India continues to be one of the world’s most attractive destinations for global hiring, thanks to its vast talent pool, English-speaking workforce, and competitive labor costs. But while hiring in India is straightforward, Payroll Setup in India is not especially for employers without a local entity. Between complex tax structures, statutory deductions, varying state regulations, and mandatory employee benefits, global HR teams often struggle to build an efficient and compliant payroll process.

This guide breaks down exactly how Payroll Setup in India works in 2025, the statutory rules employers must follow, and why partnering with an Employer of Record (EOR) such as Asanify is the fastest, simplest, and most compliant way to run payroll without setting up an Indian entity.

How Payroll Works in India for Global Companies

For companies hiring in India for the first time, understanding how salary calculations, statutory contributions, and monthly payroll cycles work can be challenging. India follows a structured salary system with well-defined components, strict tax rules, and compliance obligations that vary not only nationally but also from state to state. This makes accurate payroll execution essential, as even small mistakes can lead to major compliance penalties.

Payroll in India typically includes multiple salary components Basic Pay, HRA (House Rent Allowance), Special Allowance, reimbursements, employer contributions, and statutory deductions such as PF, ESI, and TDS. Employers must also factor in non-salary benefits, claim workflows, mandatory forms, and digital record-keeping requirements.

Global employers must navigate India’s multi-layered regulatory environment, where payroll compliance is governed by a combination of central laws, state regulations, and industry-specific norms. This results in significant complexity, particularly when companies hire across multiple Indian states.

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Key Differences in Indian Payroll vs. Other Countries

Compared to North America, Europe, or APAC markets, payroll in India has several unique characteristics:

1. Monthly Tax Withholding (TDS)

Indian employers must deduct Tax Deducted at Source (TDS) every month based on the employee’s annual estimated income. This differs from countries where tax filings are done quarterly or annually.

2. Mandatory PF and ESI Laws

India requires employers to contribute to:

• Provident Fund (PF) – a retirement benefit
• Employee State Insurance (ESI) – social security for employees below a certain salary threshold

These schemes are statutory and must be calculated precisely every pay cycle.

3. Gratuity Law

Unlike many countries, India mandates gratuity payments to employees completing five years of service, calculated based on salary and tenure.

4. Minimum Wage Differences Across States

Each Indian state sets its own minimum wage rates depending on:

• Skill category
• Industry
• Local economic conditions

This makes multi-state hiring particularly complex.

5. Employee Documentation and KYC Norms

Indian payroll requires detailed employee identity verification, including PAN, Aadhaar, bank details, and address proof adding an extra compliance layer.

Step-by-Step Payroll Setup Process in India

Setting up payroll in India involves a structured sequence of compliance steps. For global companies, these steps can be time-consuming because each process requires local registrations, statutory filings, and in-depth knowledge of Indian employment laws. The following framework outlines what payroll setup involves while also highlighting how Asanify automates this entire journey for global employers.

Step 1 – Register for Statutory Identifications (PAN, TAN, PF, ESIC)

Before running payroll, employers must obtain several mandatory registrations:

PAN (Permanent Account Number): Required for all tax-related activities, PAN ensures the employer can legally operate and fulfill tax obligations in India.

TAN (Tax Deduction and Collection Account Number): Essential for withholding TDS from employee salaries. Without TAN, companies cannot remit taxes to the government.

PF Registration: Mandatory for establishments with 20 or more employees, but optional registration is common even for smaller teams to offer competitive benefits.

ESIC Registration: Required if any employee earns ≤ INR 21,000/month, as ESI provides medical and social security coverage.

Professional Tax Registration: Applicable in states like Maharashtra, Karnataka, Telangana, and West Bengal. Employers must deduct and remit PT based on state slabs.

Step 2 – Define Employee Salary Structure

A compliant salary structure is the backbone of payroll in India. Employers must break compensation into fixed, variable, and statutory components while ensuring tax efficiency and legal alignment.

Essential Components Include:

• Basic Salary – forms 35–50% of CTC
• HRA (House Rent Allowance) – tax benefits vary based on city (Metro vs. Non-metro)
• Special Allowance – taxable balance component
• LTA (Leave Travel Allowance) – tax-exempt under certain conditions
• Bonus / Performance Pay – governed by the Payment of Bonus Act

A compliant salary breakup ensures:

• Optimal tax efficiency for employees
• Accurate PF and ESI calculations
• Transparent CTC communication
• Smooth audits and statutory reporting

Asanify automatically builds state-compliant and tax-efficient salary structures, reducing manual complexity for employers.

