Hailed as the fastest-growing major economy in the world, India has positioned itself as an attractive location for businesses. However, like any other country, doing business in India comes with a plethora of regulations for both local and international businesses to follow.

Payroll and income tax compliance are key obligations for businesses operating in India. Compliance helps businesses stay out of legal trouble and build a positive reputation in the eyes of the government, employees, and clients.

Due to the country’s popularity as the next big thing in the global economy, India EOR services are readily available. These services keep businesses compliant with the country’s payroll and income tax systems by managing everything from calculation to reporting. In this guide, we cover the Indian payroll tax rates and obligations for employers in detail.

Table of Contents show

What Is Payroll Tax in India?

Payroll tax in India isn’t as complicated as in some other countries, but it’s still important to understand. The main social security contributions in the tax are to the Employees Provident Fund (EPF) and Employee’s Pension Scheme (EPS). Both the employer and the employee have to contribute to these programs.

Definition and Purpose of Payroll Tax

Payroll tax in India refers to the various taxes and deductions employers must withhold from employee salaries and contribute to government programs. These taxes help fund essential services like social security, healthcare, and employee welfare schemes.

The purpose of payroll tax is twofold. First, it helps employees get access to benefits like pensions, health insurance, and gratuity. Second, payroll taxes contribute to public services that support economic stability. In India, payroll tax is a structured way to balance employee benefits with national development.

Payroll Tax vs. Income Tax in India

Payroll tax and income tax may seem similar, but they serve different purposes and fall on different shoulders. The former is the employer’s responsibility. It includes contributions to schemes like the Employees’ Provident Fund (EPF), Employees’ State Insurance (ESI), and Professional Tax (in some states). Employers must deduct these amounts from employee salaries and contribute their share before depositing them with the authorities.

In contrast, income tax is the employee’s responsibility. It’s deducted as Tax Deducted at Source (TDS) from salaries based on applicable tax slabs. The amount varies depending on income, exemptions, and deductions under the Income Tax Act.

Employees can reduce their taxable income through investments in tax-saving instruments like PPF, NPS, or Section 80C deductions. While payroll taxes fund employee benefits, income tax contributes to overall government revenue and public services.

When you work with an India recruitment agency, they can help sign your employees up for EPF and ESI schemes. The agency will typically handle the paperwork, including compliance checks, contributions, and withdrawals. They can also advise on tax-saving options to help you stay compliant with Indian laws.

Employer and Employee Responsibilities

While both the employer and the employee contribute to payroll taxes in India, the administrative responsibility mainly falls on the employer. They have to calculate the taxes according to the rates set by the government. Then, they must deposit deductions with the respective authorities within the specified deadlines to avoid penalties.

Employers typically also have to keep a record of the deductions made and provide employees with salary slips that detail the deductions. These records help confirm compliance in audits.

Employees mainly have to understand the tax deductions made on their salaries. They must review their payslips to ensure correct tax and statutory deductions. If they have made any tax-saving investments (e.g., under Section 80C or 80D), they should declare them at the start of the financial year.

Even though TDS is deducted, employees must file their income tax return to claim refunds or additional deductions. As evident, this is a lot of paperwork, which can be hard to manage for companies on top of their day-to-day operations. India PEO services can take this extra burden off your shoulders and ensure compliance with payroll deductions, thanks to their expertise in Indian tax laws and regulations.

Payroll Tax Deductions and Allowances in India

In India, the payroll contributions from the employers and the employee have to be made from the first day of employment. Employers contribute a total of 16.75% of the employee’s salary to multiple social security schemes, while employees pay 18.08% towards them.

Breakdown of Common Payroll Deductions

As we’ve mentioned above, there are three main contributions: PF, ESI, and professional tax. Here’s how they are calculated.

Provident Fund (PF) Contributions

The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme. Both the employer and the employee contribute 12% of the employee’s basic salary to the fund. The employer’s contribution is further divided:

  • 8.33% goes to the Employees’ Pension Scheme (EPS) (for salaries up to INR 15,000 per month)
  • 3.67% remains in the EPF account

Employees can withdraw their PF balance upon retirement, job change, or in specific financial emergencies.

Employee State Insurance (ESI) Contributions

The Employees’ State Insurance (ESI) scheme provides medical, disability, and maternity benefits for employees earning INR 21,000 or less per month (INR 25,000 for disabled employees).

Employers contribute 3.25% of the employee’s salary towards the scheme, while employees contribute 0.75%. It’s important for employers to register their employees for ESI and pay the contributions regularly to avoid any legal repercussions.

Professional Tax (PT)

Professional Tax is a state-imposed tax on salaried individuals deducted by employers. The rates vary by state, with some states exempting employees earning below a certain threshold. On average, the tax ranges from INR 200 to INR 2,500 and has to be paid monthly.

Some states that levy professional tax are Maharashtra, Karnataka, and West Bengal. However, the tax only applies to individuals who earn more than a certain amount per month.

Employer Responsibilities for Payroll Compliance

Employers have to calculate and remit payroll taxes on time to stay compliant. The calculations are made based on the salary structure, tax slabs, and applicable social security contributions. If there’s a professional tax in the state, it also has to be factored in.

Next, employers must deposit the relevant contributions on time. For example, PF and ESI contributions have to be made by the 15th of the following month. Similarly, TDS payments have to be reported in quarterly TDS returns. As for the professional tax, it is paid according to the state guidelines.

