Payroll taxes in India: An employer’s guide

When you hire in India, you — as the employer — are responsible for calculating, withholding, and submitting payroll taxes from your team members’ pay slips. For some taxes, you are also required to make employer contributions.

In this article, we’ll explain clearly which taxes you need to withhold, which taxes you need to contribute to, and how to remit and make payments. So let’s jump straight in.

What is payroll tax?

Payroll taxes are the contributions employees and businesses make to the government to fund public programs, such as retirement, healthcare, and unemployment insurance. They typically include income tax and social contributions, and are set at pre-determined rates.

These rates (and the rules governing them) vary by country, but it’s every employer’s responsibility to ensure they are compliant, and that they are withholding and submitting the correct amounts.

What is the difference between payroll taxes and corporate taxes?

Generally, payroll taxes are tied to your employees’ wages, while corporate taxes are based on your company’s profits. 

Which payroll taxes do you need to withhold from your employee in India?

In India, the taxes you’ll need to withhold are:

Income tax (TDS)

As in most countries, Indian residents are taxed progressively based on their level of income. These rates are set at between 0% and 30%.

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 retirement savings scheme which is designed to provide financial security post-retirement. Employees must contribute 12% of basic salary plus dearness allowance.

When to pay: You must deposit by the 15th of the following month.

Employee's state insurance (ESI)

ESI provides medical, disability, and maternity benefits to employees earning up to ₹21,000 per month. Employees must contribute 0.75% of their gross salary.

When to pay: Alongside EPF payments (see above).

Professional tax

This is a state-level tax that is levied only on professionals and salaried individuals. It varies by state, with a maximum limit of ₹2,500 per annum.

When to pay: Each state has their own regulations and requirements.

Note that you may also be required to withhold additional taxes for certain employees, such as child support payments, student loan repayments, or any other court-ordered garnishments.

Which payroll taxes does your business need to contribute to?

As well as withholding the taxes and contributions listed above, you are also required to make your own contributions, as follows:

Employer's provident fund (EPF)

Employers must also make contributions towards their employees’ retirement savings at a rate of 12% of their basic salary (plus dearness allowance).

When to pay: By the 15th of the following month.

Employee's state insurance (ESI)

Employers must also contribute towards ESI, at a rate of 3.25% of their employees’ gross salary.

When to pay: By the 15th of the following month.

Note that, 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.

If an employee leaves your company, you must also make a lump sum gratuity payment of 15 days’ wages for each year of service.

To quickly see a full breakdown of payroll taxes and employment costs for your Indian hire(s) based on their salary, use our free Employee Cost Calculator tool.

How do you remit and pay payroll taxes in India?

To make the payments, you will need to:

1. Calculate the correct amounts for withholding, and then add your employer contributions. If you use Remote Payroll or Remote EOR, we will do this for you.

2. Ensure that you adhere to the payment deadlines detailed above.

3. 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

How do you manage payroll taxes as an international employer?

When you hire an India-based team member from abroad, there are several ways you can manage their payroll and payroll 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 and manage everything internally. This can be costly, however.

• Use a local third party. You can hire a local firm to handle payroll, although this can be unreliable, costly, and pose data risks.

• Use a PEO. A professional employment organization (PEO) acts as an outsourced HR provider, and includes payroll.

• Use a global payroll provider. Global payroll providers — like Remote — have local specialists in multiple countries, ensuring that you are fully compliant with all tax requirements in each one. This is especially convenient if you have (or plan to have) employees in different countries, as you can manage all of them through one platform.

If you don’t have your own entity in India and you still want to hire there, you can:

• Set up your own entity. This can be extremely costly and time-consuming, but if you plan on establishing your business long-term in India, it might be a viable approach. To pay your employees, you would then need to choose one of the options above.

• Use an EOR. Employer of record (EOR) providers — like Remote — enable you to quickly and easily hire anywhere in the world, and also handle all the core HR functions (such as compliance and payroll). As well as being generally more cost-effective than opening your own entity, this option is highly scalable and, again, enables you to streamline all your global HR tasks in one place. How does an EOR work?

Global HR —

5 min

EOR, Payroll, or both: What does your business need?

Understand the difference between EOR and payroll services — and clarify which one your business needs to pay your international team members.

In India, independent contractors are classified differently to employees. As a result, they (in most cases) are responsible for calculating, managing, and paying their own taxes.

However, it’s crucial to understand the difference between contractors and employees, as you may inadvertently create misclassification risk. This can result in severe fines and penalties for your business. Learn more about hiring contractors in India.

How can Remote help?

Knowing which payroll taxes you need to calculate, withhold, and contribute to requires local expertise, especially as these rules can — and do — change. And if you make a mistake or fail to comply, the financial consequences can be significant.

Whether you have your own entity in India or not, Remote ensures that you are withholding and contributing the correct amounts, and that you are fully compliant at all times with local tax and employment laws. We also provide 24/7 support for any guidance you may need.

To see how we can help — and to learn which approach is the most suitable for your business — speak to one of our friendly payroll experts today.

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