Payroll in India: A Comprehensive Guide for 2026

Introduction

Payroll in India requires monthly tax deducted at source (TDS) filings, Employees' Provident Fund (EPF) and Employees' State Insurance (ESI) contributions, and professional tax payments that vary by state. The statutory basis for most of these obligations changed within a single year, with the four Labour Codes replacing 29 central labour laws in November 2025 and a new income tax statute taking effect in April 2026.

That creates three problems for a foreign employer. Contributions run through registrations only a local entity can hold. Professional tax, sick leave, and public holidays fragment by state, so hiring in two cities means two sets of rules. The redefined wage base pushes employer cost above the gross salary figure, and shortfalls carry interest plus graded damages.

In this guide, we cover the payroll process, statutory contributions and tax slabs, paid leave entitlements, and the compliance risks worth planning for, along with how to run payroll in India without setting up a local entity.

How can you run payroll in India?

A company paying people in India has two routes, and the choice comes down to headcount, time horizon, and how much administrative capacity it wants to build in a market it may still be testing.

Option 1: Incorporate an Indian entity

You set up your own company in India and run payroll on it. One filing through the SPICe+ form covers incorporation and registers you for PAN, TAN, EPFO, and ESIC. After that you carry a resident director, annual filings, and a yearly audit for as long as the entity exists. This route generally suits larger teams and a longer time horizon.

Option 2: Pay through a provider

Another way to run payroll in India is to work with a payroll service provider. The provider already holds an Indian entity and the registrations, so your team gets paid through them. An employer of record goes a step further and acts as the legal employer, so the contract and the statutory liability move to them. This route generally suits smaller or exploratory teams, since payroll starts on an entity that already exists.

Skuad is one such provider, supporting payroll, statutory contributions, and payslip delivery across supported markets from a single platform, so your finance team works from one pay cycle instead of several country processes.

Here is what Skuad helps with:

• Supports payroll processing in 70+ currencies with a single funding instruction each cycle
• Facilitates tax withholding and statutory deductions across supported markets on every pay run
• Supports payslip generation and downloadable payment history for each worker
• Helps consolidate payroll reporting across 160+ countries in one dashboard

Either way, gross salary is only part of what an Indian hire costs. Employer provident fund, pension, insurance, and state-level levies stack on top of it.

What does the payroll process in India involve?

Payroll in India applies to employees only. Independent contractors are engaged under a different arrangement and fall outside the payroll process entirely. Employees go through a monthly payroll run with statutory deductions and a payslip, while contractors invoice you and their payments carry tax deducted at source (TDS) on professional fees with no provident fund or insurance obligation. The components below cover the employee payroll workflow.

1. Employee information

This should include name, address, Permanent Account Number (PAN), Aadhaar number, Universal Account Number (UAN), and bank account details. Aadhaar has to be seeded and verified against the employee's UAN before you can file the monthly Electronic Challan cum Return (ECR) with the Employees' Provident Fund Organisation (EPFO). Without a valid PAN, tax deducted at source applies at a higher rate, up to 20 percent.

2. Salaries and wages

This should include whether they receive an hourly wage or a fixed annual salary, gross pay before tax and deductions, hours worked including overtime, the overtime rate, benefits contributions, additional income such as bonuses or commission, and net pay after tax and deductions. Section 14 of the Code on Wages, 2019 sets the overtime rate at no less than twice the normal rate of wages.

3. Deductions

This should include TDS under the Income-tax Act, 2025, the employee's 12 percent Employees' Provident Fund (EPF) contribution, the 0.75 percent Employees' State Insurance (ESI) contribution where monthly wages are up to INR 21,000, professional tax, and labour welfare fund contributions.

Professional tax and labour welfare fund rates are set by each state, so they vary by where the employee is based. Section 18 of the Code on Wages, 2019 caps total deductions at 50 percent of wages in any wage period.

A business must pay its employees in India in Indian rupees (INR). Section 15 of the Code on Wages, 2019 permits payment in coin or currency notes, by cheque, by credit to the employee's bank account, or by electronic transfer. Bank credit is standard practice.

A contractor can be paid in foreign currency through an Authorised Dealer bank, which usually converts the amount to rupees when it credits the account. Under the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015, a resident may open an Exchange Earners' Foreign Currency (EEFC) account to hold those earnings in foreign currency, though holding one is optional. Paying in rupees keeps the paperwork lighter on both sides.

What are the key statutory requirements for payroll in India?

Income Tax

India replaced its direct tax law on 1 April 2026. The Central Board of Direct Taxes confirms that the Income-tax Act, 2025 repealed the Income-tax Act, 1961 from that date, reorganising 819 sections into 536 without altering tax policy or rates.

Employees still choose between two regimes. The new regime applies by default and trades exemptions for lower slab rates. The old regime carries higher rates and keeps those exemptions, and an employee whose net tax works out lower under it can elect to stay on it. Salaried employees can switch each year.

Here is how the two regimes compare.

