With a population of 139 crores, India is one of the fastest progressing economies. Naturally, in every economy growing at this rate, there are several emerging sectors, technological advancements, and multiple trends. This growth requires companies to expand, hire new employees, and manage a large workforce.

However, in an attempt to do so, payroll taxes in India can become a bottleneck rather quickly. If you are facing issues in understanding professional taxes in India, have a look. We have mapped the entire journey of what employer payroll taxes are levied and why it is important to look after these taxes.

What Are The Types Of Payroll Taxes In India?

The main professional tax that any employee needs to pay is TDS or income tax. Other than this, there are various deductions and compliance requirements for employers. We have discussed everything you need to know.

1.     Income Tax

Every individual with any income should pay payroll taxes in India, including Hindu Undivided Family, individual, an organization with an income, etc. Further, any salaried employee in India needs to pay professional taxes, due in the form of capital gains, business gains, income from sources like gambling, dividends, etc.

The tax slab for every individual may differ depending on the new and the old tax regime, which we have explained below. Usually, TDS is deducted at the source depending on the tax slab. Employees can file ITR return depending on their deductions and exemptions to claim a part of this payroll tax back.

2.     Social Securities

Payroll in India has various schemes, such as health insurance, pension plans, gratuity, etc. This is akin to social security.

  • The Employees’ Provident Fund Scheme is a form of pension contribution for payroll in India. The employee, as well as the employer, contributes to the EPF as per the income.
  • Payroll in India includes National Health Services. However, these services don’t provide free care to employees. It offers funds to cover maternity, sickness, and other issues.
  • According to compliance rules, females should receive 12 weeks of leave for maternity, right before and after the birth of the child.
  • Gratuity is deducted in payroll taxes in India when the employee has served one company for more than 5 years. This gives employees 15 days of the extra wage for every one year of employment in one company.

3.     Employer and Employee Contributions

There are many contributions made by both the employee and employer under Payroll in India.

  • Any employer having 20 or more employees needs to contribute to Employee Pension Scheme and Employee Provident Fund.
  • Any employer having 10 or more employees needs to contribute to Employee State insurance.

The above deductions or contributions are made by both the employee and the employer at different rates.

For the employer payroll tax, here are the details:

  • Income between INR 0.0-INR 2.5 Lakhs = No tax
  • Income between INR 2.5-INR 5.00 Lakhs = 5% tax
  • Income between INR 5.00-INR 10.00 Lakhs = 20% tax
  • Income above INR 10.00 Lakhs = 30% tax

4.     Minimum Wage

As per the rules and regulations of state governments, there’s a minimum wages act in India. Depending on the employment and other categories, a minimum wage is decided for every job role. Employers need to refer to the rule as per the 400 categories of employment.

5.     Working Hours and Leave

Usually, the standard working time for every employee as per payroll in India is 9 hours in one day or 48 hours in a week. Any employment time above this is overtime and overtime is calculated as per twice the regular pay of the employee.

There are over 15 paid leaves offered to one employee in one year. There are many additional leaves as per national holidays. Over this, the leaves may be paid leaves.

Income Tax Slab According To Employee Salary

Recently in India, a new tax regime has been launched. Based on this, you can either pay as per the new regime or use the old regime. While filing the ITR return, taxpayers may have already selected one of the two. The regime reduces tax but employees don’t get certain exemptions.

Here are the tax slabs:

  • Income between INR 0.0-INR 2.5 Lakhs annually = No tax
  • Income between INR 2.5-INR 5.00 Lakhs annually = 5%
  • Income between INR 5.0-INR 7.5 Lakhs annually = 10%
  • Income between INR 7.5-INR 10.00 Lakhs annually = 15%
  • Income between INR 10.00-INR 12.50 Lakhs annually = 20%
  • Income between INR 12.5-INR 15.00 Lakhs annually = 25%
  • Income more than 15 Lakhs annually = 30%

There are a few things that we need to keep in mind regarding the new tax regime:

  • The tax slabs are the same for every professional, including professionals up to 60 years, 60-80 years, and above.
  • Any individual with income below or under INR 5 lakhs can receive the rebate as per u/x 87A. This means no tax liability.
  • For NRIs, INR 2.5 Lakhs is the basic exemption limit.

