Hailed as the fastest-growing major economy in the world, India has positioned itself as an attractive location for businesses. However, like any other country, doing business in India comes with a plethora of regulations for both local and international businesses to follow.

Payroll and income tax compliance are key obligations for businesses operating in India. Compliance helps businesses stay out of legal trouble and build a positive reputation in the eyes of the government, employees, and clients.

Due to the country’s popularity as the next big thing in the global economy, India EOR services are readily available. These services keep businesses compliant with the country’s payroll and income tax systems by managing everything from calculation to reporting.

In this guide, we cover the Indian payroll tax rates and obligations for employers in detail.

What Is Payroll Tax in India?

Payroll tax in India isn’t as complicated as in some other countries, but it’s still important to understand. The main social security contributions in the tax are to the Employees Provident Fund (EPF) and Employees’ Pension Scheme (EPS). Both the employer and the employee have to contribute to these programs.

Definition and Purpose of Payroll Tax

Payroll tax in India refers to the various taxes and deductions employers must withhold from employee salaries and contribute to government programs. These taxes help fund essential services like social security, healthcare, and employee welfare schemes.

The purpose of payroll tax is twofold. First, it helps employees get access to benefits like pensions, health insurance, and gratuity. Second, payroll taxes contribute to public services that support economic stability. In India, payroll tax is a structured way to balance employee benefits with national development.

Payroll Tax vs. Income Tax in India

Payroll tax and income tax may seem similar, but they serve different purposes and fall on different shoulders. The former is the employer’s responsibility. It includes contributions to schemes like the Employees’ Provident Fund (EPF), Employees’ State Insurance (ESI), and Professional Tax (in some states). Employers must deduct these amounts from employee salaries and contribute their share before depositing them with the authorities.

In contrast, income tax is the employee’s responsibility. It’s deducted as Tax Deducted at Source (TDS) from salaries based on applicable tax slabs. The amount varies depending on income, exemptions, and deductions under the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 from April 1, 2026. The new tax regime is the default, and employees must opt for the old regime to claim most deductions and exemptions.

Employees can reduce their taxable income through investments in tax-saving instruments like PPF, NPS, or deductions under Section 123 of the Income-tax Act, 2025 (formerly Section 80C), although these are available only under the old tax regime. While payroll taxes fund employee benefits, income tax contributes to overall government revenue and public services.

When you work with an India recruitment agency, they can help sign your employees up for EPF and ESI schemes. The agency will typically handle the paperwork, including compliance checks, contributions, and withdrawals. They can also advise on tax-saving options to help you stay compliant with Indian laws.

Employer and Employee Responsibilities

While both the employer and the employee contribute to payroll taxes in India, the administrative responsibility mainly falls on the employer. They have to calculate the taxes according to the rates set by the government. Then, they must deposit deductions with the respective authorities within the specified deadlines to avoid penalties.

Employers typically also have to keep a record of the deductions made and provide employees with salary slips that detail the deductions. These records help confirm compliance in audits.

Employees mainly have to understand the tax deductions made on their salaries. They must review their payslips to ensure correct tax and statutory deductions. If they have made any tax-saving investments (e.g., under Section 123 or Section 126 of the Income-tax Act, 2025, formerly Sections 80C and 80D), they should declare them at the start of the tax year. These deductions only reduce TDS if the employee has opted out of the default new tax regime.

Even though TDS is deducted, employees must file their income tax return to claim refunds or additional deductions. As evident, this is a lot of paperwork, which can be hard to manage for companies on top of their day-to-day operations.

India PEO services can take this extra burden off your shoulders and ensure compliance with payroll deductions, thanks to their expertise in Indian tax laws and regulations.

Payroll Tax Deductions and Allowances in India

In India, the payroll contributions from the employers and the employee have to be made from the first day of employment. Where both EPF and ESI apply, employers contribute about 16.25% of the employee’s wages (12% to EPF and EPS, 0.5% to the Employees’ Deposit Linked Insurance (EDLI) scheme, 0.5% in EPF administrative charges, and 3.25% to ESI), while employees contribute 12.75% (12% to EPF and 0.75% to ESI), subject to the wage ceilings explained below.

Breakdown of Common Payroll Deductions

As we’ve mentioned above, there are three main contributions: PF, ESI, and professional tax. Here’s how they are calculated.

As we’ve mentioned above, there are three main contributions: PF, ESI, and professional tax. Here’s how they are calculated.

