Payroll & Employment Guide India

In India, a variety of employment contracts are utilised, tailored to different types of employment arrangements. The most commonly used contract types are full-time (indefinite), part-time, zero-hour, and casual contracts.

Types of employment contracts

• Indefinite employment contract (permanent): Offers job security, full benefits (paid leave, PF), and requires notice for termination.
• Fixed-term contract: Specifies a duration (e.g., 1 year). Employees are entitled to statutory benefits on par with those of permanent employees (pro-rated) and to gratuity after one year of service.
• Part-time contract: For employees working less than 48 hours/week. Benefits are pro-rated.
• Zero-hour contract: Work is based on employer needs with no guaranteed hours. No mandatory statutory benefits, but the minimum wage applies.
• Casual contract: For short-term/seasonal work. Paid based on completed work; generally no statutory benefits.

Validity of contracts

• Written contracts: The standard practice for permanent/long-term roles. They provide clarity on duties, compensation, and termination. The Shops and Establishments Act, 1958, mandates written contracts for establishments with more than 20 employees.
• Oral contracts: Legally valid under the Indian Contract Act, 1872, but challenging to prove in disputes.
• Electronic contracts: Valid under the Information Technology Act, 2000. Convenient for remote work but requires secure digital signatures.

Key contract contents: Title of position, confidentiality clause, vacation/leave details, working hours, termination clause, jurisdiction clause, remuneration clause, IP ownership, and non-compete clauses.

Notice periods: At least 30 days is the general minimum rule. This can be superseded by the employment contract or by state-specific laws such as the Shops and Establishments Acts.

Termination of employment: Due to breach of contract, serious misconduct, redundancy, or unethical behaviour by the employee. Termination requires adherence to due process and natural justice.

Employers in India are required to provide mandatory employment benefits in accordance with the country’s labour laws. Many of them also offer extra perks to stay competitive in the job market. Understanding both of them is essential to attracting and retaining talent.

Private pension systems/annuity plans are retirement plans that help employees create a source of guaranteed income for their retirement years. Retirement benefits can be invested in a lump sum or over the years. The invested amount is utilised to generate returns, which are paid out to the policyholder on retirement. Private-sector employees can now opt to contribute 14% of their basic salary to NPS and claim an income tax deduction.

Employee incentive programs come in various sizes, kinds, and types. They are generally classified based on their purpose and are customised by organisations to serve their specific needs. They can be broadly classified under three heads:

Monetary benefits: Salary incentives, bonus, commission, profit sharing, stock options, recognition rewards.

Non-monetary benefits: Employee recognition, flexible work development, wellness programs, workplace perks.

Performance-based benefits: Sales performance incentives, individual performance awards, team-based incentives, and goal-based incentives.

Mandatory benefits: Medical, retirement benefits (EPF), and gratuity (after 5 years of service).

Leave Policies

• Annual leave: Annual leave entitlements are an integral aspect of employment law in India. Employees generally earn 1 day of leave for every 20 days worked (approx. 15-18 days/year depending on the State Shops and Establishment Act). Unused leave can typically be carried forward (up to ~45 days) or encashed.
• Sick leave: Sick leave is an essential aspect of employment law in India. Typically, employees are entitled to at least 12 days of paid sick leave. Employers may request a medical certificate if leave exceeds 2-3 days. Unused sick days generally expire at the end of the year.
• Maternity leave: Maternity leave laws in India are governed primarily by the Code on Social Security, 2020. New mothers are entitled to 26 weeks of paid leave (8 weeks max pre-delivery). This applies to biological mothers, adoptive mothers (child <3 months), and commissioning mothers (surrogacy).
• Paternity leave: While India has made strides in maternity benefits, the landscape of paternity leave is still evolving. There is no nationwide statutory mandate for the private sector. Government workers receive 15 days. Some states (e.g., Maharashtra) and progressive companies offer 15 days or more.
• Menstrual leave: Effective Nov 2025, the Karnataka State Government mandates one day of paid menstrual leave per month for women aged 18-52 in eligible establishments.
• Maternity leave: Entitlement is 26 weeks of paid leave (8 weeks maximum pre-delivery), requiring at least 80 days of service in the preceding 12 months. It is governed by the Maternity Benefit Act, 1961.

