India Payroll and Benefits Guide

What global businesses need to know about payroll in India

India has now overtaken China as the country with the largest population in the world. However, in GDP terms, it still only ranks fifth: indeed, its total GDP is only around one-eighth that of the United States, despite the fact that it has more than four times the number of people.

This is just one of the reasons why there’s so much opportunity to make real gains by expanding into the Indian marketplace. Its economy has consistently grown by between 3% and 9% every year this century, with the exception of 2020 as COVID-19 impacted economics. And while wages and living costs are still very low, there is a burgeoning Indian middle-class with growing income, and therefore greater ability to spend on goods and services.

However, things aren’t quite as easy as it seems. India’s rules around employment and payroll can be unfortunately complicated, and there’s also a huge amount of admin, red tape, and bureaucracy to navigate, too. This guide highlights some of the basic things you need to know about running payroll in India – and why getting third-party support is so important.

Getting Started with India Payroll

The good news is that registering a business in India is relatively inexpensive and most fees come in at the rupee equivalent of just a few pounds or dollars. The bad news, however, is that there are many administrative hurdles to negotiate.

Companies will need to perform all of the following registration procedures, ideally in this order:

  • Class 2 digital signature certificate: issued online for two-year periods by the Ministry of Corporate Affairs (MCA)
  • Director ID numbers: issued by the MCA for each person appointed as a company director
  • Name registration: the company name is formalized with the MCA’s Registrar of Companies
  • Stamp dues: payment of these will then enable the procurement of the Certificate of Incorporation
  • Permanent Account Number (PAN): registration for the transfer of income tax payments to India’s Income Tax Department
  • Bank account: opening an in-country account in India, which requires the Certificate of Incorporation and PAN number among other documentation
  • Medical insurance: registration with the Employees’ State Insurance Corporation
  • VAT: registration with the Department of Trade and Taxes
  • Tax Account Number (TAN): required for all people who will be collecting or deducting income tax at source

As an aside, it’s important to note some of the traditional and cultural characteristics around doing business in India. Making an effort to build relationships with colleagues, such as asking them about their family, is very important. Additionally, you should only use your right hand wherever possible, and should always have business cards with you to present to new contacts.

Employment Considerations

Having a written employee contract is not required in India, but is advisable. Failing to establish employment agreements can complicate payroll or cause problems if a business is in an industry that is dominated by collective bargaining associations, as the pharmaceutical, banking, and auto industries are.

Working hours in India can vary from state to state and from industry to industry. The national standard is 40 hours, over five eight-hour days, but this can be extended to 48 hours with the agreement of the employee. Anything above 48 hours a week is considered overtime, for which the employee should be paid double their normal rate. Employers who break rules around working hours are punished severely, up to a maximum of two years in prison and a fine of 100,000 rupees (also known as one lakh, approximately £950; $1200; €1100).

A foreign national will generally apply for an Indian employment visa to the Indian Embassy/High Commission in his country of residence. Following the receipt of a visa, all labor laws regulating employment relationships in India also apply to foreign nationals working in India. Broadly, the entitlement to statutory employment rights depends on the category of employee and other factors (such as remuneration, location, and industry).

It’s important to note that Indian legislation recognizes two categories of employees, called workmen and non-workmen, the difference being that non-workmen are generally those in managerial roles. Only workmen are covered under the provisions and protections of the Industrial Disputes Act. 

Probationary periods are between three and six months, varying according to the type of job and the seniority of the employee concerned. Removing any ambiguity from this is one of the many reasons why a written employment contract is recommended.

Compensation, Bonuses & Severance Pay

India has a national minimum wage rate, which is currently 178 rupees per day (approximately £1.70; $2.15; €1.95). However, local and state governments apply their own rates which vary across different states, industries, and skill levels of workers. It’s estimated that the number of minimum wage rates in India runs into the thousands.

Many Indian workers are eligible for statutory bonuses, and the payment of these bonuses is a key part of the country’s working culture. If any employee works in a company employing at least 20 people and earns 21,000 rupees per month (approximately £200; $250; €230) or less, they are entitled to a bonus of between 8.33% and 20% of their annual salary.

Severance pay entitlement is 15 days of wages per year of service, plus potentially certain other severance-related benefits such as statutory bonus payments, and a gratuity for those with at least five years’ service.

Tax and Withholding Considerations

The Indian income tax system has undergone a series of revisions in recent years and you should watch out for possible further changes in the future.

For 2023/24, income tax is levied progressively over six bands. The first 300,000 rupees earned per year (approx. £2800; $3600; €3300) are exempt from any income tax. New bands take effect at 300,000-rupee intervals, across 5%, 10%, 15% and 20%. In the highest band, earnings above 1.5 million rupees (approx. £14,200; $18,000; €16,300) are taxed at 30%. There are also a range of exemptions and rebates that employees can claim on an individual basis.

On top of this, there are also surcharges on higher earners that kick in on any earnings above 5 million rupees a year (approx. £47,000; $60,000; €54,500) – these surcharges increase in size as earnings increase.

Social security contributions are as follows:

  • Employee’s Provident Fund and Pension Scheme: 12% employer, 12% employee
  • State Insurance: 3.25% employer, 0.75% employee (only applicable to employees who earn 21,000 rupees a month or less)
  • Health and Education: 4% employee

Foreign nationals working in India are also required to make these payments, unless they come from one of a select group of countries that have bilateral social security agreements with India.

Leave and Holiday Considerations

The statutory minimum paid leave entitlement in India is 15 days per year, but it’s common for Indian employers to offer more in employment contracts; around 24 days a year is fairly commonplace. There are only four days of public holidays that are observed nationwide, but the number of holidays that are observed in individual states runs into three figures. Make sure you’re well on top of different requirements in all the states you intend to operate in.

In 2017, the statutory length of paid maternity leave was increased to 26 weeks, but reduced to the previous level of 12 weeks for women who already have at least two surviving children. All maternity leave is paid at full salary. India does not oblige employers to provide paid paternity leave; at the time of writing, only male government employees are entitled to 15 days of paid leave. Similarly, there is no provision for any additional parental leave.

Paid sick leave entitlement is 15 days per year, as long as the absence is medically certified and the employee has at least three months of service. Employers continue to pay the sick employee at 70% of their normal rate. Any time off beyond this, including long-term sick leave, is generally unpaid.

In Summary

From a payroll perspective, India isn’t for the faint-hearted: variation in rules between 36 different states and territories, and a large amount of set-up admin, can make for a complicated and stressful experience. But it doesn’t have to be. Working with a global payroll partner can help you tap into all the expertise and solutions you need to cut the complexity, ensure compliance, and make the most of the opportunities in the most populous country on Earth.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.

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