Step 3 – Set Up Attendance, Leave, and Timesheet Integrations

Payroll accuracy in India is closely tied to attendance, leave management, and timesheet tracking. Any mismatch leads to compliance issues or employee dissatisfaction.

Employers must track:

• Monthly attendance
• Sick leave, casual leave, and privilege leave
• Government-mandated holidays
• Overtime based on industry rules
• Comp-off and shift policies

Compliance Considerations:

• Labor laws mandate maintaining attendance records for audits.
• Overtime must be calculated at 2× basic wages in many states.
• Leave policies differ for shops, factories, and IT establishments.

Asanify’s integrated HRMS ensures all employee records sync directly with payroll eliminating manual errors.

Step 4 – Run Monthly Payroll and Calculate Deductions

Indian payroll involves multiple statutory deductions each month. Employers must apply accurate formulas, check exemptions, and ensure timely remittances.

Payroll Calculation Includes:

• Gross Salary → Net Pay
• Employer PF & ESI contributions
• Employee PF, ESI, PT, and TDS deductions
• Tax exemptions and standard deductions
• Reimbursement workflows (e.g., telephone, internet, fuel)

Key Compliance Elements:

• TDS must be deposited on or before the 7th of each month
• PF and ESI payments must follow monthly due dates
• Employers must maintain digital records for 7+ years

Asanify automates the entire payroll run calculations, validations, deductions, and filings.

Step 5 – Generate Payslips, Reports & Statutory Filings

Payslips and payroll records are legally required documents under Indian labor law.

Employers must issue:

• Monthly payslips with detailed breakup
• PF, ESI, PT, and TDS reports
• Quarterly TDS returns
• Form 16 annually for all employees

Documentation Requirements:

• Records of wages, leave, attendance, bonuses
• Digital employee files
• Year-end payroll reports

With Asanify, all payslips, forms, filings, and payroll reports are fully automated, minimizing risk during audits or statutory inspections.

Core Statutory Components of Payroll Compliance in India

Payroll compliance in India is governed by several mandatory labor and tax regulations. These statutory components ensure employee welfare, social security coverage, and tax transparency. For global employers, understanding these regulations is essential because non-compliance can result in penalties, back payments, legal notices, and reputational damage.

Asanify positions itself as a compliance-first payroll partner, ensuring every statutory requirement is automatically calculated, filed, and recorded without manual errors.

Below are the core statutory pillars of India’s payroll system.

Provident Fund (PF)

The Employees’ Provident Fund (EPF) is one of India’s primary social security schemes. It mandates both employer and employee contributions toward long-term retirement savings.

Contribution Requirements

• Employee Contribution: 12% of Basic + DA
• Employer Contribution: 12% split into:
  • 8.33% towards the pension fund (EPS)
  • 3.67% toward the EPF corpus

Eligibility

• Mandatory for employees earning up to INR 15,000/month (Basic).
• Employees earning above this limit can voluntarily opt-in.
• Establishments with 20+ employees must register and comply.

Exemptions

• International workers have special rules under social security agreements.
• Certain categories of apprentices or trainees may be exempt.

Compliance Requirements

Employers must:

• Generate and upload ECR (Electronic Challan-cum-Return) monthly
• Deposit PF contributions by the 15th of every month
• Maintain employee UANs and KYC documentation

Asanify automatically manages PF calculations, filings, ECR submissions, and digital verification for error-free compliance.

Employee State Insurance (ESI)

The Employee State Insurance Corporation (ESIC) provides medical, disability, and maternity benefits to lower-wage employees.

Coverage Limit

Employees earning ≤ INR 21,000/month (gross salary) must be enrolled.

Contribution Rates (2025)

• Employer: 3.25%
• Employee: 0.75%

Employer Responsibilities

• Register eligible employees
• Generate periodic ESIC challans
• File monthly contributions and maintain ESI records
• Report accidents or workplace injuries

Because ESI applies selectively based on salary thresholds, global employers must continuously monitor salary revisions to avoid misclassification.
Asanify ensures real-time eligibility tracking and automated filings.

Income Tax (TDS)

Income tax deductions known in India as TDS (Tax Deducted at Source) are a mandatory component of payroll. Employers must deduct income tax every month based on projected annual earnings.

Slab Rates for 2025

Employees can choose between:

• New Tax Regime: Lower slab rates but fewer exemptions
• Old Tax Regime: More exemptions (HRA, LTA, deductions under Section 80C, etc.)

