Comprehensive Guide to Payroll Setup and Compliance in India

With a population of more than 1.3 billion, India is leveraging its large talent pool for innovation, research, and development. Additionally, the government is looking to launch numerous business-friendly schemes to motivate the youth’s entrepreneurial spirit and invite investments.

Many global organizations consider India a desirable market for personnel and customer growth. As a result, there is a growth of companies entering the Indian market and hiring aggressively. 

However, an essential part of setting up a business in India is understanding the payroll structure and procedures. There are several payroll rules and regulations in India which companies have to follow. Before deciding on payroll processing and your options, you must consider a few things.

There is a fixed formula to calculate payroll in India. A few important terms to consider are:

• Gross income or salary: Includes the regular salary, allowances and one-time payments or benefits.
• Gross Deduction: Includes the regular deductions, statutory deductions and one-time deductions.

The equation to find out the net pay (the amount due to the employees) is as follows:

Net Pay = Gross Income – Gross Deduction

The most commonly used term for salary is CTC (Cost to the Company), which means the employee’s total package. The CTC is prepared by adding the total amount a company is spending on the employee. Following are the elements that contribute to the CTC:

• Gross Salary: Calculated by adding the basic salary, HR allowances, other allowances and extras, including overtime pay, holiday pay, bonuses, etc. You do not deduct the tax while calculating the gross salary.

Gross Salary = Basic Salary + HRA + Other Allowances

• Net Salary: Net Salary is the amount an employee takes home after subtracting the income tax and other deductions.

Net Salary = Gross Salary – (Professional Tax + Public Provident Fund + Income Tax)

• Allowances: Employees receive perks and allowances from the company and some of them are taxable. Allowances include House Rent Allowance (HRA), medical coverage, Leave Travel Allowance (LTA), and likewise. These allowances are a part of the basic salary, contributing to the gross income.
• Perquisites: These are non-cash benefits that certain employees receive due to their position in the organization. An official vehicle for personal purposes, free lodging, and a higher personal accident insurance premium are just a few such benefits. The monetary worth of perquisites is a part of the employee’s wage and the relevant tax is deducted from the pay.
• Reimbursements: This is the amount an employer pays to their employee for covering any official expense, for instance, phone calls, cab rides to locations, meals with a client, hotel stays during business trips, etc. Reimbursements are not taxable to the employees.
• Incentives and bonuses: These are additional pay credited to the employee’s basic salary after completing a stipulated goal.
• Income tax: The tax imposed on an employee’s income is called income tax. Income tax is deducted based on the employer’s salary slab. These deductions are made before giving the net salary; hence they are also called TDS (Tax Deduction at Source).

Lack of a payroll setup will lead to missing tax payments, incorrect payments, and failure to protect sensitive data. Below is a basic step-by-step checklist for setting up payroll in India:

Apply for TAN

TAN, the abbreviation for Tax Deduction and Collection Account Number, is a 10-digit alphanumeric number given by the Income Tax Department of India. Companies who deduct or collect tax at source are required to apply for TAN via online or offline methods.

Gather employee information

As an employer, it is your responsibility to file taxes on your employees’ behalf. As a result, you must keep track of the employees who work for you and gather the following information:

• Full name
• Aadhar number
• PAN number
• UAN number
• Date of birth
• Current address
• Permanent address
• Declaration form 12B
• PF and ESI information

Group the employees

It will help if you categorize employees before starting the payroll procedure. The first division should be based on whether the worker is a permanent employee, a freelancer, a part-time employee, or an hour-based professional. This classification is necessary because the amount you owe your employees and how you withhold their taxes will be affected by the category they belong to. You should also indicate the employee’s pay grade and tax bracket.

Decide the pay structure

When you plan to set up payroll in India, you also have to determine each employee’s CTC (cost to the company). Furthermore, you have to outline CTC components like health insurance, coupons, benefits, etc. It is important to note that if an employee’s basic income exceeds Rs. 10,000, they reserve the right to decline 12 percent of their basic salary going to the provident fund.

Pick a payroll software

Payroll administration is the most time-consuming and complicated HR task. As a result, businesses prefer to outsource payroll processing, hire an accountant, or purchase online software. Multiplier is a digital platform that takes care of your payroll processing and ensures that you adhere to all local and international laws while paying your employee in the preferred currency.

Remember the tax filing dates

Even though the payroll software manages everything in this regard, it is still important to remember important tax-related dates. By doing so, you will not run the risk of missing any filing and paying a fine.

The Indian payroll process involves the following three stages:

1. Pre-payroll tasks

Every company needs to set payroll policies and procedures, including attendance, benefits, leaves, incentives, etc. While preparing the policy, it is advised to take the inputs of various departments in the organization, like HR and finance. Once the draft is ready, send to the management for approval

2. Payroll process

After the payroll policies are approved, feed the data into the payroll system. The payroll administrator needs to check if the policies adhere to the statutory compliances. Furthermore, they have to consider all the necessary deductions per the compliances, like PF, TDS, ESI, etc. You can double-check the process to ensure there are no errors in the system.

3. Post-payroll tasks

After completing the above tasks, generate the salaries via the preferred payment method. For crediting any amount in a salary account, you need to send the relevant information to the bank branch, such as salary bank account statements, employee IDS, account number, etc.

Many organizations prepare reports on employee costs per department or location. The financial or the management team often conducts regular analyses to get better insights.

Contributions towards payroll tax in India are made both by employers and employees, as follows:

Employer contribution

Payroll rules and regulation in India demand the employer contribute the following:

Employee contribution

The slab rates applicable to individuals for the tax year 2021/22 are as follows:

The basic exemption limit for resident individuals who are 60 years of age or more but less than 80 years of age at any time during the tax year is INR 300,000. For resident individuals who are 80 years of age or more, it is INR 500,000.

Alternate personal tax regime (APTR)

Effective 1 April 2020, an optional APTR, devoid of any deductions or exemptions, has been introduced with lower tax rates spread across six income levels as provided below:

However, if the APTR is not opted, the existing income-tax rates will apply.

Under the APTR, the taxpayer is not eligible to claim certain exemptions/deductions/set-off of losses/carry forward of losses, such as:

• Leave travel allowance.
• House rent allowance.
• Allowance under which incomes do not form part of the total income of the Income-tax Act, except certain prescribed allowances.
• Exemption of free food and beverages through vouchers provided by the employer.
• Standard deduction of INR 50,000 and deduction for professional tax.
• Deduction of interest payment on housing loans for self-occupied property and restrictions on set-off of loss from the let-out property.
• All Chapter VIA deductions of the Income-tax Act is available for expenditure by way of employee’s contribution to provident fund, children’s tuition fees, insurance premiums, donations, medical premiums, etc., except employer’s contribution to notified pension scheme, such as National Pension Scheme (NPS).

Surcharge

In addition to the income tax, a surcharge is to be levied where the total income of individuals exceeds INR 5 million, as follows:

However, on income arising on account of long-term capital gains, the rate of surcharge would be capped at 15%.

Payroll Cycle

The payroll in India is credited every month, usually on or after the 28^th of every month.

The 13th month’s pay is mandatory in India. It is a percentage of the yearly salary within eight months of the end of the financial year.

Smooth and efficient payroll processing is important for every organization. Companies have two options to manage payroll in India:

Establish an in-house team: Companies have the option to develop an internal team that takes care of every aspect of payroll processing. An in-house team has to handle all the responsibilities and solve relevant issues from the policies and benefits to crediting salaries and handling taxes.

Hire a third-party payroll provider: A third-party payroll processor, like Multiplier, can take the entire responsibility for payroll management. