Key Takeaways
- CTC ≠ in-hand salary — employees take home roughly 65–75% of their CTC after deductions
- PF (12% employer + 12% employee on basic) is non-negotiable — late deposits attract 12% interest and potential prosecution
- TDS must be deposited by the 7th of every month — miss this at your peril
- For small teams (<20), outsource payroll to your compliance partner — it’s cheaper than learning the hard way
Running payroll in India is one of those things that looks simple on paper and gets complicated fast. If you’re a foreign company hiring your first employees in India, this guide will walk you through everything you need to know — from salary structure to monthly filings.
The India Salary Structure: CTC vs In-Hand
The first thing that confuses foreign companies: the number you agree on is not the number your employee takes home.
In India, compensation is expressed as CTC (Cost to Company) — the total annual cost the employer bears for that employee. But the employee’s in-hand salary (what hits their bank account) is significantly lower.
Here’s a typical breakdown for an employee with ₹12,00,000 CTC (~$14,400/year):
| Component | Annual (₹) | Monthly (₹) |
|---|---|---|
| Basic Salary | 4,80,000 | 40,000 |
| House Rent Allowance (HRA) | 2,40,000 | 20,000 |
| Special Allowance | 2,28,600 | 19,050 |
| Employer PF Contribution | 57,600 | 4,800 |
| Employer ESI Contribution (if applicable) | 0 | 0 |
| Gratuity (estimated) | 23,076 | 1,923 |
| Annual Performance Bonus | 70,724 | — |
| Total CTC | 12,00,000 | — |
From this CTC, the employee’s in-hand after deductions (employee PF, professional tax, income tax TDS) might be around ₹72,000–80,000/month depending on their tax regime choice and investments.
⭐ Key Point: When an Indian candidate says they expect “₹15 lakhs,” they mean CTC. Their in-hand will be roughly 65–75% of that.
The Building Blocks
Basic Salary
This is the foundation. It’s typically 40–50% of CTC. Basic salary matters because:
- PF contributions are calculated on basic salary
- HRA tax exemption is linked to basic salary
- Gratuity is calculated on basic salary
💡 Tip: Setting basic too high increases your PF costs. Setting it too low can create tax complications for employees. The sweet spot is usually 40–50% of gross.
House Rent Allowance (HRA)
HRA is a tax-advantaged component for employees who pay rent. It’s typically set at 40–50% of basic salary (50% for metro cities like Mumbai, Delhi, Bangalore, Chennai; 40% for others).
Employees claim HRA exemption in their tax returns — the exemption is the lowest of: actual HRA received, rent paid minus 10% of basic, or 50%/40% of basic.
Special Allowance
This is the catch-all bucket. Whatever’s left after basic, HRA, and other fixed components goes here. It’s fully taxable.
Other Common Allowances
- Conveyance/Transport Allowance — Largely merged into standard deduction now
- Medical Allowance — Mostly discontinued after 2018 tax changes
- Leave Travel Allowance (LTA) — Tax-exempt for actual domestic travel, twice in a 4-year block
- Meal/Food Coupons — Up to ₹50 per meal tax-free (Sodexo, Zeta cards)
Statutory Contributions: The Non-Negotiables
Provident Fund (PF)
The Employees’ Provident Fund (EPF) is India’s mandatory retirement savings scheme.
- Employee contribution: 12% of basic salary (deducted from salary)
- Employer contribution: 12% of basic salary (additional cost to company)
- Applies to: All establishments with 20+ employees; voluntary for smaller ones
- Wage ceiling: Statutory PF is mandatory on basic up to ₹15,000/month, but most companies contribute on full basic
The employer’s 12% breaks down into:
- 3.67% → EPF (employee’s retirement account)
- 8.33% → EPS (Employees’ Pension Scheme, capped at ₹15,000 basic)
- 0.50% → EDLI (life insurance)
- Admin charges: ~0.50%
⭐ Key Point: PF is not optional. Even if your employee doesn’t want it, you must deduct and deposit it. Late deposits attract interest at 12% per annum and potential prosecution.
Employee State Insurance (ESI)
ESI provides medical and disability benefits.
- Employee contribution: 0.75% of gross wages
- Employer contribution: 3.25% of gross wages
- Applies to: Employees earning up to ₹21,000/month gross
- Coverage: Medical expenses, maternity benefits, disability
💡 Tip: For most tech and professional roles in India (which typically pay above ₹21,000/month), ESI doesn’t apply. But if you’re hiring operations or support staff at lower salary levels, it kicks in.
Professional Tax
Professional tax is a state-level tax on employment. It varies by state:
| State | Monthly Professional Tax |
|---|---|
| Karnataka | ₹200/month |
| Maharashtra | ₹200/month (₹300 in February) |
| Tamil Nadu | Varies by salary slab |
| Delhi | No professional tax |
| Telangana | ₹200/month |
Maximum professional tax is capped at ₹2,500/year across all states. It’s small but must be deducted and deposited on time.
Gratuity
Gratuity is a lump-sum payment to employees who complete 5+ years of service.
- Formula: (Last drawn basic × 15 × years of service) / 26
- Applies after: 5 years of continuous service
- Tax-free up to: ₹20 lakhs
💡 Tip: While gratuity is only payable after 5 years, it’s typically provisioned in CTC from day one. Most companies include it as a CTC component at ~4.81% of basic.
Income Tax (TDS on Salary)
As an employer, you must deduct income tax at source (TDS) from employee salaries every month.