Bonuses: A minimum bonus of 8.33% of salary/wage is mandatory for eligible employees under the Payment of Bonus Act, 1965.

• Mandatory benefits: Medical, retirement benefits, and gratuity.
• Common perks: Meal vouchers, transport reimbursements.
• Leave policies: Paid annual leave, sick leave, and maternity leave.

Social Security contributions

• Employees’ Provident Fund (EPF): Mandatory for employees earning < ₹15,000/month. Contribution is 12% of income (Basic + DA).
• Employees’ Pension Scheme (EPS): 8.33% of the employer's EPF contribution is diverted to this scheme.
• Gratuity: Employees who complete 5 years of service are entitled to a lump-sum payment (15 days' wages for each year of service).

Unemployment insurance, launched by the Employees' State Insurance Corporation (ESIC), is a social security measure designed to provide financial assistance to workers who have lost their jobs involuntarily.

India has a comprehensive tax system that applies both to individuals and businesses. Employers are responsible for withholding and remitting income tax and social security contributions. Additional tax rules may apply to royalty income, professional fees, and other payments.

Payroll tax or income tax refers to taxes withheld by an employer from an employee’s salary. The tax is on par with tax deducted at source (TDS) and has to be remitted to the government.

Income tax: Employers must withhold income tax (TDS) based on the employee's salary slab (Old or New Regime).

• Old regime: Higher tax rates, but allows various deductions (HRA, LTA, 80C).
• New regime: Lower tax rates but limited deductions.

Income tax for new joiners remains the same as above; tax is calculated on a prorated basis, depending upon the investment declarations submitted and taxes paid from April FY24 to the last working day.

Employers must comply with a range of tax laws and payroll contributions, including individual income tax (IIT), social security contributions, VAT, withholding tax, and business tax. Nonetheless, employers do not have to withhold any income taxes for their employees.

Social Contributions

• Employer’s provident fund: 12% (capped at ₹15,000 wage ceiling, though voluntary higher contributions exist).
• Employer’s state insurance (ESI): 3.25% (for employees earning ≤ ₹21,000).
• Employee’s provident fund: 12%.
• Employee’s state insurance: 0.75%.

VAT/GST: 18% (standard rate for services).

Personal income tax rate: From 0% to 30%.

Tax allowances: House rent allowance, leave travel allowance

Income tax (TDS): Employers are responsible for withholding income tax (TDS) from employees' salaries and remitting it to the government.

Employers in India must pay salaries in accordance with the terms stated in the employment contract, and wages must meet or exceed the minimum wage set by the central or state governments. Salaries are typically paid on a monthly basis, and timely payment is mandated under the labour law. In India, the mandatory local currency is only INR (Indian Rupee). This currency is used for all financial transactions, including salaries, allowances, and benefits within the country.

For provident fund contributions, the ceiling is 12% of the minimum wage, which is INR 15,000. This means the maximum contribution to the Provident Fund is based on this amount, regardless of the employee's gross salary exceeding this threshold.

In India, salary calculations typically use calendar days for a whole month. This means that irrespective of the number of working days in a month, salary is calculated on the basis of 30 days per month, unless otherwise specified in the employment contract or company policy.

Salary payments are typically structured over 12 months. This means employees receive their salary monthly throughout the year, for a total of 12 payments annually.

While 13th-month pay is not a statutory requirement, some companies may choose to provide it. The standard salary arrangement in India is limited to a basic 12-month salary structure.

Salary payment deadlines are not fixed: 5th of the following month, last day of the month worked, or 1st of the following month, depending on client request.

Salary calculation specifics

The Minimum Wages Act of 1948 covers several listed employments to ensure that workers receive fair wages for their work. For any hours of work exceeding those required, it is ordered that employees must be given double the regular rate of wages as overtime pay.

Overtime pay = (basic salary + DA) / total weekly work hours * 2 * number of overtime hours

Total weekly work hours = number of normal working days * average daily work hours.

