Payroll in India: Essential Guide For Employers In 2025

India is an increasingly attractive destination for organizations due to its large and skilled workforce, growing economy, and favorable business climate.

However, navigating local payroll and tax legislation can be challenging due to the complex regulatory framework, varying state laws, and frequent policy updates.

Here’s a comprehensive guide on payroll in India, tailored to cover the full scope from taxes to payroll setup and options for employers.

Payroll Taxes And Contributions In India

Understanding payroll taxes and contributions is essential for employers operating in India. Here I provide an overview of the key taxes and contributions, along with their purposes and breakdowns, to ensure compliance and efficient payroll management.

1. Provident Fund (PF)

Purpose: A mandatory retirement savings scheme for salaried employees, administered by the Employees' Provident Fund Organisation (EPFO).

Contribution Details:

• Employee Contribution: 12% of basic wages + dearness allowance (DA)
  Employer Contribution: 12% of basic + DA, split into:
  • 3.67% towards EPF
  • 8.33% towards Employee Pension Scheme (EPS)

Eligibility: Mandatory for organizations with 20 or more employees. Applicable to employees earning up to ₹15,000 per month (basic + DA), though employers may voluntarily contribute for higher earners.

More Info: EPFO Official Website

2. Employee Pension Scheme (EPS)

Purpose: To provide post-retirement pension to employees.

Contribution Details:

• Employer: 8.33% of the basic salary + DA (capped at ₹15,000/month) is diverted from the 12% employer PF contribution.
• Employee: No separate contribution; covered under PF.
  

Eligibility: Employees must have completed 10 years of service to avail pension benefits under EPS.

More Info: EPS Section on EPFO Site

3. Employee State Insurance (ESI)

Purpose:
Provides medical care, sickness, maternity, disability, and dependent benefits to insured employees and their families.

Contribution Details (as of June 2025):

• Employee Contribution: 0.75% of gross salary
  
• Employer Contribution: 3.25% of gross salary
  

Eligibility: Employees earning a gross monthly salary ≤ ₹21,000 are eligible.

Administered by: Employees' State Insurance Corporation (ESIC), under the Ministry of Labour and Employment.

More Info: ESIC Official Website

4. Professional Tax

Purpose: A tax levied by state governments on professionals and salaried employees.

Contribution Details:

• Employer Responsibility: Deduct the applicable amount from the employee’s salary and remit it to the respective state government.
• Employee Contribution: Varies by state. Some typical examples:
  
  • Maharashtra: Up to ₹2,500/year
  • Karnataka: ₹200/month (i.e., ₹2,400/year)
  • Tamil Nadu: Slabs from ₹75 to ₹208/month depending on salary
    

Note: Not all Indian states impose this tax (e.g., Delhi and Haryana do not). For more info, visit the respective State Commercial Tax Department websites, for example:

• Maharashtra PT
• Karnataka PT
• West Bengal PT
  

5. Tax Deducted at Source (TDS) on Salary

Purpose: TDS is deducted by employers from employees’ salaries as per applicable income tax slabs and deposited with the Income Tax Department.

Contribution Details:

• Employer: Must deduct and remit TDS monthly and issue Form 16 annually.
• Employee: Tax liability is based on income tax slabs:
  • ₹0 – ₹3,00,000: 0%
  • ₹3,00,001 – ₹6,00,000: 5%
  • ₹6,00,001 – ₹9,00,000: 10%
  • ₹9,00,001 – ₹12,00,000: 15%
  • ₹12,00,001 – ₹15,00,000: 20%
  • Above ₹15,00,000: 30%

(Note: Slabs as per New Tax Regime for FY 2024–25. Older regime optional.)

More Info: Income Tax Department - TDS; TDS on Salary – Guide (TRACES)

Summary Table

Contribution Type	Employer Contribution	Employee Contribution
Provident Fund	12% of basic + DA	12% of basic + DA
Employee State Insurance	3.25% of wages	0.75% of wages
Professional Tax	Varies by state	N/A
Gratuity	As per service years	N/A

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How Payroll Tax Is Calculated In India

Calculating payroll tax in India involves several steps to ensure accurate deductions and compliance with the law. Here's a step-by-step guide to help employers navigate the process effectively.

Steps to Calculate Payroll Tax in India

1. Determine Gross Pay: Calculate the employee's total earnings, including basic salary, allowances, bonuses, and any other income components.
2. Calculate Provident Fund (PF) Contributions: Deduct 12% of the basic salary plus dearness allowance for both employer and employee contributions.
3. Compute Employee State Insurance (ESI) Contributions: Deduct 3.25% of the gross salary for employer contribution and 0.75% for employee contribution, if applicable.
4. Deduct Professional Tax: Determine the applicable professional tax based on the employee's salary and state regulations.
5. Apply Tax Deducted at Source (TDS): Calculate TDS based on the employee's income tax slab, taking into account any exemptions and deductions.
6. Account for Other Deductions: Include any other statutory or voluntary deductions such as health insurance or loan repayments.
7. Calculate Net Pay: Subtract all contributions and deductions from the gross pay to arrive at the employee's net pay.

By following these steps, employers can ensure accurate payroll tax calculations and compliance with Indian regulations.

