HR and payroll for startups in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll and HR compliance in an Indian startup is manageable once you understand which obligations apply at which headcount — and in which order to set them up.
Get the basics registered before your first hire
Before you pay anyone, you need a few registrations in place. A Tax Deduction Account Number (TAN) is required to deduct TDS from salaries. If you anticipate crossing the ESI wage threshold, ESI registration is needed. EPF registration becomes mandatory once you reach a certain employee count, though many startups register voluntarily from day one to offer the benefit from the start.
Skipping these registrations and catching up later is painful — back contributions, interest and penalties add up quickly. Do it in the right order: company incorporation, then PAN and TAN, then labour registrations as headcount and payroll costs grow.
Understand your statutory deductions from day one
Every salaried employee in India has three core statutory deductions you must handle correctly.
EPF. Both the employee and employer contribute 12% of basic wages to the Employees' Provident Fund. Your employer contribution is an additional payroll cost on top of the gross salary — a point founders sometimes miss when building salary budgets. EPF filings go through the EPFO unified portal and must be completed monthly.
ESI. Employees below the applicable wage threshold are covered under the Employees' State Insurance scheme. Both employer and employee contribute. ESI covers medical and certain other benefits, so it matters to employees even if it feels like admin to you.
TDS on salary. You must deduct income tax at source each month based on each employee's projected annual income. For 2026/27, the default regime is the new tax regime, with slabs rising to 30% at higher incomes. A section 87A rebate reduces or eliminates tax for employees at lower income levels. A 4% health and education cess applies on the income tax amount. At year-end, you issue Form 16 to each employee and file Form 24Q quarterly with the income tax department.
Getting TDS wrong is one of the most common startup payroll mistakes. The quarterly Form 24Q filings must reconcile with what you actually paid, and any shortfall attracts interest.
Structure salary components carefully
How you structure a salary package affects the employee's take-home and your compliance burden. A salary split across basic, HRA, special allowance and other components has been standard practice for years. Under the new tax regime, many of the old exemptions (HRA, LTA) do not apply unless an employee opts for the old regime — but the structure still matters for PF calculation, since EPF contributions are based on basic wages.
A common startup mistake is setting basic wages very low to reduce EPF liability. This is now more closely scrutinised. The four Labour Codes, which came into force in 2025, redefine "wages" more broadly, which has implications for EPF, gratuity and other statutory calculations. Make sure your payroll structure accounts for the new definition, not the old one.
Plan for gratuity even before you owe it
Gratuity becomes payable once an employee completes five years of continuous service. For an early-stage startup, five years feels distant — until suddenly you have your first cohort of founding-team members hitting that milestone simultaneously.
The amount is based on the employee's last drawn salary and years of service. You are not required to fund it upfront, but many growing companies take out a group gratuity policy to provision for the liability gradually rather than facing a large cash outflow all at once. Knowing this obligation exists from the moment you hire is more useful than discovering it when it falls due.
Build a payroll process that scales
A spreadsheet works when you have three employees. It breaks down around ten, and becomes a liability around twenty. The failure mode is not just inconvenience — it is missed filings, incorrect TDS, and reconciliation errors that take weeks to unwind.
What a scalable payroll process looks like for a startup:
- A single source of truth for employee data (joining date, salary, PAN, bank account, tax regime choice)
- A monthly payroll run that produces payslips, a salary register and the data needed for EPF, ESI and TDS filings
- A calendar of due dates — EPF by the 15th of the following month, TDS by the 7th, Form 24Q quarterly — so nothing is missed
- A clear owner, whether internal or an outsourced provider
How Mellow runs payroll across six countries on one platform is worth reading if you are managing any cross-border hires alongside your India team.
The Labour Codes have also consolidated several older acts into four codes covering wages, industrial relations, social security, and occupational safety. Full state-level rules are still being notified, but the direction is clear: compliance is being standardised and enforcement is expected to tighten. Setting up clean processes now costs far less than retrofitting them later.
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