Tax Slabs (New Regime, FY 2024-25)
| Income Slab | Tax Rate |
|---|---|
| Up to ₹3,00,000 | Nil |
| ₹3,00,001 – ₹7,00,000 | 5% |
| ₹7,00,001 – ₹10,00,000 | 10% |
| ₹10,00,001 – ₹12,00,000 | 15% |
| ₹12,00,001 – ₹15,00,000 | 20% |
| Above ₹15,00,000 | 30% |
Employees can choose between the New Regime (lower rates, fewer deductions) and Old Regime (higher rates but allows deductions for rent, insurance, investments, etc.). As an employer, you calculate TDS based on their chosen regime.
⭐ Key Point: Monthly obligation — deduct TDS from salary and deposit to government by the 7th of the following month. No exceptions.
India Payroll Quirks Foreign Companies Don’t Expect
1. Salary Is Paid Monthly
India pays monthly, not bi-weekly. Salary is typically credited on the last working day of the month or the 1st of the following month.
2. The 13th Month Isn’t Standard (But Bonuses Are)
India doesn’t have a mandatory 13th-month salary like some countries. However, most companies pay an annual performance bonus (typically 10–20% of CTC). Some industries follow the Payment of Bonus Act, which mandates a minimum bonus of 8.33% of basic for employees earning up to ₹21,000/month.
3. Leave Encashment Is a Thing
Unused leave can be “encashed” (paid out) at termination or, in some company policies, annually. This is typically calculated on basic salary and has specific tax treatment.
4. Reimbursements Need Bills
If your salary structure includes reimbursement components (telephone, internet, books), employees need to submit actual bills for tax-free treatment. Without bills, it becomes taxable income.
5. Full & Final Settlement Has Rules
When an employee leaves, the “full and final” settlement (last salary, leave encashment, bonus, PF withdrawal) should be processed within 30 days of the last working day. Many states have specific timelines.
6. Salary Revision Timing Matters
💡 Tip: Most Indian companies do annual salary revisions in April (start of the financial year). If you revise in January like many global companies, you’ll need to handle tax recalculation for the remainder of the financial year.
The Compliance Calendar
Monthly
| Deadline | Filing |
|---|---|
| 7th | TDS deposit for previous month’s salaries |
| 15th | PF deposit and return for previous month |
| 15th | ESI deposit for previous month (if applicable) |
| Varies | Professional tax deposit (state-specific) |
Quarterly
| Deadline | Filing |
|---|---|
| 31st July, Oct, Jan, May | TDS quarterly return (Form 24Q) |
| 15th of month after quarter | Advance tax installments (June 15, Sep 15, Dec 15, Mar 15) |
Annual
| Deadline | Filing |
|---|---|
| June 15 | Form 16 issuance to employees (TDS certificates) |
| July 31 | RBI FLA return (foreign-owned companies) |
| October 31 | Company income tax return |
| October 30 | Annual PF return |
| November 30 | Company annual return (MCA) |
✅ Recommendation: Put all these dates in your calendar from day one. Missing deadlines in India means automatic interest and penalties — there’s no grace period culture.
Payroll Software & Processing
You have several options:
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Indian payroll software — Platforms like Razorpay Payroll, GreytHR, Keka, or Zoho Payroll handle India-specific salary structures, statutory calculations, and filings. Cost: ₹50–150 per employee/month.
-
Global payroll platforms — Deel, Remote, Papaya Global can run India payroll as part of a multi-country setup. Higher cost but convenient if you’re already using them globally.
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Outsourced payroll — Have your compliance partner run payroll for you. Cost: ₹500–2,000 per employee/month depending on team size and complexity.
💡 Tip: For small teams (under 20), I typically recommend outsourcing payroll to your compliance partner. The cost is minimal, and you avoid the learning curve of India-specific payroll software.
Common Mistakes to Avoid
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Not depositing PF on time — Late PF deposits attract 12% interest and potential criminal proceedings for the authorized signatory. Take this seriously.
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Incorrect TDS calculation — Getting tax regime wrong or not accounting for investment declarations leads to employee frustration and potential penalties.
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Missing Form 16 deadline — Employees need Form 16 to file their personal tax returns. Late issuance creates problems for everyone.
-
Not registering for Professional Tax — It’s easy to forget this state-level registration. Each state where you have employees requires separate PT registration.
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Ignoring the Payment of Wages Act — Salary must be paid within 7 days of the wage period end (for establishments with fewer than 1,000 employees) or 10 days (for larger ones). Consistent late payments have legal consequences.
FAQ
What’s the difference between CTC and in-hand salary?
CTC (Cost to Company) is the total annual cost the employer bears, including employer PF contribution, gratuity, insurance, and all allowances. In-hand salary is what the employee actually receives after deductions (employee PF, professional tax, income tax). In-hand is typically 65–75% of CTC for most salary levels.
Do I need to register for PF even with just one employee?
Technically, PF registration is mandatory for establishments with 20+ employees. However, if you register voluntarily (which most professional firms recommend), you must continue contributing. Many foreign subsidiaries register from day one as it’s expected by employees and demonstrates compliance commitment.
Can I pay Indian employees in foreign currency?
No. Employees of an Indian entity must be paid in Indian Rupees (INR). The company receives funds in foreign currency and converts to INR through normal banking channels. If you’re using an EOR, they handle the currency conversion.
How do I handle payroll during the first month of operations?
Start by registering for PF, ESI (if applicable), professional tax, and getting a TAN for TDS. Your first payroll run should ideally align with the start of a month. Pro-rate the first month’s salary if the employee joins mid-month. Ensure you have all employee documents (PAN, Aadhaar, bank details) before the first pay run.
India payroll has a lot of moving parts, but once you set up the systems and processes correctly, it runs smoothly. The key is getting the foundation right — correct salary structuring, timely statutory deposits, and a reliable compliance calendar.
If you’re setting up payroll for your India team and want guidance on structuring it right, let’s talk. I’ll help you avoid the common pitfalls and get your team paid on time, every time.