Employers must calculate taxes under the regime chosen by the employee.

TDS Compliance Requirements

• Monthly TDS deposit by the 7th of every month
• Quarterly TDS returns (Form 24Q)
• Annual tax statements (Form 16) given by June 15
• PAN validation for all employees

Errors in TDS processing can result in penalties and interest. Asanify automates:

• Regime selection
• Tax projection
• TDS calculation and reporting
• Quarterly return generation

Gratuity & Bonus Laws

Gratuity is a statutory benefit paid to employees who complete at least five years of continuous service, calculated based on basic salary and tenure. The Payment of Bonus Act mandates that eligible employees receive an annual bonus ranging from 8.33% to 20% of wages, depending on company performance and statutory thresholds. These laws ensure long-term financial security and fair rewards for India’s workforce.

Gratuity

Gratuity is a statutory payout owed to employees who complete at least five years of continuous service, calculated using a formula based on basic salary and tenure. It acts as a long-term financial benefit, payable upon resignation, retirement, or termination (except for misconduct).

Eligibility Criteria:

• Employee must complete 5 years of continuous service

Calculation Formula:
Gratuity =
(15 × Last Drawn Salary × No. of Completed Years of Service) / 26

Employers must pay gratuity within 30 days of employee exit to avoid interest liability.

Bonus

The Payment of Bonus Act requires employers to provide an annual bonus to eligible employees earning below the statutory wage threshold. This bonus typically ranges from 8.33% to 20% of wages, rewarding employee contribution and ensuring fair financial inclusion.

The Payment of Bonus Act applies to employees earning ≤ INR 21,000/month.

• Minimum bonus: 8.33% of annual wages
• Maximum bonus: 20% of annual wages

Asanify tracks bonus eligibility automatically and ensures on-time computation.

Professional Tax

Professional Tax (PT) is a state-level tax, not a central requirement. Rates vary across states, and some states do not charge PT at all.

States That Levy PT Include:

• Maharashtra
• Karnataka
• West Bengal
• Telangana
• Andhra Pradesh
• Gujarat
• Tamil Nadu

Employer Responsibilities

• Obtain state-specific PT registration (if applicable)
• Deduct PT from salaries monthly
• Deposit PT within prescribed deadlines
• File periodic PT returns

Non-payment results in interest penalties and potential legal notices.
Under Asanify’s payroll automation, PT slabs and filings are automatically applied based on employee location.

Payroll Challenges Global Employers Face in India

Running payroll “the right way” in India is harder than it appears. Even well-established global companies struggle with compliance gaps, documentation issues, and multi-state complexities.

Below are the most common challenges global HR teams encounter:

1. Regional Compliance Differences

India’s decentralized labor law structure means rules differ across:

• States
• Industry types (IT/ITES, manufacturing, retail)
• Employee categories (skilled, semi-skilled, unskilled)

This makes onboarding and payroll compliance significantly more complicated for companies hiring in multiple locations.

2. Manual Payroll Errors

Foreign companies unfamiliar with India’s salary structure often miscalculate:

• Tax exemptions
• PF & ESI contributions
• Overtime & attendance
• Professional tax
• Gratuity accruals

Manual spreadsheets amplify the risk of incorrect deductions and employee dissatisfaction.

3. Multi-State Registration Complexity

Hiring just one employee in a new state may require:

• PT registration
• Shops & Establishment registration
• Local statutory compliance

Maintaining multiple registrations is costly and difficult without local HR teams.

4. Statutory Payment Delays

Late deposits of PF, ESI, or TDS trigger:

• Penalties
• Interest
• Disallowance of expenses
• Potential government scrutiny

Global companies operating across time zones often miss cut-off dates unless automation is in place.

5. Employee Misclassification Risks

Incorrectly classifying contractors vs. full-time employees can lead to:

• Back payment liabilities
• PF/ESI penalties
• Tax non-compliance issues
• Legal disputes

EOR frameworks help eliminate these risks entirely.

How an Employer of Record (EOR) Simplifies Payroll Compliance in India

An EOR, such as Asanify, becomes the legal employer of your Indian workforce handling all payroll, contracts, taxes, and compliance obligations on your behalf. This allows global companies to hire talent in India without setting up a local entity or registering for any statutory identification numbers.

EOR simplifies every part of payroll, enabling companies to focus on work instead of paperwork.

What an EOR Handles:

• Drafting compliant employment contracts
• Payroll processing & payslips
• Employee onboarding
• PF, ESI, TDS, PT calculations and filings
• Statutory benefit administration
• Leave & attendance management
• Offboarding & final settlements

With Asanify, employers can hire in India within 48 hours, compared to 6–12 months required to establish an entity and set up payroll infrastructure.

