Payroll in India: A Compliance Guide for Global Firms

Payroll in India refers to the process of calculating employee salaries, processing statutory deductions, and ensuring compliance with both central and state labor laws. It's essentially how you pay employees while meeting all legal obligations.

For global companies, India's payroll system operates differently from Western markets. The 2026 landscape features a dual tax regime where employees choose between the Old Tax Regime (with deductions) or the New Tax Regime (lower rates, fewer deductions). This choice impacts how you calculate tax deductions for each employee.

Here's what makes Indian payroll complex: you're dealing with multiple authorities simultaneously. The Income Tax Department handles income tax withholding, while state governments manage professional tax and labor welfare contributions. It's multi-layered compliance across different jurisdictions.

Most businesses follow a monthly payroll cycle, disbursing salaries by the 7th or 10th of the following month. This timeline gives your payroll team enough breathing room to process employer contributions, statutory payments, and maintain compliance without penalties.

The real challenge? India's layered salary structure (CTC). Employee compensation breaks down into basic salary, house rent allowance, and various other components. Each piece affects your calculations for provident fund, professional tax, and statutory deductions differently. Understanding this structure is non-negotiable for accurate payroll processing and employee satisfaction.

What you need to remember: managing payroll in India means juggling tax regulations, statutory benefits like Employees Provident Fund and Employees State Insurance, and state-specific requirements. Get a reliable payroll system in place early, or you'll find yourself drowning in compliance headaches.

What are the primary components of an Indian salary structure (CTC)?[toc=Salary Structure]

CTC (Cost to Company) is the total amount your company spends on an employee annually. It includes the employee's salary, allowances, statutory contributions, and employer-paid benefits.

Here's the breakdown of what makes up a typical Indian salary structure:

• Basic Salary: This is the foundation, usually 40-50% of CTC. It's the base amount before any additions. Why does this matter? Because your provident fund contributions, gratuity, and other statutory benefits are calculated as a percentage of basic salary. Keep it too low, and employees lose out on retirement benefits.
• House Rent Allowance (HRA): Typically 40-50% of basic salary. This component offers tax benefits if employees live in rented accommodation and submit rent receipts. Under the Income Tax Act, HRA is partially or fully exempt from tax based on specific calculations.
• Special Allowances: These are flexible pay components like transport allowance, food allowance, or performance bonuses. Companies use these to optimize the salary structure and give employees more net take home pay.
• Employer Contributions: This is where it gets interesting. Your Employees Provident Fund contribution (12% of basic + dearness allowance) and Employees State Insurance (3.25% for eligible employees earning under ₹21,000/month) are part of CTC but never reach the employee's bank account. They go directly to social security contributions.
• Statutory Deductions: Professional tax, income tax withholding (TDS), and employee's share of EPF (12%) come out before calculating net salary. These aren't CTC components but reduce gross salary to arrive at what employees actually receive.
• Other Components: Bonus payments, gratuity provisions, health insurance, and mandatory benefits like maternity leave provisions for female employees. Some companies also include performance incentives here.

The math is simple: CTC minus statutory deductions minus employer contributions equals gross salary. Then subtract tax deducted at source and voluntary deductions to get net salary. Understanding this structure helps you design competitive packages while managing payroll costs effectively.

What are statutory deductions and contributions?[toc=Statutory Deductions]

Statutory deductions are mandatory amounts deducted from employee salaries and contributed by employers to comply with Indian labor laws and the Income Tax Act. These aren't optional; they're legal obligations that apply based on company size and employee earnings.

Here's what you're dealing with:

• Employees' Provident Fund (EPF): This is your biggest statutory contribution. Mandatory for companies with 20+ employees. Both you and the employee contribute 12% of basic salary plus dearness allowance. The employee's share comes out of their gross salary, while your 12% is an employer contribution on top of CTC. The money goes to the Employees Provident Fund Act framework, building retirement savings for employees.
• Tax Deducted at Source (TDS): You deduct income tax from employee salaries based on their chosen tax regime. Under 2026 bands, income up to ₹400,000 annually is exempt. After that, rates scale progressively up to 30% for earnings above ₹2.4 million. You're responsible for deducting this and remitting it to the Income Tax Department monthly.
• Employees State Insurance (ESI): Mandatory for employees earning up to ₹21,000 per month. The employee contributes 0.75% while you contribute 3.25% of gross wages. This covers medical care, maternity benefits for female employees, and employment injury compensation through the Employees State Insurance Corporation.
• Professional Tax (PT): A state-level tax that maxes out at ₹2,500 annually but varies by location. Maharashtra and Karnataka have PT, while some states don't. You deduct this from employee's salary and pay it to state authorities. It's a small amount but missing payments triggers penalties.
• Labour Welfare Fund (LWF): State-specific contributions for worker welfare programs. Not all states mandate this, and contribution amounts vary. Check your state's local regulations because what applies in Karnataka might not apply in Delhi.