Any work performed beyond the daily (9 hours) or weekly (48 hours) limit attracts overtime wages at twice the ordinary rate.

Holiday pay: Private sector employees are entitled to a minimum of 15 days of earned leave per year, although this entitlement varies by state. The terms of paid time off are specified in employment agreements.

Public holidays employment laws in India address national holidays to ensure fair treatment. There are three mandatory national holidays: Republic Day (Jan 26), Independence Day (Aug 15), and Gandhi Jayanti (Oct 2). Establishments generally observe 10–15 holidays, depending on the state. Work on these days entitles the employee to double wages or compensatory time off.

Employers are required to inform employees about public holidays and ensure they are granted paid leave or extra remuneration for working on those days.

Termination payments: There is no specific date for the Full and Final settlement (FnF) to be made, and it can take anywhere from 45 to 90 days. Experts generally consider 30 to 45 days to be an ideal time for the FnF settlement.

No additional termination pay is provided beyond the statutory entitlements and contractual agreements. The final settlement typically includes pending wages, any unused leave encashment, and other dues as per the employment contract.

Salary payment deadline: Not fixed.

Taxes and contributions payment deadline: Within 15 days of the last day of the calendar month.

Payroll declarations deadline: By March 31st.

Payroll currency: INR.

India’s labour laws are shaped by a mix of central and state legislation, covering areas such as employment types, minimum wages, working hours, probation periods, and termination. To remain compliant, employers must navigate both national standards and state-level regulations.

Employer contributions payment: Employer contributions can be paid in a variety of ways, such as EPF, ESIC, pension, if any. An employer is liable to pay their contribution in respect of every employee, deduct the employee's contribution from the wages bill and shall pay these contributions at the above-specified rates to the Corporation within 15 days of the last day of the Calendar month in which the contributions fall due.

If any employee incurs any expenses on behalf of the organisation, it will be treated as non-taxable. The company reimburses after validating them through multiple approval levels. Reimbursable expenses include business supplies, work-related travel costs, education or training, and other business-related expenses. Expenses that cannot be supported with proof will be considered allowances and will be taxable.

Night work: India regulates night shifts, typically spanning from 7:00 PM to 6:00 AM. Under the OSH Code, women are permitted to work night shifts subject to consent and safety measures (transportation, lighting, security). Night shift workers often receive shift allowances, though this is policy-based rather than strictly statutory.

Data protection: In India's ever-evolving employment legal framework, employee privacy rights stand out as a crucial aspect.

• DPDP Act 2023: Employers are "Data Fiduciaries." Personal data can be processed for "legitimate uses" (employment purposes) or with consent.
• Rights: Employees can access, correct, and erase their data.
• Security: Employers must implement safeguards to prevent breaches. Penalties for non-compliance can reach INR 250 crore.

Intellectual Property (IP): Understanding IPR in the context of employment is crucial. Generally, the "work for hire" principle applies; IP created during employment belongs to the employer if explicitly stated in the contract.

• Patents: Inventions are usually assigned to the employer via "Invention Assignment Clauses."
• Copyright: Works created during the course of employment generally belong to the employer.

Non-compete clauses: In India, non-compete clauses are recognised and enforceable under certain conditions.

• During employment: Valid and enforceable to protect employer interests.
• Post-termination: Generally considered void under Section 27 of the Contract Act (Restraint of Trade), unless necessary to protect trade secrets. Courts strictly scrutinise post-employment restrictions.

Remote working: The surge in remote work in India has revolutionised work dynamics.

• Regulation: Governed by the Shops and Establishments Acts and OSH standards regarding safety.
• Policy: Employers should define work hours, data security (VPNs, password policies), and equipment provision in a clear Remote Work Policy.
• Responsibility: Employees must maintain availability during core hours and safeguard company data.

Total employment cost:

• Employer’s provident fund contributions: 12% (capped at ₹15,000 per month)
• Employer’s state insurance contributions: 3.25%
• Employees’ provident fund contributions: 12%
• Employees’ state insurance contributions: 0.75%

Minimum wage: INR 21,917 per month (varies by state)

Probation period: Up to 2 months.

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• Legal employment and contracts
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