HR and payroll for technology in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Running payroll and HR for a technology company in India follows the same statutory framework as any other sector, but the specifics of how tech firms hire, structure compensation, and manage compliance create a distinct set of practical considerations.
How tech compensation structures complicate payroll
Most technology companies in India pay a significant portion of total compensation through variable components: performance bonuses, stock options (ESOPs), retention bonuses, and allowances. Each of these has different tax treatment, and getting the breakdown wrong creates TDS shortfalls or year-end surprises for employees.
The basic rule is that all salary components are taxable unless explicitly exempt. Under the new income tax regime — which is now the default for most employees — few exemptions apply, and slabs rise to 30% at higher income levels. The 4% health and education cess applies on top of the computed tax liability. A section 87A rebate is available for employees whose net taxable income falls within the qualifying threshold.
For ESOPs specifically, the tax event occurs at two points: at exercise (perquisite tax, deducted via TDS by the employer) and at sale (capital gains tax, the employee's responsibility). Employers at unlisted companies have an option to defer TDS on ESOPs to the earlier of sale, transfer out of employment, or five years from exercise — a provision introduced to ease the cash-flow problem employees face when taxed before they can sell shares. Make sure your payroll process flags ESOP exercise events and triggers the correct TDS calculation each time.
EPF, ESI and the Labour Codes
For provident fund, the standard contribution is 12% of basic wages from the employee and 12% from the employer. In tech companies, where take-home optimisation is common, there is sometimes pressure to keep the basic salary component low so that EPF contributions remain small. Be careful here: under India's Labour Codes — which have consolidated the old patchwork of labour legislation and are in force from 2025 — the definition of "wages" has been tightened. A higher proportion of total remuneration now counts as wages for the purpose of statutory deductions, which affects both EPF and gratuity calculations.
ESI (Employees' State Insurance) applies to employees whose wages fall below the prescribed threshold. In a typical technology company, most engineers and professional staff will be above that threshold and therefore outside ESI. However, contract staff, support roles, and junior hires may fall within it. If you engage workers through a contractor or staffing agency, verify that ESI compliance sits with the principal employer in cases where the contractor defaults — the law places that liability on you.
TDS filings and Form 16
Technology companies tend to have a higher-than-average proportion of employees in senior income brackets, which means more TDS complexity. Employers must deduct TDS on salary each month based on the projected annual liability, deposit it with the government, and file Form 24Q quarterly. At year-end, Form 16 must be issued to every employee.
Where it goes wrong: mid-year salary revisions, variable pay paid in Q3 or Q4, or ESOP exercises that push an employee into a higher slab — all of these require a recalculation of TDS for the remaining months of the financial year. Build a process to recalculate projected annual income whenever a material pay event occurs, not just at the start of the year.
Gratuity and attrition realities
Gratuity is payable after five years of continuous service, calculated on last drawn basic wages. Technology companies typically have higher attrition than most sectors, so the practical gratuity liability looks smaller than in manufacturing or banking. But high attrition also means a steady flow of employees who are approaching or have crossed the five-year mark — tracking this precisely matters.
The contractual "notice period buy-out" that is standard in tech also has a payroll angle: when an employee pays the company to exit early, or the company pays the employee to leave immediately, both are treated as salary and taxed accordingly.
Contractors, moonlighting and gig workers
Many technology companies engage a mix of full-time employees, fixed-term contractors, and freelancers. Each category sits differently in law. Full-time employees carry the full statutory burden — EPF, TDS, gratuity eligibility. Contractors who are individuals (not incorporated) and receive recurring fees above the TDS threshold are subject to TDS under the relevant section for professional or technical services, not salary TDS.
Moonlighting — where an employee takes on outside work — became a visible policy debate in Indian tech after several large firms took public positions on it. From a payroll standpoint, the employer has no direct liability for undisclosed outside income, but your employment agreement should be clear about what is and is not permitted, because any secondary employer paying that person will also be deducting TDS, potentially creating a mismatch when the employee files their ITR. If you want to manage this cleanly, consider requiring disclosure and factoring it into your TDS calculations where the law permits.
For companies managing payroll across multiple geographies — common in Indian tech firms with global teams — how Mellow runs payroll across six countries on one platform covers the cross-border structure in more detail.
Record-keeping under the Labour Codes
The 2025 Labour Codes require employers to maintain registers covering wages, leave, attendance, and other employment particulars, and to issue payslips. Technology companies that rely on HRIS platforms often assume this is handled automatically — verify that your system actually generates compliant records in the formats required, not just internal dashboards. Inspections and disputes both turn on documentary evidence.
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