Payroll & Employment Guide India

Employment contracts in India can be different, depending on the employment arrangement, duration, and other factors. They can also be oral, written, or electronic, where the written form is the standard practice for permanent and long-term employment.

Notice periods: At least 30 days.

Termination of employment: Due to breach of contract, serious misconduct, redundancy, or unethical behaviour by the employee.

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 system/annuity plans are retirement plans that help you create a source of guaranteed income for your retirement years. The retirement benefits can be invested in a lump sum or invested 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 for 14% of their basic salary toward NPS and get an income tax deduction.

Every employer shall be bound to pay to every employee in respect of any accounting year, a minimum bonus which shall be 8.33% of the salary or wage earned by the employee during the accounting year or Rs. 100, whichever is higher. However, not all employees in India receive a performance bonus, depending on the segment and department. Performance bonuses can vary based on the company, industry, and individual performance. They can be a fixed amount or a percentage of the employee's base salary, typically ranging from 5% to 20%.

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 incentives: (salary incentives, bonus, commission, profit sharing, stock options, recognition rewards)

Non-monetary incentives: (employee recognition, flexible work development, wellness programs, workplace perks)

Performance-based incentives: (sales performance incentives, individual performance awards, team-based incentives, goal-based incentives)

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

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.

(Old and New) Income tax - The tax slabs and rates are different in the old and new tax regimes. Various deductions and exemptions are allowed in the old tax regime. The new regime offers lower rates of taxes, but permits limited deductions and exemptions.

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.

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

VAT: 18%

Tax allowances: House rent allowance, leave travel allowances.

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 Rupees). 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 full 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 on a monthly basis throughout the year, totalling 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 includes only a basic 12-month salary structure.

Salary payment deadline is not fixed, 5th of the following month, last day of the month worked, and 1st of the following month, depending upon 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.

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.

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.

Total employment cost:

• Employer’s Provident Fund contributions: 12%
• Employer’s State insurance contributions: 3.25%
• Employees’ Provident Fund contributions: 12%
• Employees’ State Insurance contributions: 0.75%

Minimum wage: INR 15.000 per month (varies by state)

Probation period: Up to 2 months.

EOR partners let you hire anyone in India without opening legal entities. Your EOR will take over the legal responsibilities of an official employer, including:

• Legal employment and contracts
• Payroll processing
• Tax withholding
• Benefits administration
• Onboarding/offboarding employees

PEO services provide HR and administrative support while you remain the legal employer for your team in India. PEO services are beneficial for employers who already have legal entities in India but need help managing:

• HR operations and workforce administration
• Payroll and benefits management
• Compliance and local labour law guidance
• Employment contracts assistance

With Native Teams’ locally adjusted payroll calculator, you can estimate net/gross salaries, employer/employee contributions, and other mandatory deductions in India.