  • Provident Fund (PF) Contributions: The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme. Both the employer and the employee contribute 12% of the employee’s basic salary to the fund, calculated on wages up to the statutory wage ceiling. The government raised this ceiling from INR 15,000 to INR 25,000 per month, effective September 17, 2026. Contributions on wages above the ceiling are voluntary. The employer’s contribution is further divided:
    • 8.33% goes to the Employees’ Pension Scheme (EPS) (calculated on wages up to INR 25,000 per month)
    • 3.67% remains in the EPF account (along with any employer contribution on wages above the EPS cap)
    Employees can withdraw their PF balance upon retirement, after a prescribed period of unemployment, or in specific financial emergencies. On a job change, the balance is normally transferred to the new employer’s account.
  • Employee State Insurance (ESI) Contribution: The Employees’ State Insurance (ESI) scheme provides medical, disability, and maternity benefits for employees earning INR 21,000 or less per month (INR 25,000 for disabled employees). Employers contribute 3.25% of the employee’s salary towards the scheme, while employees contribute 0.75%. It’s important for employers to register their employees for ESI and pay the contributions regularly to avoid any legal repercussions.
  • Professional Tax (PT): Professional Tax is a state-imposed tax on salaried individuals deducted by employers. The rates vary by state, with some states exempting employees earning below a certain threshold. In most states that levy it, the tax is up to INR 200 per month, and the Constitution caps professional tax at INR 2,500 per person per year. Each state sets its own payment schedule. Some states that levy professional tax are Maharashtra, Karnataka, and West Bengal. However, the tax only applies to individuals who earn more than a certain amount per month.

Employer Responsibilities for Payroll Compliance

Employers have to calculate and remit payroll taxes on time to stay compliant. The calculations are made based on the salary structure, tax slabs, and applicable social security contributions. If there’s a professional tax in the state, it also has to be factored in.

Next, employers must deposit the relevant contributions on time. For example, PF and ESI contributions have to be made by the 15th of the following month. Similarly, TDS must be deposited by the 7th of the following month (April 30 for tax deducted in March) and reported in quarterly TDS returns (Form 138 from tax year 2026-27, previously Form 24Q). As for the professional tax, it is paid according to the state guidelines.

Employers are also required to maintain compliance records. EPF contributions are reported through a monthly electronic challan-cum-return (ECR), which replaced the separate monthly and annual EPF return forms. ESI contributions are filed monthly and reconciled in a half-yearly return of contributions. Plus, employers must issue Form 130 (which replaced Form 16 for salary earned from April 1, 2026) by June 15 after the end of the tax year to employees showing details of their taxable income. Employees then use these forms to file their annual tax returns.

Another important factor in compliance is keeping up with tax laws. As the government updates tax laws, employers need to implement changes as required.

Employer Payroll Tax Rates in India

Employers in India have several mandatory tax contributions that facilitate employee welfare and regulatory compliance. Apart from these contributions, employers also have to adhere to labor laws, minimum wage requirements, and other mandatory compliances.

India’s former National Floor Level Minimum Wage (NFLMW) was a non-statutory benchmark, last officially set at INR 176 per day. Since November 21, 2025, the Code on Wages, 2019 has required the central government to fix a statutory floor wage that no state minimum wage can fall below, but no floor wage had been notified as of October 2026. In practice, employers must pay at least the minimum wage in India notified by the relevant state for the worker’s skill level and area. Rates vary between states, with some setting higher minimum wages due to the high cost of living in those areas.

Key Employer Tax Contributions

The main employer tax contributions in India are to the EPF, ESI, and EPS. It’s important to note that these contributions only have to be made for employees earning up to specific amounts.

For EPF, the current monthly salary threshold is INR 25,000 (INR 15,000 until September 16, 2026). It means that employees who join with wages above INR 25,000 per month are not required to become EPF members, although existing members remain covered and can contribute on higher wages voluntarily.

EPF applies to establishments employing 20 or more people in total, not only those within the wage ceiling. For ESI, the salary limit is INR 21,000 per month.

Statutory Benefits for Employees

Indian labor laws mandate several statutory benefits for the financial security of employees. For example, a gratuity is a lump sum paid to employees who have completed at least 5 years of service with an employer (one year for fixed-term employees under the Code on Social Security, 2020, in force since November 21, 2025).

It is calculated as 15 days’ worth of salary for every completed year of service. For private sector employees, gratuity is capped at INR 2 million (INR 20 lakh), which is also the lifetime limit for tax-free gratuity under the Income-tax Act. The Payment of Gratuity Act, 1972 has been subsumed into the Code on Social Security, 2020, with existing rules continuing during the transition.

