30-06-2025
Decoding your monthly salary pay out
Have you ever wondered how your salary reaches your bank account on a fixed day each month after all the calculations and deductions? Ensuring that the funds hit your bank account on the same day each month, especially in India where there are myriad national and local payroll taxes, can be a complex process.
In fact, if you are an employer in India, the responsibility of calculating, withholding and submitting various payroll taxes from every employee's pay slip is yours. For some of these, you also need to make your own contributions as an employer.
This makes understanding all the intricacies of the laws and rules essential – it is not just about being on the right side of the law. It is about safeguarding your business and your most valuable asset, which is your people. Read on to know all you need to ensure your payroll operations are as smooth and predictable.
Think of payroll taxes as contributions made by both employees and businesses to the government to fund public programs such as retirement schemes, healthcare and unemployment insurance. They typically include income tax and social contributions, all set at specific, pre-determined rates.
These rates and the rules that govern them differ from country to country. As an employer, it is your responsibility to make sure you follow all the rules, withholding and submitting the correct amounts.
It's easy to get confused between payroll taxes and corporate taxes, but they serve very different purposes. Generally, payroll taxes are directly linked to your employees' wages and contributions towards their benefits and government programs. Corporate taxes, on the other hand, are based on your company's profits.
In India, the following will be withheld from your employees' pay:
Income Tax (TDS - Tax Deducted at Source): Like in many other countries, Indian residents pay income tax based on how much they earn. The rates range from 0% to 30%, depending on the income slab that the employee falls under.
When to pay: You must deposit TDS to the government by the 7th of the following month.
Employee's Provident Fund (EPF): EPF is a crucial retirement savings scheme designed to provide financial security after retirement. Employees must contribute 12% of their basic salary plus dearness allowance.
When to pay: You must deposit EPF by the 15th of the following month.
Employee's State Insurance (ESI) ESI offers medical, disability, and maternity benefits to employees earning up to ₹ 21,000 per month. Employees contribute 0.75% of their gross salary.
When to pay: Alongside EPF payments, by the 15th of the following month.
Professional Tax: This is a state-level tax levied only on professionals and salaried individuals. It varies by state, with a maximum annual limit of ₹ 2,500.
When to pay: Each state has its own regulations and requirements.
In addition to the above, you might need to withhold additional amounts for specific employees, such as child support payments, student loan repayments, or any other court-ordered deductions.
Beyond withholding, your business also needs to contribute to certain funds. These include:
Employer's Provident Fund (EPF) As the employer, you must also contribute towards your employees' retirement savings at a rate of 12% of their basic salary (plus dearness allowance). This matches the employees' contribution, doubling down on their retirement security.
When to pay: By the 15th of the following month.
Employee's State Insurance (ESI) You also need to contribute towards ESI, at a rate of 3.25% of your employees' gross salary. This employer contribution strengthens the safety net for your eligible team members.
When to pay: By the 15th of the following month.
Beyond these, in India, employers must make an annual bonus payment of between 8.33% and 20% of an employee's annual salary, provided they are earning up to ₹ 21,000 per month. Also, if an employee leaves your company, you must make a lump sum gratuity payment of 15 days' wages for each year of service.
Still confused on the deduction amounts? Get a quick estimate of payroll taxes and employment costs for your Indian hire (s) based on their salary, by using a free Employee Cost Calculator tool.
Making these payments accurately and on time is crucial for that consistent monthly payroll. Here's how you go about it:
Calculate correct amounts: The first step is to calculate the amounts to withhold from employees and then add your employer contributions. You can use a dedicated payroll software or EOR service for this.
Adhere to deadlines: Ensure you stick to the payment deadlines mentioned above. Missing these can lead to penalties and disruptions.
Payments: You will need to pay:
· TDS through the income tax e-filing portal.
· EPF through the EPFO Unified portal.
· State Insurance through the relevant ESIC portal.
· Professional tax through the relevant state tax portal.
If you are hiring an India-based team member from abroad, there are several ways to manage their payroll and taxes.
If you already have your own legal entity in India, you can:
· Handle it in-house: You can hire your own payroll tax specialists. While this gives you full control, it can be quite expensive.
· Use a local third party: You could hire a local firm to handle payroll. However, this can sometimes be unreliable, expensive, and even pose risks to your data privacy.
· Use a Professional Employment Organisation (PEO): A PEO acts as an outsourced HR provider and includes payroll services.
· Use a global payroll provider: Providers like Remote have local specialists in multiple countries. This ensures you are fully compliant with all tax requirements in each region. This is especially beneficial if you have (or plan to have) employees in different countries, as you can manage all of them through one common platform.
If you don't have your own entity in India but still want to hire here, you can:
· Set up your own entity: This can be very costly and time-consuming. However, if you plan to establish your business long-term in India, it might be a viable approach. Once set up, you would then need to choose one of the payroll options mentioned above.
· Use an Employer of Record (EOR): EOR providers enable you to quickly and easily hire anywhere in the world. They also handle all the core HR functions like compliance and payroll. Besides being generally more cost-effective than opening your own entity, this option is highly scalable and again, allows you to streamline all your global HR tasks in one place, ensuring that same reliable salary process for your international hires.
In India, independent contractors are classified differently from employees. As a result, they are typically responsible for calculating, managing, and paying their own taxes. However, it is crucial to understand the difference between contractors and employees to avoid 'misclassification risk', which can result in severe fines and penalties for your business. Learn more about hiring contractors in India.
Knowing exactly which payroll taxes you need to calculate, withhold, and contribute requires local expertise, especially because these rules can – and do – change. If you make a mistake or fail to comply, the financial consequences for your business can be significant, directly impacting your ability to deliver that seamless monthly pay check.
Whether you have your own entity in India or not, a partner like Remote ensures you are withholding and contributing the correct amounts, and that you are fully compliant at all times with local tax and employment laws. They also provide 24/7 support for any guidance you may need, ensuring your employees get paid precisely as expected, every single time.
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Note to the Reader: This article has been produced on behalf of the brand by HT Brand Studio and does not have journalistic/editorial involvement of Mint.
