadhaar (if applicable), and investment proofs.
   • Attendance Data (working days, leaves taken, loss of pay).
   • Variable payments (bonuses, commissions, expense reimbursements).
   • New/updated employee details (bank changes, new tax declarations).
3. Data Validation: The collected data must be rigorously checked against company policies and statutory thresholds (like the ESI wage limit) before moving forward.

Stage 2: Actual Payroll Processing (The Core Calculation)

Once the inputs are validated, the actual computation begins. This is where your chosen payroll system performs the heavy lifting.

1. Gross Salary Computation: Calculate the total earnings, factoring in basic salary, allowances/bonuses, and variable pay.
2. Statutory Deductions: Perform mandatory payroll calculations for income tax (TDS), provident fund (PF), and employees state insurance (ESI) based on the legal structure of the salary.
3. Net Salary Determination: Subtract all deductions (statutory and voluntary) from the gross salary to arrive at the final net salary, the amount due to the employee.

Stage 3: Post-Payroll Activities (Disbursement and Compliance)

This final stage focuses on payment, compliance, and record-keeping, ensuring all statutory requirements are met after the salary is processed.

• Disburse Salaries: Transfer the net salary to employees' bank accounts, typically monthly (e.g., by the 7th or 10th of the next month, depending on company size).
• Issue Payslips: Provide each employee with a detailed, itemized payslip.
• Deposit Statutory Dues: Remit all deducted contributions and taxes to the respective government authorities within the specified deadlines.
• File Returns: Submit necessary monthly, quarterly, and annual statutory reports (e.g., Form 24Q for TDS returns, EPF returns).
• Maintain Records: Keep precise records of all payroll transactions for audits.

If you want to minimize payroll errors and simplify the entire process, start by using reliable payroll software or services. Check out our article on “Best Payroll Software in India” to find the right fit for your business.

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

As an Indian payroll expert with extensive experience advising global businesses, we can confirm that payroll calculations in India follow a systematic process.

The fundamental formula for calculating an employee's take-home pay is:

Net Pay = Gross Salary - Deductions

Here's a more detailed breakdown of this calculation:

• Gross Salary Computation: Gross Salary = Basic Salary + HRA + Other Allowances + Bonuses
• Deductions: Deductions = Income Tax + Provident Fund + Professional Tax + Other Statutory Deductions
• Net Pay Calculation: Net Salary = Gross Salary - (PF + ESI + Professional Tax + Income Tax + Other Deductions)

To ensure accurate calculations and compliance with Indian regulations, we recommend using specialized tools. Our Salary Calculator can help you compute the Cost to Company for your employees in India and simplify your payroll calculations.

What are the payroll changes in India?[toc=Payroll Changes]

Payroll isn’t static. Every month, HR teams deal with updates like new joiners, exits, bonuses, or reimbursements that directly impact salary payouts. Managing these payroll changes correctly keeps your company compliant and avoids errors in tax deductions and employee payments.

1. Onboarding: When adding a new employee, collect accurate employee data such as PAN, Aadhaar, bank details, and previous employment records. Missing or incorrect details can lead to wrong TDS deductions and delayed salaries. Using an employee self-service portal helps automate this step and reduce manual errors.
2. Offboarding: During exits, calculate final settlements that include unpaid salary, gratuity, bonuses, and leave encashment. Delays or errors can violate the Payment of Wages Act and cause non-compliance. Always close out PF and ESI accounts promptly.
3. Loss of Pay (LOP): When employees take unpaid leave, payroll must adjust salaries accordingly. Incorrect attendance data or manual errors often cause mismatched payouts. Integrating attendance tracking with payroll software ensures accuracy.
4. Bonuses: Annual or performance-based bonuses must follow the Payment of Bonus Act and be included in tax deductions. Misreporting bonuses can lead to errors in PF and TDS filings. Automated payroll tools simplify these one-time payments.
5. Reimbursements: Expenses like travel, meals, or medical claims need to be verified and processed in payroll. Late submissions or manual tracking often delay payments and create compliance gaps. A digital claim system ensures faster approvals and accurate records.
6. Arrears: Salary arrears occur when pay revisions are backdated or payments are missed. They can impact PF, ESI, and income tax if not adjusted in the same financial year. Always process arrears promptly to stay compliant with the Income Tax Department.
7. Salary Updates: Promotions or increments must reflect in the payroll system immediately. Missing updates lead to incorrect tax deducted at source (TDS) and wrong employer contributions. Cross-check all changes before processing payroll each month.

Accurate payroll processing is just as important as salary structuring. Paystub in India: What Employers Need to Know is key to understanding payslip formats, statutory details, and compliance essentials.

What are the challenges faced when managing payroll in India?[toc=Payroll Challenges]

Managing payroll in India can be complex due to various compliance issues and statutory requirements. Common challenges include:

1. Compliance with constantly changing payroll regulations at both the central and state governments level.
2. Calculating payroll for employees working in different states with varying minimum wage rates and statutory deductions.
3. Manual processes can be time-consuming and error-prone, especially when handling employee data manually. This increases the risk of non-compliance.
4. Tax deductions are complicated, especially for foreign businesses managing international payroll. Ensuring compliance with income tax and professional tax rules is crucial.
5. Managing employee benefits like maternity benefit, leave policies, and health insurance involves ensuring compliance with various laws, including the Maternity Benefit Act and Employees' State Insurance Act.

Many companies are moving towards automated payroll systems to save time and reduce the risk of errors. Payroll software makes managing complex deductions and statutory contributions easier, improving payroll compliance and ensuring that companies stay compliant with all payroll regulations.

How does Wisemonk help with payroll in India?[toc=How Wisemonk Helps]

Wisemonk is a leading Employer of Record (EOR) service provider trusted by 500+ international companies that helps global businesses to hire, pay and manage employees in India without establishing a local entity. Wisemonk handles wage calculations, tax withholdings, deductions, direct deposits, and generation of detailed pay statements.

Why global companies trust Wisemonk for Payroll in India:

• Recruitment: End-to-end hiring support from screening and assessments to interview coordination and final selection, ensuring fast access to top talent.
• Payroll Processing: Managing $20M+ in payroll each month with tax optimization, local compliance, and automated, error-free payslips for 2K+ employees, ensuring timely and accurate compensation.
• Dedicated HR Support: Simplifying onboarding for 300+ companies with seamless document collection, background checks, and policy setup to maintain smooth HR operations across teams.
• Contractor Management: Seamless contractor payments and compliance with local laws, plus tools to track and manage your freelance workforce.
• Compliance: Keeping global teams compliant with Indian tax, labor, and statutory laws by managing filings, updates, and audits, preventing costly errors or legal issues.
• Equipment Management: We lease, track, and recover work equipment for remote and on-site teams, ensuring everyone has what they need to stay productive.

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. Contact Wisemonk today!