New tax regime

Old tax regime

Two figures matter more than the slabs. Section 19 of the Income-tax Act, 2025 sets the standard deduction at INR 75,000 under the new regime and INR 50,000 for everyone else, and a rebate takes tax to zero for total income up to INR 12 lakh. A salaried employee earning up to INR 12.75 lakh a year pays no income tax at all.

The choice is worth running per employee at the offer stage, since employees who rely heavily on house rent allowance often come out cheaper under the old regime.

The following components of employee income are fully taxable:

• Basic salary
• Commission
• Bonuses
• Profit-share income
• Perquisites and benefits given in place of cash pay

Reimbursement of genuine business expenses against bills is generally not treated as salary income. Reimbursement of an employee's personal expenses generally is.

Overtime pay

Section 14 of the Code on Wages, 2019 sets overtime pay at no less than twice the normal rate of wages. The number of hours that make up a normal working day is fixed by the central or state government, so the point at which overtime starts can differ by state and by sector.

Social security contributions

Only the Employees' Provident Fund (EPF) contribution comes out of an employee's salary. The Employees' Pension Scheme (EPS) is carved out of the employer's own EPF contribution, and the Employees' Deposit Linked Insurance (EDLI) Scheme is funded by the employer alone under Section 16 of the Code on Social Security, 2020. Employers cannot recover their own share from wages.

Provident fund coverage becomes mandatory once an establishment employs 20 or more people. Below that threshold, an employer and a majority of its employees can agree to opt in voluntarily. Coverage also runs one way: Section 1(8) keeps a chapter applicable to an establishment even if its headcount later falls below the threshold.

13th-month bonus

Employees in establishments with 20 or more people are entitled to an annual bonus once they have worked at least 30 days in the accounting year. Chapter IV of the Code on Wages, 2019 sets the bonus at a minimum of 8.33 percent of wages and a maximum of 20 percent. Employers must credit it to the employee's bank account within eight months of the close of the accounting year.

Minimum wage

India has no single national minimum wage. Each state fixes its own rates, and Section 6 of the Code on Wages, 2019 requires those rates to account for skill category and geographical area. The applicable figure therefore depends on the state, the industry, the worker's skill level, and the zone within that state. Section 9 gives the central government power to fix a national floor wage that no state can go below. Paying under the notified rate is an offence.

What are the paid leave rules in India?

Paid leave

A worker who has worked 180 days or more in a calendar year earns one day of paid leave for every 20 days worked. The Occupational Safety, Health and Working Conditions Code, 2020 cut that threshold from 240 days on 21 November 2025, so leave now accrues roughly four months earlier than it used to. State Shops and Establishments Acts set their own rules alongside the Code, so the applicable entitlement depends on where the establishment is situated.

Sick leave

India has no central statutory sick leave entitlement. Sick leave and casual leave come from each state's Shops and Establishments Act and differ by state, so an employer hiring across several states will be applying more than one rule. Employees covered by ESI separately receive sickness benefits under Section 32 of the Code on Social Security, 2020, funded by the scheme rather than the employer.

Public holidays

India observes three national holidays: Republic Day on 26 January, Independence Day on 15 August, and Gandhi Jayanti on 2 October. Every other holiday is notified by individual state governments, so the calendar for an employee in Maharashtra differs from one in Tamil Nadu or West Bengal.

Employers should work from the current year's notification for each state where they employ people, since a single national list will understate the entitlement in most states and misstate the dates in all of them.

Maternity leave

Maternity leave runs to a maximum of twenty six weeks, of which up to eight weeks may be taken before the expected date of delivery. A woman qualifies once she has worked at least 80 days in the 12 months preceding the due date, and receives her average daily wage for the full period.

Women with two or more surviving children receive a reduced entitlement, while adoptive and commissioning mothers receive 12 weeks from the date the child is adopted or handed over.

Cost depends on coverage. Within the Employees' State Insurance wage ceiling, the scheme funds maternity benefit. Above that ceiling, the employer pays directly. The Code also permits a woman returning from leave to work from home where the role allows.

Paternity leave

No central statute provides paternity leave in the private sector. Central government employees receive it under service rules, and some private employers offer it as a contractual benefit, but there is no statutory floor an employer must meet.

What are the main payroll challenges in India?

Payroll compliance

Payroll compliance in India carries more risk in 2026 than it has in decades, because three legal transitions are running at once. The four Labour Codes replaced 29 central labour laws on 21 November 2025, the final Rules followed on 8 May 2026, and the Income-tax Act, 2025 took effect on 1 April 2026. Any employer that set up its Indian payroll before this period is working from rules that have since changed.

Provident fund shortfalls show how the exposure compounds, because a single error creates three separate liabilities.

• Arrears, meaning the full shortfall for the entire period of default.
• Interest at 12 percent per annum, notified on 29 May 2026 and backdated to 21 November 2025.
• Damages, graded by length of default from 0.25 to 1 percent of arrears per month under the Employees' Provident Funds Scheme, 2026.

Enforcement powers have widened alongside this. Provident fund officers now act as inspectors-cum-facilitators and recovery officers, which allows them to inspect an establishment, file complaints, and levy damages directly. Prosecution remains available for deliberate evasion, although the Code requires a 30-day improvement notice first.