Best Practices for Payroll Accuracy and Compliance in 2025

Running payroll in India requires a combination of structured processes, timely checks, and proactive compliance management. Even before adopting an automated system like Asanify, global employers can build a strong payroll foundation by following best practices designed to reduce errors, maintain legal integrity, and improve employee experience.

1. Maintain Complete and Up-to-Date Employee Records

Indian payroll is documentation-intensive. Accurate employee data directly impacts statutory calculations, tax filings, and audit responses.

Best practices include:

• Collecting PAN, Aadhaar, bank details, address proof, educational records, and joining documents
• Maintaining Form 11, PF nomination forms, and ESI records where applicable
• Updating salary revisions, promotions, and benefit changes regularly
• Ensuring correct personal details for TDS and Form 16 generation

Proper documentation protects employers from compliance disputes, especially during PF and labor inspections.

2. Track Leave, Attendance, and Working Hours Precisely

Leave and attendance errors account for a large percentage of payroll disputes in India.
India’s labor laws require employers to maintain accurate attendance logs for each employee.

Best practices:

• Implement digital attendance systems
• Sync leave policies with Shops & Establishment Act requirements
• Track overtime based on state-specific wage rules
• Maintain monthly timesheets for audit readiness

An integrated HRMS ensures accuracy and prevents disputes related to overtime or leave balances.

3. Review Salary Structures Annually

Salary structures in India need periodic reviews to ensure:

• Compliance with evolving minimum wages
• Correct PF/ESI eligibility
• Tax optimization for employees
• Competitive compensation benchmarking

With frequent changes in India’s income tax regime, employers must reassess components like HRA, LTA, and special allowances annually.

4. Automate Payroll Filings and Deposits

Manual calculations or late filings frequently lead to:

• Penalties for delayed PF/ESI payments
• Interest on late TDS deposits
• Non-compliance risk during audits

Automation ensures:

• On-time challan generation
• Accurate statutory filings
• Digital record retention
• Error-free monthly payroll processing

Asanify’s automation minimizes human error and guarantees compliance consistency.

5. Conduct Periodic Payroll Audits

Quarterly or biannual payroll audits help employers identify discrepancies early.

Audit focus areas:

• Employee classification
• PF/ESI eligibility
• TDS projections
• Bank deposit reconciliations
• Leave and attendance mapping
• Compliance with state-specific labor laws

Documenting findings and corrective actions ensures continuous improvement.

6. Stay Updated on State-Wise Notifications and Policy Changes

India frequently updates:

• Minimum wage rates
• PT slabs
• Tax rules
• Social security amendments

Employers must monitor labor notifications across all states where employees work.
Partnering with Asanify ensures you receive real-time compliance updates, eliminating the need for manual tracking.

Why Asanify Is the Preferred Payroll Partner for Global Teams

Asanify is built for global companies that want fast, accurate, and fully compliant payroll execution in India and beyond. Its automation-first approach, seamless integrations, and end-to-end compliance coverage make it a trusted partner for HR and finance teams worldwide.

• Asanify ensures fully compliant payroll every month with automatic application of statutory rules and audit-ready records.
• All tax-related calculations including TDS, PF, ESI, gratuity, and bonus are automated in real time for complete accuracy.
• A unified multi-country payroll dashboard allows global teams to manage India and international payroll from a single interface.
• Transparent, predictable pricing makes Asanify cost-effective for startups, SMEs, and distributed teams with no hidden fees.
• The platform integrates HR, payroll, leave management, compliance, benefits, onboarding, and offboarding in one seamless system.
• Dedicated customer success support ensures quick issue resolution, proactive compliance guidance, and smooth payroll operations.

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Conclusion

India offers unmatched access to skilled talent, but its payroll framework can be difficult to navigate without local expertise. Complex statutory laws, multi-state variations, evolving tax systems, and strict compliance requirements make manual payroll management risky for global employers.

Asanify eliminates these challenges by acting as the legal employer of record, handling every aspect of payroll, taxation, statutory compliance, onboarding, benefits, and HR documentation. With automated calculations, seamless integrations, transparent pricing, and a global-ready platform, Asanify empowers companies to hire in India within days not months.

Whether you are building a small distributed team or scaling a global workforce, Asanify ensures payroll in India is accurate, compliant, efficient, and stress-free every single month.

FAQs

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.