Payroll Taxes In India – A Guide for Employers

When hiring employees in India, one of the important considerations is payroll taxes.

While the compliance rules around taxes and contributions evolve constantly, non-compliance can result in severe penalties and employee dissatisfaction.

This article walks you through all the payroll contributions and deductions as an employer to manage your payrolls effectively. 

What are Payroll Taxes in India?

Payroll taxes refer to statutory contributions and levies that companies need to pay to the government based on their employees’ income. These taxes are aimed at funding social security, healthcare, and educational services to employees.

Here are the major payroll taxes in India:

• Employees’ Provident Fund (EPF)
• Employees’ Pension Scheme (ESI)
• Employees’ State Insurance (ESI)
• Gratuity
• Income Tax (TDS on Salary)
• Health and Education Cess
• Professional tax

As an employer, you are responsible for accurately calculating, deducting, and remitting these taxes to the concerned government departments. 

Mandatory Payroll Taxes and Employer Contributions

Following are the mandatory payroll contribution schemes in India that employers have to comply with. 

Employees’ State Insurance (ESI)

Based on the ESI Act,1948, the Employees’ State Insurance is implemented in India to protect employees and their dependents in case of sickness, unemployment, maternity, or on-the-job injuries.

Depending on the state, any employee who earns more than INR 21,000 and works for a company with more than 10 employees is eligible for ESI benefits.

The ESI contribution rate from employers is 4.75% while the employee contributes 1.75%.

Employees’ Provident Fund (EPF)

EPF is a retirement savings scheme where both employees and employers each contribute 12% of the employee’s basic salary plus dearness allowance. Employees can either access this fund upon their retirement or in case of certain financial needs such as loan repayment, higher education, etc. 

As per regulations, companies with more than 20 employees are required to register for the EPF fund. 

For employers who don’t meet the criteria, they can register for EPF voluntarily. However, it is not preferred because that means 12% deductions for both employees and employers.

Employees’ Pension Scheme (EPS)

As a part of EPF, the Employees’ Pension Scheme provides retirement benefits to employees in India. Out of 12% contributed by the employer towards the provident fund, 8.37% automatically goes to the EPS. Employers don’t need to make any separate contributions to the pension scheme. 

Upon retirement, the employee starts receiving regular payments as a monthly pension. However, as per regulations, EPS benefits are only available to those employees who earn less than INR 15,000 every month.

Gratuity

According to the Gratuity Act 1972, employees who work continuously for over 5 years and then resign, retire, are terminated, or pass away, get a tax-free gratuity from their employers.

The gratuity payment in India is equal to 15 days of salary for every year of service in the company. 

As per laws, employers need to contribute towards a gratuity fund to cover future gratuity payouts. They can also make provisions for gratuity via insurance or bank guarantees. 

Payroll Taxes Deducted by Employer from Employee’s Salary

In addition to mandatory payroll contributions, employers must deduct several taxes from employees’ salaries based on criteria set by the Indian authorities. These deductions mainly include income tax, health and education cess, and professional tax.

Income Tax (TDS)

TDS or Tax Deducted at Source refers to income tax that employers must deduct from employees’ salaries if their estimated annual income is above the threshold limit. 

India has two income tax thresholds commonly known as “Old” and “New” tax regimes. 

The new tax regime has six different levels of tax rates. If you earn up to INR 300,000, you don’t have to pay any tax. For every additional INR 300,000 you earn, the tax rate goes up by 5%.

In comparison, the old tax regime offers 4 levels of tax rates with a 0% tax rate for income of up to INR 250,000. however, it also allows employees to claim various exemptions including pension funds, etc. 

Moreover, employees have the flexibility to choose whether they want to go with the old or the new. 

As an employer, you are responsible for calculating the income taxes based on every employee’s preferred tax regime and remit them accordingly.

Health and Education Cess

To support the healthcare and education of families living below the poverty line, the Indian government requires a 4% Health and Education Cess.

This cess is implemented on income tax, not the salary. Therefore, if someone owes income tax, they also need to pay an additional 4% towards health and education cess. 

As an example, if your employee owes INR 5000 in income taxes, they also need to pay an additional INR 200 (5000 * 4%) towards health and education cess.

In case the employee does not owe any income taxes, the Health and Education Cess is not deducted.

Professional Tax

Professional tax is imposed by the state government in India on income earned from any kind of work including job, trade, etc. The total amount of professional tax you pay varies from state to state. However, there is a maximum limit set by the Indian law which is INR 2,500 every year.

Keep in mind that not all states charge professional tax. Therefore, as an employer, you will need to determine beforehand whether you need to deduct and remit professional tax or not.

Simplify Your Payroll Process in India with RecruitGo

RecruitGo helps employers streamline their payroll process in India through our platform and ensures compliance with local regulations. We handle every aspect related to payroll from tax deductions to statutory contributions for each employee. Meanwhile, employers benefit from the convenience of receiving a single, consolidated invoice covering all employees.