Employers carrying older exposure have a limited period to resolve it. EPFO launched VISHWAS, 2026 on 17 July 2026, a one-time settlement scheme running six months that recalculates damages on pre-14 June 2024 defaults at 0.25 to 1 percent per month. It matters most to companies that acquired an Indian entity or inherited a payroll book, where the liability predates their involvement.

Misclassification

Misclassification risk in India is frequently misunderstood, because two different arrangements get treated as one. Contract labour means workers supplied through a contractor, under a licensing regime where the contractor holds the licence and the principal employer registers separately. The OSH Code raised that threshold from 20 to 50 workers. Independent contractors engaged directly fall outside the regime, and that is where the classification risk arises.

India has no statutory misclassification test and no routine assessment that flags it. Classification is decided after the fact, either by courts applying control and integration tests from case law, or by provident fund and insurance inspectors during an audit. Because the finding is retrospective, liability covers the full engagement: back contributions, interest, damages, and prosecution where evasion is deliberate. An arrangement that has run without incident for three years can still generate three years of liability.

Skuad helps reduce that exposure. Skuad acts as the legal employer of record, so the employment relationship, contracts, and statutory filings run through a registered local entity rather than your overseas company.

Here is what Skuad helps with:

• Assists with worker classification checks before onboarding, so the engagement model is set correctly at the start
• Supports locally compliant employment agreements and contractor agreements across 160+ countries
• Facilitates statutory registrations and filings through owned and partner entities in supported markets
• Helps track regulatory changes across supported markets so your contracts and filings stay current

Salary structure changes

The third risk shows up as cost rather than enforcement. Indian salary structures have traditionally paired a small basic component with large allowances, because provident fund and gratuity are calculated on the basic. The Labour Codes ended that by redefining wages as basic pay, dearness allowance, and retaining allowance, and by adding back any other payouts that exceed 50 percent of total remuneration.

An allowance-heavy structure therefore produces a higher contribution base for provident fund, gratuity, and leave encashment, even though gross pay has not moved. Companies still using salary templates built under the old definition are absorbing an increase they have not accounted for, and it shows up in the monthly contribution rather than an enforcement notice.

Customer story: How RemoteLock hired across six countries with Skuad

RemoteLock is an access control software company based in Denver, with 51 to 200 employees. It needed technical staff in six countries, including India, on both full-time and consultant terms. Setting up an entity in each one was not practical. Skuad supported compliant onboarding, multi-currency payroll, and tailored insurance for the India-based employees, with payroll, taxes, onboarding, and offboarding tracked on one dashboard. RemoteLock hired 26 people across the six markets.

"Partnering with Skuad has transformed our international hiring and onboarding processes. Their streamlined approach has enabled our tech team to scale effortlessly and efficiently."

- Ravi Bhalotia, Senior VP of Engineering, RemoteLock

Read the full RemoteLock case study

Run payroll in India without building a local entity

Setting up your own Indian entity takes months, and the filing calendar it creates never stops.

Skuad supports that operational load in India, covering employment contracts, statutory contributions, payroll in 70+ currencies, statutory benefits, and payroll record keeping, so your team can spend its time on the hires themselves.

Companies across SaaS, logistics, e-commerce, and technology use Skuad to build India teams, stay aligned with the Labour Codes as rules are notified, and pay people accurately each cycle without local payroll infrastructure.

See how Skuad supports payroll in India. Book a demo

FAQs

1. What is payroll compliance in India?

Payroll compliance in India means meeting statutory obligations under the four Labour Codes, the Income-tax Act, 2025, and the EPF and ESI schemes. Employers generally register with EPFO and ESIC, deduct tax at source each month, remit contributions, and file quarterly returns on Form 138.

2. What are the employer payroll contributions in India?

Employers typically contribute 12 percent of wages to the Employees' Provident Fund, of which 8.33 percent is directed to the pension scheme, plus 0.5 percent towards EDLI. For employees earning up to INR 21,000 a month, ESI adds a 3.25 percent employer share.

3. Can a foreign company run payroll in India without a local entity?

Foreign companies can typically pay workers in India through an employer of record, which holds the employment relationship and runs payroll on its own EPFO and ESIC registrations. Paying employees directly is generally not workable, since those registrations require an Indian legal presence.

4. What changed for payroll in India under the new Labour Codes?

The four Labour Codes took effect on 21 November 2025, replacing 29 central labour laws. For payroll, the most consequential change is a single statutory definition of wages applied across gratuity, bonus, and social security, which generally widens the contribution base for allowance-heavy salary structures.

5. Is a local entity or an EOR better for running payroll in India?

This usually depends on headcount and time horizon. A local entity generally suits larger, long-term teams, though it carries incorporation, EPFO and ESIC registration, and continuing filings. An employer of record typically fits smaller or exploratory teams, since payroll runs on an existing India entity.

6. Is a 13th month salary mandatory in India?

India does not mandate a 13th month salary. Chapter IV of the Code on Wages, 2019 requires an annual bonus between 8.33 and 20 percent of wages for eligible employees in establishments with 20 or more workers, credited to their bank account within eight months of the accounting year end.