Payroll in India

Using payroll services in India

Global payroll services can take that headache away. Payroll outsourcing in India makes the process a whole lot easier by taking on the burden of managing payroll for your employees based in other countries. Some will even go a step further, helping you to hire and onboard your employees, as well as administering employee benefits and managing human resources.

Hiring the awaiting talent in India becomes a walk in the park with that level of service from your payroll company partner. 

In the rest of this article, you’ll get a sneak peek into the payroll process in India, including potential mistakes to avoid and your options for the best way to get started. What’s more, the Skuad team is available to answer any payroll-related questions you might have.

What does the payroll process in India involve?

Whether you’re hiring a full-time employee or outsourcing services to an independent contractor in India, you’ll need to know the components of a payroll workflow in order to remain compliant with local labor laws:

1. Employee information
   This should include their name, address, and AADHAR  number.‍
2. Salaries and wages
   This should include whether they receive an hourly wage or a fixed annual salary, their gross pay (pre-tax and deductions), their hours worked (or overtime worked), the rate of overtime pay according to Indian employment law, benefits contributions, additional income (tips, bonuses or commission) and net pay (post-tax and deductions). ‍
3. Deductions
   This should include payroll tax, payroll withholdings, and benefit deductions. 

A business must pay its employees in India in the local currency of Indian rupees (INR ₹).

A contractor may be paid in another currency, though they must open a foreign currency account. Businesses are better off paying in rupees to simplify the process and ensure that they remain compliant. 

‍If compliance is causing you concern, turn to Skuad. Our experts know all the details about running payroll in India. And we’re here to help.

India Payroll - Key statutory points

Tax

A new tax regime has recently been introduced to India, which companies will need to wrap their heads around. 

In a nutshell, income tax was reduced for employees. In some tax brackets, it was cut by up to half of what it was in the old regime.

While reduced tax may initially sound very appealing, this new regime doesn’t allow for so many tax exemptions, which could end up costing some employees more. In this situation, the employee is allowed to stick with the old regime where the net tax payable works out to be less than that of the newer system. 

Here’s a comparison of the old vs. new tax system:

The following components of employee income are subject to full taxes:

• Basic salary
• Commission
• Bonuses
• Profit-share income
• Personal expenses reimbursements
• Benefits that are exchanged for additional pay

Around 70 out of 120 exemptions were removed in the new regime. The good news is that transport allowance, medical allowance, house rent allowance as well as some other allowances remain tax-deductible. 

Overtime pay

If an employee works more hours than stated in their employment contracts, they may be due overtime pay. However, this isn’t clearly defined in Indian law and can vary depending on the type of work, the usual hours worked, and the state in which the employee is based.

Social security contributions and penalties

In India, employers are responsible for deducting statutory employee benefits from payroll, including the Employees’ Provident Fund, Employees’ Pension Scheme, and Employees’ Deposit Linked Insurance Scheme.

If a business has less than 20 workers, the employer may contribute to the PF voluntarily. Once there are over 20 employees, this contribution becomes a statutory requirement.

13th-month bonus

Employees in some industries are legally entitled to a bonus. The amount is determined by their annual salary and must be paid within eight months of the end of the financial year.

Minimum wage

The national minimum wage in India is 176 rupees per day—the equivalent of around $3. However, this rate can differ depending on the industry or the state within India. 

‍We get it. There’s a lot to learn about payroll in India. So why not lighten your load? Book a Skuad demo and see what we can do.

Types of paid leave that Indian employees will expect

Paid leave

Employees are legally entitled to 12 days off for every 240 days worked. Again, the laws do vary depending on location, but this time it’s down to where the employer’s legal entity is based, rather than the employee. 

Sick leave

Employees in India are entitled to 12 days of time off for health or personal reasons. 

Public holidays

There are a few national public holidays in India, with additional public holidays celebrated in different states. Employers should be aware of the following important holidays

• Republic day - January 26th
• Rama Navami - est. April 10th
• Ambedkar Jayanti - April 14th
• Good Friday - April 15th
• Eid al-Fitr - est. May 2nd - 3rd
• Eid al-Adha - est. July 9th - 10th
• Indian Independence Day - August 15th
• Gandhi Jayanti - October 2nd
• Dussehra - October 5th
• Prophet's Birthday - October 8th - 9th
• Diwali - October 24th
• Christmas Day - December 25th

Maternity leave

If the employee has fewer than two children, they are entitled to a minimum of 26 weeks of maternity leave. If they have two children or more or have adopted or used a surrogate, they are entitled to twelve weeks of leave. They can start maternity leave up to eight weeks before the due date.

For an employee to be entitled to maternity leave, she needs to have worked a minimum of 80 hours within the last 12 months of employment. 

Paternity leave

Employees are not automatically entitled to paternity leave under Indian employment laws.

If that all sounds overwhelming, why not leave it up to the experts? Get a demo of Skuad’s payroll processing support in India today.

3 potential pitfalls of payroll in India

Payroll compliance

The process of payroll in India is complex, especially with the introduction of the new tax regime.

It’s vital to keep up with statutory regulations to remain compliant and avoid facing fines or business penalties. 

For instance, if an employer were not to make the correct contributions to India’s social security system, they’d have to make a back payment of the total sum owed on top of interest, as well as fines ranging anywhere from 5-25% of the amount due.

It’s even possible for employers to face prosecution if they’re found to have deliberately avoided contributing. 

Misclassification

The use of contractors in India is sometimes prohibited, in which case employers would need to secure a 'principal employer' license to hire self-employed workers. However, if a company chooses to use contractors, they'll need to avoid misclassification — or, as Indian law puts it, 'Sham contracting’.

Companies will undergo government ‘tests’ to determine whether or not employees have been misclassified. If they are found guilty of misclassification, the company will be liable to severe fines and penalties. 

Centralized payroll and data management

Sometimes companies can end up outsourcing payroll management to multiple employers of record when in reality they only need to partner with one efficient provider. 

Having too many payroll systems or HR processes can limit the potential for a company to scale and end up draining precious resources like time and money. It’s far more efficient to employ one payroll partner who can handle onboarding, compliance, HR, and more in multiple countries.

Outsourcing payroll in India: Start building your team today!

Payroll outsourcing for your employees in India is far more cost and time effective than the alternative, which would be setting up your own legal entity.

Not only would you have to factor in the registration costs, but also high fees for lawyers and accountants that specialize in Indian labor and employment law to help you remain compliant, as well as travel expenses for the inevitable trips back and forth to India when setting it up, on top of even more unforeseen costs. 

Working with a reputable payroll partner like Skuad will take all of this work off your hands. With a legal entity already established in India, we can provide your company with Employer of Record services including HR management and competitive benefits packages that meet local statutory requirements. 

You’ll be able to access all of this payroll data on a single dashboard for easy viewing to ensure that your business is running smoothly without stress on your mind!

Keen to see how our unrivaled global payroll solution works? Book into a demo with one of our friendly team members today to start getting assistance with payroll in India and beyond today!