Indian HR and payroll: a starter guide
Reviewed by Mellow Editorial Team, HR & payroll content team
Indian payroll involves deducting income tax (TDS), provident fund contributions and, where applicable, ESI from employee salaries each month, then depositing those amounts with the relevant authorities on statutory deadlines. Get these mechanics right from your first hire and you avoid penalties, interest and the administrative pain of correcting past filings.
Who you are dealing with and what they expect
As an employer in India you interact with three main bodies: the Income Tax Department, the Employees' Provident Fund Organisation (EPFO) and the Employees' State Insurance Corporation (ESIC). Each has its own registration, challan (payment) process and return-filing schedule.
You also need to register under applicable state-level legislation — shops and establishments acts vary by state — and, increasingly, align your policies with India's four consolidated Labour Codes, which have been in force from 2025. The Labour Codes consolidate decades of older central legislation on wages, social security, industrial relations and occupational safety into a single framework. Review your employment contracts, leave policies and standing orders against the new Codes if you have not already done so.
Setting up payroll: the basics
Before you run your first payroll, you need:
- A TAN (Tax Deduction and Collection Account Number) to deduct and deposit TDS
- An EPF employer code from EPFO once you cross the applicable headcount threshold
- An ESI employer code from ESIC if any employee's wages fall below the ESI wage ceiling
Every employee fills in a declaration choosing between the old tax regime and the new tax regime. The new regime has slabs rising to 30%, a section 87A rebate for lower incomes and a 4% health and education cess on the final tax liability. Employees who do not actively declare a preference default to the new regime. Their choice determines how you calculate TDS each month, so collect declarations before the financial year starts — or at the point of joining for mid-year hires.
Monthly payroll mechanics
Each month you run a gross-to-net calculation for every employee:
Gross salary minus EPF employee contribution (12% of basic wages) minus income tax TDS minus any other statutory or voluntary deductions equals net take-home.
On the employer side, you add your own EPF contribution (also 12% of basic wages) to your cost. Part of the employer's contribution goes to the Employees' Pension Scheme; the split is set by EPFO rules.
For employees covered under ESI, both employee and employer contribute a percentage of wages each month. Eligibility is based on the employee's wage being below the current ESI threshold.
Depositing these amounts on time matters. EPF and ESI challans are due by the 15th of the following month. TDS deducted from salaries must be deposited by the 7th of the following month (with a different deadline for March). Missing these dates triggers interest and penalty.
Quarterly and annual compliance
TDS compliance runs on a quarterly cycle. You file Form 24Q — the salary TDS return — four times a year. At year end, you issue Form 16 to every employee. Form 16 is their primary document for filing their personal income tax return, so errors in it create problems for employees as well as audit risk for you.
Your annual tasks also include:
- Reconciling EPF contributions and filing the annual return with EPFO
- Closing out the ESI contribution period and filing returns with ESIC
- Issuing payslips consistently throughout the year, which employees need for loan applications, visa processing and other purposes
If you have employees on fixed-term or project contracts, check whether they qualify for gratuity. Gratuity becomes payable after five years of continuous service, and it is worth accounting for this liability well before it crystallises.
Payroll for distributed and remote teams
Many Indian businesses now hire across multiple states, or employ a mix of full-time employees and contractors. Each adds a layer of complexity.
Contractors are generally not on payroll — you do not deduct EPF or ESI for them — but TDS may still apply to their payments under other TDS provisions (not Form 24Q). Misclassifying a full-time worker as a contractor is a significant compliance risk, particularly under the Labour Codes.
For employees in different states, the applicable shops and establishments registration, professional tax rates (a state-level levy) and minimum wage notifications differ. Professional tax is deducted from employees in most states and deposited with the state government — another line item your payroll process must handle.
If your workforce spans countries as well as states, understanding how payroll works across multiple jurisdictions from the outset saves significant rework later.
What good payroll hygiene looks like
Accurate payroll comes down to clean data, consistent processes and timely action. Maintain a single source of truth for employee details — joining date, PAN, bank account, salary structure, tax regime choice. Run a payroll register each month before disbursement and check it against the previous month for anomalies. Keep challan receipts and return acknowledgements organised by period; you will need them if EPFO, ESIC or the tax department raises a query.
Statutory rates and thresholds change. Review the Finance Act each year after the Union Budget and update your TDS calculations accordingly for the new financial year starting April.
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