Payroll Services in India

After five years of being described as imminent, all four Labour Codes commenced on 21 November 2025 – the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020 and the Occupational Safety, Health and Working Conditions Code 2020 – consolidating twenty-nine central labour laws. The central rules under all four were notified on 8 May 2026. Any guide describing them as pending is out of date, and that includes a great deal of what currently ranks.

The provident fund machinery moved too. On 29 June 2026 the government notified the Employees’ Provident Funds Scheme 2026, the Employees’ Pension Scheme 2026 and the Employees’ Deposit Linked Insurance Scheme 2026 under the Code on Social Security, replacing the 1952, 1995 and 1976 schemes from July 2026. Existing members carried over, and contribution rates stayed where they were.

The change with the money in it is the common definition of wages. Wages must now be at least 50% of an employee’s total remuneration, and payments in kind above 15% of wages count as wages too. Indian pay has been structured for decades around a low basic salary and a large stack of allowances, precisely to keep the provident fund, gratuity and bonus base small. That no longer works: where basic pay falls below half of total remuneration, the shortfall is added back. Provident fund, gratuity, statutory bonus and maternity benefit all compute on the same definition, so they all rise together.

Three other changes are live. The retrenchment threshold requiring government permission rose from 100 workers to 300. The wage threshold below which a supervisor counts as a worker rose from ₹10,000 to ₹18,000, which brings more people into scope rather than fewer. And fixed-term employees now qualify for gratuity after one year rather than five. Appointment letters stating designation and wages are also now mandatory for every worker.

The provident fund wage ceiling was raised from ₹15,000 to ₹25,000 a month with effect from 17 September 2026 – the first change since September 2014 and a two-thirds increase in the statutory contribution base, landing mid-year. Cabinet approved it on 16 September 2026 and it covers provident fund, pension and deposit-linked insurance, bringing around 51 lakh more employees into mandatory coverage. Any Indian cost model built before that date understates employer cost for everyone earning between the two figures.

The employee contributes 12%. The employer’s 12% is split between the pension scheme at 8.33% and the provident fund at 3.67%, plus 0.5% administrative charges and 0.5% for deposit-linked insurance, for 13% in all. The pension element is what the ceiling binds hardest: the employer’s maximum monthly pension contribution rose from ₹1,249.50 to ₹2,082.50, and anything above the pension cap flows into the provident fund account instead.

Here is the interaction that decides the number, and it is not in any rate card. Because wages must be at least 50% of total remuneration and the ceiling is ₹25,000, the ceiling binds from ₹50,000 a month of total remuneration upward. Above that point employer provident fund is a flat ₹3,250 a month whatever the employee earns – the same on ₹50,000 as on ₹400,000. For an employee at or above ₹50,000 the ceiling change costs the employer an extra ₹1,300 a month, or ₹15,600 a year.

Two boundaries are routinely misread. The ESI ceiling did not move: it is still ₹21,000 a month, unchanged since January 2017. And international workers have no wage ceiling at all – contributions are due on full salary. The Karnataka High Court struck those provisions down in 2024, but the Delhi High Court upheld them on 4 November 2025, so there is a live conflict and EPFO continues to enforce them. Do not assume expatriate provident fund has gone away.

Employees’ State Insurance is 0.75% from the employee and 3.25% from the employer on gross wages up to ₹21,000 a month, with the employee share waived where the average daily wage is ₹176 or less – though the employer still pays its 3.25%. It runs on fixed six-month contribution periods, April to September and October to March: an employee whose wage crosses ₹21,000 mid-period stays covered until the period ends. And it applies by notified area rather than nationally, so the same employer can be covered in one city and not in another.

Gratuity is 15 days’ wages for every completed year of service, divided by 26 working days, payable after five years – now one year for fixed-term employees – and capped at ₹20 lakh. What changed is the base: gratuity now computes on the common definition of wages with the 50% add-back. For an employer with a low basic and a large allowance stack, gratuity cost rises with no change to either the formula or the cap. It is also the only uncapped employer cost in Indian payroll – at ₹400,000 a month the annual accrual is over ₹115,000.

Professional tax is the most commonly botched item in foreign-run Indian payroll, in both directions. It is levied by state, not centrally, and capped at ₹2,500 per person per year by Article 276 of the Constitution. Several major employment states do not levy it at all – Delhi, Haryana, Uttar Pradesh and Rajasthan among them, which cover Gurugram and Noida. A generic configuration that deducts it there is making an unlawful deduction from wages.

Where it is levied, the detail matters. Maharashtra charges ₹200 a month for eleven months and ₹300 in February, reaching exactly ₹2,500 – an engine configured with a flat ₹200 under-deducts ₹100 per employee per year. Maharashtra also exempts women up to ₹25,000 a month against ₹7,500 for men. Tamil Nadu levies it half-yearly through the local body. And each levying state normally requires two registrations: one to deduct from employees and one for the entity’s own liability.

The new tax regime is the default and is where most employees now sit. Under it there is no tax on the first ₹4 lakh, a standard deduction of ₹75,000 applies to salary, and a rebate of up to ₹60,000 takes the effective nil-tax point to ₹12 lakh of income – ₹12.75 lakh for a salaried employee. The top rate of 30% applies above ₹24 lakh, and surcharge is capped at 25% where the old regime reaches 37%. The old regime survives for anyone who chooses it and keeps the full deduction architecture, which still suits employees with large housing loan interest and investment deductions.

The 2026 Budget changed no slabs under either regime. What changed is the statute: the Income Tax Act 2025 commenced on 1 April 2026, replacing the 1961 Act, and renumbered the rules without altering a rate. Tax deduction from salary is now section 392, the annual certificate Form 16 is now Form 130, the quarterly return is Form 138, and the previous year and assessment year are replaced by a single tax year. Every contract, offer letter and payroll specification that cites the old sections now cites a repealed Act.

The mechanics are unforgiving in one respect. Tax deducted from salary must be deposited by the 7th of the following month, returned quarterly and certified to each employee annually. Where an employee has not provided a permanent account number, the employer must deduct at 20% rather than at the slab rate, which produces a punitive first payslip for any new joiner whose number is not on file. Late deduction attracts interest of 1% a month and late deposit 1.5% a month.

There is no national leave entitlement in India. Earned leave is set by each state’s Shops and Establishments Act – commonly around fifteen to eighteen days a year, with different accrual, carry-forward and encashment rules by state – so a multi-state employer runs several leave rules at once. Casual and sick leave are state-set too. A single national leave policy is a commercial decision to pay above the floor everywhere, not a compliance position.

Maternity benefit is 26 weeks of paid leave for the first two children, reducing to 12 weeks from the third, paid entirely by the employer. Establishments with 50 or more employees must provide a creche. There is no statutory paternity leave in the Indian private sector – a point commonly misstated in international guides.

Termination turns on whether the individual is a worker under the Industrial Relations Code, which is a functional test rather than a seniority one. For workers, retrenchment requires one month’s notice or pay in lieu and compensation of fifteen days’ average pay per completed year, and above 300 workers prior government permission. Employees outside the worker definition are governed by their contract and the state Shops and Establishments Act.

On the entity question, India resists employment without one. A subsidiary is the cleanest route. A branch or project office creates a permanent establishment with corporate tax exposure on attributable profits, and a liaison office cannot carry on commercial activity at all. Engaging people as independent contractors carries the highest risk: the tests are applied substantively, and misclassification leaves the engager liable for the tax it failed to withhold. An Employer of Record is the common practical answer.