Understand Under What Condition You Can Adopt The New Tax Regime

Any taxpayer can use the new regime but they may need to let go of many deductions allowed in the old scheme. There are around 70 deductions that have been removed from the new regime, here are some important ones:

  • House rent allowance
  • Leave travel allowance
  • Conveyance allowance
  • Helper allowance
  • Relocation allowance
  • Children education allowance
  • Standard deduction on salary
  • Interest on housing loan
  • Professional tax

Which One Is Better?

The new regime is beneficial for many taxpayers. However, it is believed that taxpayers falling under the range of INR 15 lakh annually may benefit the most from this scheme. Naturally, the old regime would benefit high taxpayers more.

You should consider a new tax regime if you fall under the following criteria:

  • You are doing fewer investments
  • Not opting for deductions
  • Not opting for tax-saving schemes

However, in case you have a favorable deduction plan in place, including insurance, Mediclaim, etc, then the old regime may be beneficial for your case. The old regime may help you reduce tax liability with well-planned investments and deductions.

Hence, before you select one type of tax regime, do proper analysis, understand the requirements/benefits, and then select a regime that helps you reduce your tax liability. It may be best to calculate tax liability under both regimes before filing the return or selecting one regime.

Why Are Payroll Taxes In India Important?

You must be wondering why employees need to pay taxes. How these taxes are necessary for every individual? Understand how:

1.     Avoid Penalties

The first reason to pay payroll taxes in India on time is to avoid penalties. There are set of professional taxes for employees, all of which may or may not be deducted under TDS at the source. Every individual with some income in India should pay professional taxes in India. This is as per your tax slab or tax liabilities.

If you fail to pay the entire tax as per the rules and guidelines, you may have to pay a penalty. The number of fines for non-payment of taxes can be very high.

This further impacts your future employment, credit score, and credibility amongst employers or other institutions.

2.     Responsibility

If you look at it, then the first responsibility of paying taxes is of the employees. As a responsible citizen of the country, you need to understand your individual taxes and ensure that these are paid on time.

However, when you are working with an employer, then employer payroll tax becomes their responsibility partly. The accounting team or HR of the company deducts payroll taxes in India as per your declarations and investments.

Therefore, as a responsible citizen, you need to pay professional taxes on your income on time to avoid penalties and hassle to yourself.

3.     Economy

Lastly, payroll taxes in India are important for the economy of the country. Every country thrives and flourishes with this tax money. This money helps sectors grow and public spaces become more liveable and better.

Any country’s well-being is dependent on taxpayers who contribute as per their income slabs to the nation. This money helps in tech developments and other sectors of the country.

In all, payroll taxes in India allow national growth. It strengthens the economy.

Conclusion

So, this was an overview of payroll taxes in India. Employees need to pay TDS, which is usually deducted at the source. This includes many other deductions at source only. Depending on the tax slab, employees can select a suitable tax regime for reducing tax liability.

If you are facing issues in managing taxes of the business or employees, TopSource Worldwide offers tax outsourcing services. We have skilled and experienced professionals who understand the dynamic environment deeply. This ensures accuracy.

You can rely on us for your taxes. Connect with our team now for more details.

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Published On: January 5th, 2022Last Updated: June 16th, 2022

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About the Author: Sachin Disa

Sachin heads the India Payroll business unit and is responsible for global sales into India, India domestic sales and delivery, and local finance support in India. Sachin has over 17 years of experience with the company, his previous roles include head of UK payroll operations, head of accounting support services, head of sales in India and VP of finance.