Employers are also required to maintain compliance records. ESI and PF returns have to be filed monthly and annually. Plus, employers must issue Form 16 to employees showing details of their taxable income. Employees then use these forms to file their annual tax returns.

Another important factor in compliance is keeping up with tax laws. As the government updates tax laws, employers need to implement changes as required. 

Employer Payroll Tax Rates in India

Employers in India have several mandatory tax contributions that facilitate employee welfare and regulatory compliance. Apart from these contributions, employers also have to adhere to labor laws, minimum wage requirements, and other mandatory compliances.

In 2024, the minimum wage in India was INR 178 per day. It is the National Floor Level Minimum Wage (NFLMW), which means that no state government can set minimum wages below this amount. However, some states have higher minimum wage requirements due to the high cost of living in those areas.

Key Employer Tax Contributions

The main employer tax contributions in India are to the EPF, ESI, and EPS. It’s important to note that these contributions only have to be made for employees earning up to specific amounts.

For EPF, the current monthly salary threshold is INR 15,000. It means that any employee earning more than INR 15,000 per month does not have to contribute to EPF. Employers who have hired more than 20 employees in this salary range are obligated to make this contribution. For ESI, the salary limit is INR 21,000 per month.

Statutory Benefits for Employees

Indian labor laws mandate several statutory benefits for the financial security of employees. For example, a gratuity is a lump sum paid to employees who have completed at least 5 years of service with an employer. It is calculated as 15 days’ worth of salary for every completed year of service. For private sector employees, the gratuity is tax-free up to INR 2 million under the Gratuity Act of 1972.

Similarly, the Payment of Bonus Act of 1965 applies to companies employing 20 or more workers. Under this law, employers can give bonuses up to 20% (with a minimum of 8.33%) of salary based on company profits. Employees earning up to INR 21,000 are eligible for bonuses.

Another benefit is the encashment of paid leaves, which is a part of most company policies. Employees can encash unused paid leaves, such as sick leave, casual leave, etc., at the end of a certain period. Upon resignation or retirement, leave encashment is tax-free, up to INR 25,00,000 for non-government employees.

Payroll Tax Rates Based on Salary Levels

Payroll tax obligations vary based on an employee’s salary. For example, employees who earn under INR 21,000 per month are covered by the ESI. The employer contribution is 3.25% of the employee’s salary, while the employee’s contribution is 0.75%. These employees are also eligible for minimum wage protections and statutory bonuses.

Similarly, employers only contribute to EPF for employees earning less than INR 15,000 per month. High-income employees who make over INR 15,000 per month don’t have to contribute to the PF. They can voluntarily contribute to the PF if they choose, but it is not mandatory. Gratuity, bonuses, and professional tax (if applicable) still apply.

India Payroll Tax Calculator

RemotePeople has a handy payroll tax calculator that you can use to compute both employer and employee taxes in the local currency or USD.  

How the Calculator Works

The calculator is pretty simple to use as you only have to provide it with the required data, and it does the rest. After selecting India from the country list, select the employee type (local or foreign) and the calculation period (monthly or annually). Then, enter the gross salary and select the currency in which you want the output.

Example Payroll Scenarios

Let’s explain the use of this India payroll tax calculator with two examples. First, let’s suppose an employee makes INR 50,000 per month. According to the calculator, they have to pay INR 2,708 in income tax per month, while the employer’s taxes amount to INR 6,805. As a result, the employee’s net salary is INR 37,291 per month.

Now, let’s say we have a high earner who makes INR 1,000,000 per year. They pay INR 9,375 in income tax per month, with employer’s taxes being INR 11,341 per month. Their net salary for the month is INR 57,291, which amounts to INR 687,492 per year. As you can see, almost 31% of their gross salary goes towards taxes, making it a significant expense for both the employee and employer.

Simplify Payroll and Tax Compliance in India

Compliance with the Indian income tax law and payroll tax regulations is a must for any business operating in the country. Besides contributing to the social security schemes, employers also have to calculate the professional tax (where applicable) and the employee’s TDS. These calculations can be complex and time-consuming, especially for multinational companies with employees from different countries.

Using a payroll tax calculator like the one mentioned above can simplify this process. If needed, businesses can also partner with payroll management services, who can then maintain compliance by taking care of all tax-related calculations and filings.

Need assistance in staying on top of your payroll and tax compliance in India? Contact RemotePeople to avail professional payroll management services. Reach out to us here.

Frequently Asked Questions

The tax deducted depends on the employee's income tax slab after exemptions and deductions. Additionally, 12% PF contribution, TDS (if applicable), and professional tax (state-specific) may be deducted from the salary.

Employers contribute 16.75% of an employee's salary to statutory schemes, including PF (12%), ESI (3.25%) for eligible employees, and gratuity (where applicable). They must also deduct TDS and pay professional tax as per state laws.

The TDS for salaried employees in India ranges from 0% to 30% plus a certain surcharge, depending on their income tax slab and other factors. For senior and very senior citizens, the TDS rate is lower.

The key payroll deductions include Provident Fund (PF), which is 12% of the salary, and ESI (if applicable), which is 3.25% of the salary. TDS and professional tax (state-specific) may also be deducted from an employee's salary.