Similarly, the statutory bonus rules formerly in the Payment of Bonus Act, 1965, now in the Code on Wages, 2019,apply to companies employing 20 or more workers. Under this law, employers must pay a minimum bonus of 8.33% of wages (or INR 100, whichever is higher) even without profits, and up to 20% depending on company profits.Employees earning up to INR 21,000 per month are eligible for bonuses.

Another benefit is the encashment of paid leaves, which is a part of most company policies. Employees can encash unused paid leaves, such as sick leave, casual leave, etc., at the end of a certain period. Upon resignation or retirement, leave encashment is tax-free, up to INR 25,00,000 for non-government employees, as a lifetime limit.

Payroll Tax Rates Based on Salary Levels

Payroll tax obligations vary based on an employee’s salary. For example, employees who earn under INR 21,000 per month are covered by the ESI. The employer contribution is 3.25% of the employee’s salary, while the employee’s contribution is 0.75%.

Minimum wage protections now apply to all employees under the Code on Wages, and employees at this salary level are also eligible for statutory bonuses. Similarly, employers only have to contribute to EPF for employees earning up to INR 25,000 per month.

High-income employees who make over INR 25,000 per month when they join don’t have to contribute to the PF. They can voluntarily contribute to the PF if they choose, but it is not mandatory. Gratuity and professional tax (if applicable) still apply, but employees earning above INR 21,000 per month fall outside statutory bonus eligibility.

India Payroll Tax Calculator

RemotePeople has a handy payroll tax calculator that you can use to compute both employer and employee taxes in the local currency or USD.

How the Calculator Works

The calculator is pretty simple to use as you only have to provide it with the required data, and it does the rest. After selecting India from the country list, select the employee type (local or foreign) and the calculation period (monthly or annually). Then, enter the gross salary and select the currency in which you want the output.

Example Payroll Scenarios

Under the default new tax regime for tax year 2026-27, salaried income up to INR 12.75 lakh a year attracts no income tax because of the INR 75,000 standard deduction and a full rebate, so both examples below would show nil income tax under current law.

Let’s explain the use of this India payroll tax calculator with two examples. First, let’s suppose an employee makes INR 50,000 per month. They pay no income tax under the default regime. Assuming PF wages of at least INR 25,000, the employee contributes INR 3,000 to EPF, plus up to INR 200 in professional tax in states that levy it. The employer’s mandatory contributions come to about INR 3,250 (EPF and EPS, EDLI, and administrative charges). ESI does not apply above INR 21,000 a month. As a result, the employee’s net salary is about INR 46,800 per month.

Now, let’s say we have a high earner who makes INR 1,000,000 per year (about INR 83,333 per month). They also pay no income tax under the default regime. Because mandatory EPF contributions stop at the INR 25,000 wage ceiling, the employee and employer contributions are the same as in the first example unless both agree to contribute on higher wages. Their net salary is about INR 80,133 per month, or roughly INR 961,600 per year.

As you can see, statutory deductions take only around 4% of these employees’ gross salary under the default regime. Employers should also budget for gratuity and, where applicable, statutory bonus, which are not monthly deductions.

Simplify Payroll and Tax Compliance in India

Compliance with the Indian income tax law and payroll tax regulations is a must for any business operating in the country. Besides contributing to the social security schemes, employers also have to calculate the professional tax (where applicable) and the employee’s TDS.

These calculations can be complex and time-consuming, especially for multinational companies with employees from different countries. Using a payroll tax calculator like the one mentioned above can simplify this process.

If needed, businesses can also partner with payroll management services, who can then maintain compliance by taking care of all tax-related calculations and filings.

Need assistance in staying on top of your payroll and tax compliance in India? Contact RemotePeople to avail professional payroll management services. Reach out to us here.

Frequently Asked Questions

The tax deducted depends on the employee's income tax slab after exemptions and deductions. Additionally, 12% PF contribution, TDS (if applicable), and professional tax (state-specific) may be deducted from the salary.

Employers contribute 16.75% of an employee's salary to statutory schemes, including PF (12%), ESI (3.25%) for eligible employees, and gratuity (where applicable). They must also deduct TDS and pay professional tax as per state laws.

The TDS for salaried employees in India ranges from 0% to 30% plus a certain surcharge, depending on their income tax slab and other factors. For senior and very senior citizens, the TDS rate is lower.

The key payroll deductions include Provident Fund (PF), which is 12% of the salary, and ESI (if applicable), which is 3.25% of the salary. TDS and professional tax (state-specific) may also be deducted from an employee's salary.