Why India Payroll is Different
Running payroll in India is significantly more complex than in most Western countries. India has a unique salary structure (CTC), multiple statutory deductions, state-specific obligations, and a tax system that requires monthly TDS calculations based on projected annual income.
For global HR and finance teams managing India payroll for the first time, this guide covers everything you need to know.
Understanding CTC (Cost to Company)
In India, salaries are quoted as CTC (Cost to Company) — the total annual cost to the employer, including all salary components and employer statutory contributions. This is different from the employee's take-home salary.
| Component | Example (₹12L CTC) | Notes |
|---|---|---|
| Basic Salary | ₹4,80,000 | 40% of CTC; basis for PF, gratuity |
| HRA | ₹2,40,000 | 50% of basic (metro); tax-exempt up to limits |
| Special Allowance | ₹2,40,000 | Fully taxable |
| LTA | ₹40,000 | Tax-exempt twice in 4 years |
| Medical Allowance | ₹15,000 | Taxable (exemption removed post-2018) |
| Employer PF (12%) | ₹57,600 | Part of CTC; not in take-home |
| Gratuity Provision | ₹27,692 | 4.81% of basic; payable after 5 years |
| Total CTC | ₹12,00,292 |
Monthly Payroll Deductions
Each month, the following deductions are made from the employee's gross salary:
| Deduction | Rate | Notes |
|---|---|---|
| Employee PF | 12% of basic | Capped at ₹1,800/month if basic > ₹15,000 |
| Employee ESI | 0.75% of gross | Only if gross ≤ ₹21,000/month |
| Professional Tax | Up to ₹200/month | State-specific; max ₹2,500/year |
| TDS (Income Tax) | As per slab | Monthly deduction based on projected annual income |
The India Payroll Cycle
India follows a monthly payroll cycle. Here's the typical timeline:
- 1st–5th: Collect attendance, leave, and variable pay data
- 5th–10th: Process payroll — calculate gross, deductions, and net pay
- 25th–31st: Disburse salaries (most companies pay on the last working day)
- 7th of next month: Deposit TDS with the government
- 15th of next month: Deposit EPF and ESI contributions
- End of quarter: File quarterly TDS return (Form 24Q)
TDS Calculation: The Most Complex Part
Tax Deducted at Source (TDS) on salary is calculated based on the employee's projected annual income for the financial year (April–March). The process:
- At the start of the year, collect investment declarations from employees (Form 12BB)
- Calculate projected annual taxable income after exemptions and deductions
- Apply the applicable tax slab (old or new regime)
- Divide annual tax liability by 12 to get monthly TDS
- Recalculate each month as actual investments are confirmed
- Collect proof of investments in January–February and adjust TDS for remaining months
New Tax Regime Slabs (FY 2025-26)
| Annual Income | 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% |
Annual Payroll Compliance
- Form 16: Issue to all employees by 15th June each year (TDS certificate)
- Form 24Q: Quarterly TDS return filed with the Income Tax Department
- EPF Annual Return: Form 3A and 6A by 30th April
- ESI Return: Half-yearly return by 11th May and 11th November
- Bonus: Statutory bonus under the Payment of Bonus Act (8.33%–20% of salary) payable within 8 months of financial year end
Common Payroll Mistakes to Avoid
- Incorrect basic salary percentage (too low = lower PF, but higher scrutiny risk)
- Not collecting investment declarations at year start
- Missing TDS deposit deadlines (interest at 1.5% per month)
- Not accounting for mid-year salary revisions in TDS recalculation
- Ignoring state-specific Professional Tax rates and deadlines
- Forgetting to issue Form 16 on time
Outsourcing India Payroll to LawSync
Managing India payroll in-house requires dedicated expertise, software, and constant monitoring of regulatory changes. LawSync's payroll processing service handles the entire cycle — from salary computation and TDS calculation to statutory filings and Form 16 issuance — with 100% accuracy and on-time delivery.
Talk to our payroll team to get a custom quote for your India headcount.