Key Elements Of Payroll In India

Understanding the key elements of payroll in India is crucial for effective workforce management and compliance with labor laws. Here’s an overview of important payroll aspects, including leave policies and employment terms.

Fiscal Year

The fiscal year in India runs from April 1st to March 31st of the following year. All financial reporting and tax calculations align with this period.

Payroll Cycle

Most companies in India follow a monthly payroll cycle, with salaries typically paid on the last working day of the month.

Minimum Wage

The minimum wage varies by state and is determined by job category and skill level.

For example, Delhi (one of the highest in India), ranges from ₹17,494/month-₹21,215/month and Bihar (among the lowest), ~₹6162/month-~₹9,438/month

Overtime and Work Conditions

Though overtime pay is generally set at double the regular rate, states may have:

• Different maximum allowable overtime hours
• Unique requirements for prior approvals

For example, Tamil Nadu restricts overtime to 50 hours per quarter, while Punjab might allow more depending on sector.

Termination

Termination policies must comply with the Industrial Disputes Act, which includes notice periods and reasons for termination.

Severance

Severance pay is typically calculated based on the length of service and is applicable as per the Industrial Disputes Act.

Annual Leave

Employees are entitled to a minimum of 15 days of paid annual leave per year after completing 240 days of work.

Maternity Leave

Maternity leave is 26 weeks for the first two children and 12 weeks for the third child onwards, as per the Maternity Benefit Act.

Paternity Leave

Paternity leave is not mandated by law, but some organizations offer up to 15 days of leave.

Adoption Leave

Adoption leave is available for female employees adopting a child under three months, with leave up to 12 weeks.

Sick Leave

Sick leave policies vary by employer, but typically range from 7 to 12 days per year.

Holidays

National and state-specific public holidays are observed, with approximately 10 to 15 holidays per year, depending on the region.

How To Set Up Payroll In India

Setting up payroll in India involves several administrative steps to ensure compliance with local laws and regulations. Below is a step-by-step guide to establishing a payroll system for your organization.

Steps to Set Up Payroll in India

1. Register with Government Departments: Register your company with the Employees' Provident Fund Organization (EPFO) and Employee State Insurance Corporation (ESIC) to obtain the necessary codes and numbers.
2. Obtain a Tax Deduction and Collection Account Number (TAN): Apply for a TAN through the Income Tax Department to facilitate the deduction of Tax Deducted at Source (TDS) from employee salaries.
3. Set Up Employee Records: Collect and maintain comprehensive records of employee details, including personal information, bank account details, tax information, and employment contracts.
4. Determine Payroll Policies: Establish company-specific payroll policies, including salary structure, leave entitlements, and benefits, ensuring compliance with labor laws.
5. Choose a Payroll Software or Service: Select a reliable payroll software or service provider to streamline payroll processing, including salary calculations, tax deductions, and statutory compliance.
6. Configure Payroll System: Input employee data, salary structures, and tax details into the payroll system to automate calculations and reporting.
7. Run a Payroll Trial: Conduct a trial payroll run to ensure accuracy in calculations and compliance with statutory requirements before the first actual payroll cycle.
8. Communicate with Employees: Inform employees about the payroll setup, including salary components, deductions, and the pay cycle.
9. File Statutory Returns: Ensure timely filing of statutory returns, including PF, ESI, and TDS, to maintain compliance with government regulations.

pro tip

Use automation for calculations, tax tables, and benefit deductions, but never skip post-run validations. After each payroll run, do a final check—look at payroll summaries, spot-check a few employee records, and confirm totals before funds are disbursed.—BJ Anderson, Director of Payroll & Leave Management, Humareso

Payroll Options For Employers In India

Employers in India have several options for managing payroll, each offering distinct advantages and challenges. Here's a look at the main approaches businesses can take to run payroll effectively.

Internal Payroll Management

This involves setting up and managing payroll processes within the company using in-house resources and software.

Pros:

• Full control over payroll processes.
• Direct access to employee data for customization.
• Potential cost savings if managed efficiently.

Cons:

• Requires significant time and resources.
• Risk of errors and compliance issues without expert knowledge.
• May require investment in payroll software and training.

Outsourcing to a Local Partner

Businesses can outsource payroll functions to a local payroll service provider with expertise in Indian regulations.

Pros:

• Access to local expertise and compliance knowledge.
• Reduces administrative burden on internal teams.
• Scalability as the business grows.

Cons:

• Less control over payroll processes.
• Potential communication challenges.
• Dependence on the reliability of the provider.

Global Payroll Provider

Engaging a global payroll provider offers a unified platform for managing payroll across multiple countries, including India.

Pros:

• Consistent payroll management across regions.
• Centralized reporting and analytics.
• Expertise in international compliance.

Cons:

• May not offer localized service for specific regional needs.
• Higher costs compared to local providers.
• Possible complexity in handling local nuances.

Employer of Record (EOR)

An EOR takes on the legal responsibilities of employing staff, handling payroll, taxes, and compliance on behalf of the business.

Pros:

• Simplifies international expansion without setting up a local entity.
• Ensures compliance with local labor laws.
• Reduces administrative and legal burdens.

Cons:

• Less direct control over employment terms.
• Dependence on the EOR's service quality.
• Potentially higher costs than managing internally.

For more info, see our pick of the best EORs in India.

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