The calculation flow: Start with gross salary, subtract employee's EPF share (12%), ESI contribution (0.75% if applicable), professional tax, and TDS. What remains is net salary. Meanwhile, you're paying employer contributions (EPF 12%, ESI 3.25%) separately, which increases your actual payroll costs beyond the salary structure employees see.

What are India's mandatory benefits?[toc=Mandatory Benefits]

Mandatory benefits are non-negotiable entitlements that employers must provide to eligible employees under Indian labor laws. These go beyond salary and statutory deductions, covering everything from retirement payouts to paid leave.

Here's what you're legally required to provide:

• Gratuity: Employees completing 5+ years of continuous service get a lump sum payment calculated as 15 days of wages for every completed year. This falls under the Gratuity Act and applies to companies with 10+ employees. The calculation is simple: (Basic Salary + Dearness Allowance) × 15 × Years of Service ÷ 26. It's a significant employee benefit that rewards loyalty.
• Maternity Leave: Female employees get 26 weeks of fully paid leave for the first two children under the Maternity Benefit Act. For the third child onwards, it drops to 12 weeks. Your payroll processing must account for this extended paid absence, and you can't terminate employment during maternity leave. This is a strong protection for female employees that global companies often underestimate.
• Statutory Bonus: Mandatory for factories and establishments with 20+ workers. Eligible employees receive bonus payments typically ranging from 8.33% to 20% of annual wages, with a minimum of 8.33% even if the company makes no profit. This is paid annually and governed by the Payment of Bonus Act. It's not a performance bonus; it's a legal obligation.
• Overtime Pay: Any work exceeding 48 hours per week must be compensated at double the standard hourly rate. The Minimum Wages Act enforces this strictly. If your employees are pulling extra hours, you're paying double, no negotiations.
• Leave Entitlements: Under the Wages Act, employees are entitled to paid annual leave, casual leave, and sick leave. The specifics vary by state and industry, but you can't deny basic leave provisions.
• Employee Pension Scheme: Part of your EPF contribution (8.33% out of the employer's 12%) goes toward pension benefits. This provides social security for employees post-retirement.

These mandatory benefits increase your actual employment costs beyond the salary structure. When budgeting for Indian employees, factor in gratuity provisions, bonus obligations, and potential overtime. Skipping these isn't just non-compliance; it's a quick way to face legal action from relevant authorities and damage employee satisfaction.

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 do the new and old tax regimes differ for employees in 2026?[toc=New vs. Old Tax Regime]

India's dual tax regime lets employees choose between the Old Regime (with deductions and exemptions) or the New Regime (lower tax rates but minimal deductions). The choice significantly impacts their net take home pay and your TDS calculations.

Here's what you need to know: the New Tax Regime became the default in 2023, but employees can still opt for the Old Regime when filing employee declarations at the start of each financial year. Your payroll system needs to accommodate both because the choice affects tax deducted at source throughout the year.

Key Deduction Benefits:

• Old Regime: Employees can claim house rent allowance exemptions, Section 80C deductions (up to ₹150,000 for provident fund, insurance, investments), medical insurance premiums, and home loan interest. This regime works better for employees with significant tax-saving investments.
• New Regime: No major deductions allowed except standard deduction of ₹75,000 (increased in 2025). You lose HRA benefits, Section 80C, and most other tax deductions. But the lower tax slabs often result in higher net salary for employees without substantial investments.

For your payroll processing, this means tracking which regime each employee selects and adjusting income tax calculations accordingly. Most younger employees without dependents prefer the New Regime, while those with home loans or heavy investments stick with the Old Regime.

Your payroll team needs to collect these declarations annually and update tax obligations in your payroll software.

