Payroll in India

With about 1.4 billion inhabitants, India is the second most populous country in the world. Global organizations like yours are seeking to hire highly skilled remote workers from a constantly growing pool of highly qualified individuals from various industries. 

Nevertheless, there can also be some challenges with hiring in India, such as managing payroll for employees who work remotely. Furthermore, it is crucial to understand and abide by the local labor laws in order to prevent fines or penalties. It would be challenging if you had to handle everything by yourself.

Using payroll services in India

Utilize worldwide payroll services to reduce your workload. Choosing payroll outsourcing in India offers a simplified approach to efficiently handle payroll for your global staff. Some service providers even go above and above in helping you with the hiring and onboarding of your staff, managing human resources, and supervising employee benefits.

Hiring the talent you want in India is made easier when you collaborate with a payroll business. You will learn more about the intricacies of the payroll procedure in India in the parts that follow, along with the dangers to watch out for and the best courses of action. In addition, the EOR Services staff is ready to answer any questions you might have about payroll-related issues.

What does the payroll process in India involve?

Knowing the fundamentals of a payroll system is necessary whether you’re recruiting a full-time employee or hiring an independent contractor in India to comply with local labor laws. This entails gathering the name, address, and AADHAR number of every employee. When it comes to pay and salaries, specific details are crucial. These include the type of compensation (hourly or fixed annual salary), the pre-tax and deduction gross pay, the hours worked (including overtime), the applicable overtime pay rates as per Indian employment laws, benefit contributions, extra income sources such as tips, bonuses, or commissions, and the post-tax and deduction net pay. 

Important components are deductions, such as benefit, withholding, and payroll taxes. Specifically, contractors should have a foreign currency account even if they are entitled to be paid in a different currency; employees in India should be paid in Indian rupees (INR ₹). To ensure a smooth procedure and compliance with regulations, companies are advised to pay contractors in Indian rupees for the sake of simplicity and compliance. Understanding these elements is essential to ensuring an efficient and law-abiding payroll procedure in India.

India Payroll - Key statutory points

Tax: Businesses in India must be aware of the recently enacted new tax structure. 

In conclusion, the income tax on employees was reduced. In certain tax brackets, it was cut in half from the prior arrangement.

There are fewer tax exemptions under this new system, which could result in increased costs for some employees, even if lower taxes may initially seem quite desirable. In this case, the employee is allowed to stay under the old regime because the net tax payable under the old regime is less than under the new system. 

Here’s a comparison of the old vs. new tax system:

Taxable income (INR)	Old tax regime	New tax regime
Up to 2,50,000	0%	0%
2,50,000 to 5,00,000	5%	5%
5,00,000 to 7,50,000	20%	10%
7,50,000 to 10,00,000		15%
10,00,000 to 12,50,000	30%	20%
12,50,000 to 15,00,000		25%
More than 15,00,000		30

All parts of an employee’s income—base pay, commission, bonuses, profit-sharing, reimbursement for personal expenses, and benefits exchanged for higher compensation—are subject to full taxes. In the most current tax system, about 70 of the 120 exemptions were eliminated. Transport, medical, and housing rent allowances are among the allowances that are still tax deductible. The right to overtime compensation is dependent on working more hours than those specified in the employment contract. This is a term that is not clearly defined in Indian law and is susceptible to change depending on the nature of the work, the employee’s typical hours, and their state of domicile. As part of their payroll duties, employers in India are required to deduct statutory employee benefits, such as the Employees’ Provident Fund, Employees’ Pension Scheme, and Employees’ Deposit Linked Insurance Scheme. For enterprises with less than 20 employees, voluntary contributions to the Provident Fund are allowed; however, if the workforce reaches this threshold, the contributions become legally required.

In several businesses, employees are legally entitled to a 13th-month bonus; the size of the bonus is determined by their yearly wage. This incentive must be distributed within eight months of the end of the fiscal year.

In terms of minimum wage, the national average in India is 176 rupees per day, or around $3. It’s crucial to remember that this rate can change based on the Indian state or the particular business.

Types of paid leave that Indian employees will expect

Paid Leave:

Employees are entitled to 12 days off for every 240 days worked, as per legal regulations. It’s important to note that variations in laws exist based on location, specifically tied to the location of the employer’s legal entity rather than the employee.

Sick Leave:

In India, employees receive 12 days of leave for health or personal reasons.

Public Holidays:

India observes several national public holidays, with additional holidays celebrated in various states. Employers should be aware of key holidays, with dates based on the year 2022, including Republic Day on January 26th, Rama Navami around April 10th, Ambedkar Jayanti on April 14th, Good Friday on April 15th, Eid al-Fitr around May 2nd – 3rd, Eid al-Adha around July 9th – 10th, Indian Independence Day on August 15th, Gandhi Jayanti on October 2nd, Dussehra on October 5th, Prophet’s Birthday on October 8th – 9th, Diwali on October 24th, and Christmas Day on December 25th.

Maternity Leave:

Employees with fewer than two children are granted a minimum of 26 weeks of maternity leave. If they have two children or more, or have adopted or used a surrogate, the entitlement is reduced to twelve weeks. Maternity leave can begin up to eight weeks before the due date, contingent on the employee having worked a minimum of 80 hours within the last 12 months of employment.

Paternity Leave:

Under Indian employment laws, employees are not automatically entitled to paternity leave.

3 potential pitfalls of payroll in India

Payroll Compliance:

Navigating payroll procedures in India has become intricate, particularly with the introduction of the new tax regime. Staying informed about statutory regulations is crucial to ensure compliance and avoid potential fines or penalties for businesses. Failure to accurately contribute to India’s social security system may result in back payments, along with interest and fines ranging from 5-25% of the amount due. Deliberate avoidance of contributions could even lead to prosecution.

Misclassification:

The use of contractors in India may be limited, requiring employers to obtain a ‘principal employer’ license for engaging self-employed workers. In cases where contractors are hired, caution must be exercised to prevent misclassification, also referred to as ‘Sham contracting’ under Indian law. Government assessments may be conducted to determine the accuracy of classification, with penalties and fines imposed for misclassification.

Centralized Payroll and Data Management:

Some companies unintentionally opt for multiple employers of record for payroll management when a single efficient provider could suffice. Overly complex payroll systems and HR processes can hinder scalability and deplete resources. Choosing a streamlined approach with a single payroll partner capable of handling onboarding, compliance, HR, and more across multiple countries is a more efficient solution.

Outsourcing Payroll in India: Start Building Your Team Today!

Opting for payroll outsourcing for employees in India proves to be a cost-effective and time-saving alternative to establishing an independent legal entity. The latter involves registration costs, high fees for specialized legal and accounting services, and additional expenses related to compliance with Indian labor and employment laws. Partnering with a reputable payroll service like EOR Services eliminates these challenges. With an established legal entity in India, EOR Services offers Employer of Record services, covering HR management and competitive benefits packages compliant with local statutory requirements. Accessing all payroll data through a unified dashboard ensures seamless business operations without added stress.

Eager to explore our comprehensive global payroll solution? Schedule a demo with one of our team members to initiate payroll assistance in India and beyond today!