Payroll for your first employee in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Hiring your first employee in India means taking on a set of legal obligations before you pay a single rupee. Get the registrations and deductions right from day one, and the ongoing process is straightforward.
Register Before You Run Payroll
You need two registrations in place before your first payroll run.
EPF registration is mandatory once you have 20 or more employees, but many employers register voluntarily before that threshold. The Employees' Provident Fund Organisation (EPFO) issues you a 22-digit establishment code. You will need this to file monthly contribution challans.
ESI registration applies if you have employees below the applicable wage threshold. The Employees' State Insurance Corporation (ESIC) issues a 17-digit code. Like EPF, registration is tied to headcount thresholds, but again, early registration is possible and avoids a scramble later.
If you are starting with a single employee, check whether your state or industry has specific rules under the applicable Labour Code. India's four consolidated Labour Codes — the Code on Wages, the Industrial Relations Code, the Social Security Code, and the Occupational Safety Code — are in force from 2025 and have reshaped certain compliance obligations, including definitions of "wages" that affect how you calculate statutory contributions.
Collect the Right Information from Your Employee
Before the first pay date, gather the following from your employee:
- PAN — required for TDS deductions and Form 16
- Aadhaar — needed for EPF and ESI registration
- Bank account details — for direct salary credit
- Previous employer's Form 16 or salary slip — if they joined mid-year, so you can calculate TDS correctly for the full financial year
- Tax regime declaration — the employee must tell you in writing whether they are opting for the old or new income tax regime. If they do not declare, you default to the new regime. This affects how you compute monthly TDS.
Keep these documents on file. You will refer back to them when you file quarterly TDS returns.
Calculate the Deductions Correctly
Every pay run involves three categories of deduction.
Provident Fund: You deduct 12% of basic wages from the employee's salary. You also contribute 12% as the employer. A portion of the employer contribution goes to the Employees' Pension Scheme (EPS). Both contributions are deposited with EPFO by the 15th of the following month.
ESI: If the employee's wages fall below the applicable threshold, you deduct the employee's share and add the employer's share, then remit to ESIC. Check the current threshold, as it is set by the government and can be revised.
Income tax (TDS): You estimate the employee's total income for the financial year, apply the relevant slab rates under whichever regime they have chosen, subtract any eligible deductions, and divide the annual tax liability by 12. That monthly figure is deducted as TDS under Section 192. Under the new regime, slab rates rise progressively to 30%, and a 4% health and education cess applies on the total tax. A Section 87A rebate reduces the tax liability for employees whose income falls within the specified limit.
Deposit TDS with the government by the 7th of the following month. File Form 24Q quarterly to report salary TDS. At the year end, issue Form 16 to your employee — Part A shows TDS deposited, Part B shows the salary and deduction breakdown.
Run the Actual Payroll
Once deductions are calculated, the mechanics are simple:
1. Calculate gross salary per the offer letter or contract.
2. Subtract the employee's EPF contribution, ESI contribution (if applicable), and income tax TDS.
3. Credit the net amount to the employee's bank account.
4. Deposit EPF, ESI, and TDS with the respective authorities by their due dates.
5. Maintain a payroll register — a month-wise record of gross pay, all deductions, and net pay for each employee.
A payroll register is not just good practice. Under the Code on Wages, employers are required to maintain wage records and provide payslips.
Plan for Gratuity from the Start
Gratuity does not involve a monthly deduction, but it is a liability you should account for from the employee's first day. Once an employee completes five continuous years of service, they become eligible for gratuity on resignation, retirement, or termination. The amount is calculated on last drawn wages and years of service. Some employers provision for this monthly in their accounts so it does not come as a surprise later.
If you are hiring through a fixed-term contract, note that the Labour Codes have provisions that may affect gratuity eligibility for fixed-term employees — review these with a legal or HR advisor before structuring the contract.
Keep a Compliance Calendar
Missing a deposit deadline triggers interest and penalties. The key dates to track every month are the 7th (TDS deposit), the 15th (EPF challan), and the applicable ESI date. Quarterly, you file Form 24Q. Annually, you issue Form 16 to the employee and file your annual TDS return. Set reminders for all of these before your first payroll date, not after.
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