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 critical monthly and quarterly payroll deadlines for TDS and EPF?[toc=Payroll Deadlines]

Missing payroll deadlines in India triggers penalties, interest charges, and compliance headaches. You need to track both monthly and quarterly due dates across multiple statutory payments to avoid issues with tax authorities and relevant authorities.

Here's your must-meet calendar:

Monthly Deadlines:

• TDS Payment: Due by the 7th of the following month. You deduct income tax from employee salaries and must deposit it with the Income Tax Department by this date. Miss it, and you're paying interest at 1.5% per month plus potential penalties.
• EPF & ESI Contributions: Due by the 15th of the following month. Both employer contributions and employee deductions for provident fund and Employees State Insurance must be remitted by this deadline. Delays attract 12% annual interest on EPF and penalties on ESI.
• Professional Tax: Varies by state but typically due by the 15th or last day of the month. Since PT is state-specific, check your local regulations because Maharashtra differs from Karnataka.

Quarterly Deadlines:

• TDS Returns (Form 24Q): Filed quarterly by July 31st (Q1), October 31st (Q2), January 31st (Q3), and May 31st (Q4). This return reconciles all tax deducted at source during the quarter with the Income Tax Department. Late filing means ₹200 per day in penalties.
• ESI Returns: Due within 21 days after the quarter ends. You're reporting total wages, contributions, and employee data to the Employees State Insurance Corporation.

Annual Deadlines:

• Form 16 Issuance: Must be provided to employees by June 15th following the financial year end. This certificate shows total income, tax deductions, and TDS paid, which employees need for their tax filing.
• Annual EPF Return (Form 5A & 10): Due by April 30th each year, covering contributions and employee pension scheme details for the previous financial year.
• Income Tax Return for TDS: Annual reconciliation statement due by May 31st.

Pro tip: Set up automated reminders in your payroll software at least 3 days before each deadline. The Indian system doesn't give grace periods, and penalties stack up fast. Your payroll team should reconcile statutory payments weekly rather than scrambling at month-end.

Missing tax payments or statutory contributions doesn't just cost money; it damages your compliance record and can trigger audits from tax authorities.

How can businesses ensure 100% payroll compliance while maximizing employee satisfaction?[toc=Best Practices]

You need automation, proactive monitoring, and transparent communication. Prevent problems before penalties hit.

1. Automate Statutory Compliance: Let your payroll software handle all statutory deductions, employer contributions, and tax payments automatically. Manual calculations create errors that cost more than the software itself.
2. Beat the Deadlines: Process statutory payments by the 5th of each month, not the 7th or 15th. Buffer time prevents last-minute technical failures from triggering non compliance.
3. Audit Quarterly: Review your TDS, EPF, and ESI payments against government records every quarter. Catching errors in July beats explaining them to tax authorities in March.
4. Train Your Payroll Team: The Income Tax Act and labour laws change constantly. Quarterly training on tax regulations and local regulations keeps your team sharp.
5. Communicate Transparently: Show employees exactly where their money goes in statutory deductions and what employee benefits they're getting. Confused employees flood HR; informed employees trust the process.
6. Document Everything: Keep digital records of employee declarations, statutory payment challans, and compliance certificates. Tax authorities audit, and documentation saves you.
7. Offer Real Benefits: Health insurance and clear explanations of the employee pension scheme improve employee satisfaction beyond just net take home pay.
8. Plan the Financial Year: Don't scramble for Form 16 in May. Budget for bonus payments, gratuity provisions, and severance pay before the financial year ends.
9. Monitor Minimum Wages: States revise minimum wages periodically. Check quarterly that you're above thresholds under the Wages Act.
10. Run Payroll Consistently: Same schedule monthly. Employees expect predictability, and consistent processing prevents errors in statutory contributions.

The reality: You can't fake compliance. Tax authorities catch gaps eventually. Employee satisfaction comes from three things: getting paid on time, understanding their employee's pay, and trusting you're handling their provident fund correctly.

Your goal isn't just to maintain compliance. It's building a payroll structure that employees trust, that scales as you grow, and that handles tax obligations without constant fire-fighting. Get your foundation right with a reliable payroll system, or spend years fixing compliance issues while trying to run your actual business.

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

Wisemonk is a leading Employer of Record (EOR) service provider trusted by 300+ 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!