Setting up payroll for a new Indian company
Reviewed by Mellow Editorial Team, HR & payroll content team
Setting up payroll for a new Indian company requires completing a series of registrations, choosing a compliant salary structure, and running a monthly cycle that covers tax deduction, statutory contributions, and filings. Do it in the right order and the process is straightforward; skip a step and you face penalties that compound quickly.
Get your registrations in place first
Before you pay a single employee, you need several registrations. Each unlocks a specific compliance obligation.
PAN and TAN. Your company needs a Permanent Account Number to function as a legal entity. It also needs a Tax Deduction and Collection Account Number (TAN) specifically to deduct TDS from employee salaries and deposit it with the government. Without a TAN, you cannot legally run payroll.
EPF registration. Once you cross the threshold of 20 employees, registration with the Employees' Provident Fund Organisation (EPFO) becomes mandatory. Some employers register voluntarily before that point. Once registered, you must deduct 12% of qualifying wages from each employee's salary and contribute a matching 12% as the employer.
ESI registration. Employees whose wages fall below the prescribed threshold are covered under the Employees' State Insurance scheme. Registration with ESIC is required once you have the minimum number of eligible employees. Contributions from both sides are due monthly.
Professional Tax registration. This is a state-level obligation. Not every state levies it, but if yours does, you register with the relevant state authority. The amounts and slabs vary by state.
Shop and Establishment registration. Required in most states before you start operations. It underpins several other compliance requirements and is often asked for during EPF and ESI registration.
Build a compliant salary structure
How you structure a salary determines how much tax an employee pays and what statutory contributions are calculated on. It also affects your own employer costs.
Under India's four consolidated Labour Codes, now in force from 2025, the definition of "wages" has been standardised across EPF, ESI, gratuity, and other benefits. Broadly, allowances cannot together exceed 50% of total compensation; basic wages must form at least half. This matters because EPF contributions are calculated on this defined wage, not on gross pay.
A typical structure includes basic salary, house rent allowance, special allowance, and reimbursements. Each component carries different tax treatment. Reimbursements paid against actual bills are not taxable; a flat special allowance usually is.
Once an employee completes five years of continuous service, gratuity becomes payable. Structure their salary with this in mind — gratuity is calculated on last drawn basic plus dearness allowance, so suppressing the basic to reduce contributions today can create larger liabilities later.
Calculate and deduct TDS correctly
TDS on salary is governed by Section 192 of the Income Tax Act. At the start of each financial year — and when a new employee joins — you collect their investment declarations and project their annual income. From that, you calculate the estimated tax liability and divide it equally across the remaining months.
For 2026/27, the default is the new tax regime, where slabs rise progressively to 30%. Employees who wish to opt for the old regime must inform you explicitly. Under the new regime, a Section 87A rebate is available for employees whose net taxable income falls within the qualifying limit, which can eliminate tax liability entirely for lower earners. A 4% health and education cess applies on top of the final tax figure regardless of regime.
You deduct TDS monthly, deposit it with the government by the seventh of the following month (with a slight extension for March), file Form 24Q quarterly, and issue each employee a Form 16 after the financial year closes. Form 16 is not optional — it is the employee's primary document for filing their own income tax return.
Run the monthly payroll cycle
Once registrations are done and the structure is set, the monthly cycle follows a consistent rhythm.
Gather attendance, leave, and variable pay data. Calculate gross pay, then deduct EPF (employee share), ESI if applicable, professional tax, and TDS. The net figure is what gets transferred to the employee.
On the employer side, deposit EPF (your 12% plus any administrative charges) and ESI contributions by the statutory due dates — typically the 15th of the following month for EPF and the 15th for ESI. Missing these dates attracts interest and damages, which accumulate fast.
Maintain payslips for every employee every month. They are a legal record and employees are entitled to them.
Keep records and stay current
Payroll compliance is not a one-time setup. Statutory thresholds, cess rates, and filing formats change. The Labour Codes have introduced new definitions of wages and social security coverage that are still being implemented through state-level rules.
At minimum, audit your payroll annually: verify that wage definitions are still compliant, check that all eligible employees are enrolled in EPF and ESI, reconcile TDS deposits against Form 24Q filings, and confirm that gratuity provisioning reflects actual tenure. Catching discrepancies during an internal review is considerably less costly than finding them during an inspection.
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