What Do You Need to Know About Payroll in India?
One of the world’s fastest-growing economies and one of the most populous countries in the world, India is a great place to expand your business for one main reason: access to affordable and competent talent. With 1.4 billion people, India is just behind China when it comes to population, and unlike China which is a highly concentrated “domestic-business-focused” market, India is relatively more open.
But penetrating the Indian market and navigating the Indian job market as an employer are two completely different things. There is a lot to learn before you expand, payroll being one of them.
Payroll in India – What Do You Need to Know?
The market share of registered foreign companies in India varies quite drastically from industry to industry. “Business services” holds the highest market share, i.e., 63%, whereas it’s only 7% for manufacturing. But many businesses, large or small, might benefit from establishing a presence in the emerging market of India.
Like in any other country, you have four options when it comes to payroll in India:
Own Internal Payroll: If you have a sizeable enough presence in India and have the requisite staff, the best practice is to run your own internal payroll. You won’t increase the overhead cost of running payroll through a third party and have complete control over it.
Employer of Record: An EOR can take care of many of your payroll duties, but not all. They can be considered an extension of your base office and will be able to handle the “front-end” of the payroll in India.
Fully Outsource Your Payroll: This requires partnering with local services or businesses that offer both employment and payroll services in foreign countries and have the requisite staff and resources not just to run your payroll but take over employee management responsibility in a different country.
Remote Payroll: If you only have a few employees in India or a small team working remotely and you don’t have a presence in the country, you can set up a separate remote payroll. In some cases, it might be better to pay remote employees as per project/milestones instead of monthly or weekly.
What Do You Need to Start A Payroll in India?
Once you’ve set up your business in India, following both the federal laws and the state’s laws where you are doing business, and after having appointed/hired a local director, here is some of what you will need to set up your business payroll in India successfully.
- GST registration number — You have to obtain one if you are doing business in India without a presence as well.
- Since you’ll need to submit not just financial documents but other accompanying documents to the local regulatory bodies, you’ll need to obtain a Digital Signature Certificate (DSC). The DSCs are issued to applicants with one- or two-year validity.
- Director Identification Number (DIN) for all business directors (local and foreign).
- Get an incorporation certificate.
- Tax Account Number (TAN) and Permanent Account Number (PAN).
- PF number and ESI number
These are just a few of the items you’ll need before you can open a bank account in local currency (INR) and start paying your employees. Many local businesses offer these services, like helping you with GST registration for a relatively small fee (usually under $150). But if you have the requisite knowledge and documents, you can do everything by the book and register yourself.
Contract, Social Security, And Leaves
In India, contracts reign supreme when it comes to an employer-employee relationship. Once an employee has signed a reasonable contract, their relationship with you, i.e., the employer, is defined by it, and both entities have to abide by the written word. That puts a lot of power in the hands of employers.
Indian employers and employees both pay into social security. The amount is capped at 12% of the employee’s salary that both employer and employee need to pay. Since you are running the payroll, you will have to withhold that amount from an employee’s salary. There is a disparity when it comes to national insurance that both you and your employee need to pay into. The employee would pay 1.75% of their wages into the program, and the employer would pay 4.75%.
The rules for medical leave are a bit fuzzy in India. There are no fixed days, but an employer can set a fixed number of medical leaves in the contract. To become eligible for annual leaves, an employee has to work 240 days a year first. The number of leaves is usually determined by one leave for every 20 days of work. The maternity leave is now set at 26 weeks (paid). There is no provision for paternity leave (yet), but some private sector companies offer two weeks of paid paternity leave.
Payroll in India – Taxation
The corporate tax rate in India is quite high: 30% if you are registered as a resident company and about 41.2% for non-resident companies. Apart from withholding the social security contributions, the employer must also withhold income tax from their employee’s salary. The tiers are:
|Annual Salary (INR)||Tax Rate|
|Less than 250,000||0%|
|Between 250,000 and 500,0000||10%|
|Between 500,000 and 1,000,0000||20%|
|More than 1,000,000||30%|
As an employer, you’ll be required to withhold this tax at the source.
India is becoming an increasingly competitive market. If you aim to do business in the country, especially in a domain where local businesses already exist (and dominate), payroll might only be your secondary concern (still crucial to get everything right). But if you are expanding to India primarily for the local labor force, running a neat payroll will not just help you stay on the right side of regulatory bodies, it will also allow you to attract and retain top talent. India has been experiencing one of the most significant “reverse brain drains” in the world for a while now, so it might be easier to find individuals who are already familiar with the culture and norm of your home country. Click here to learn more about doing business in India.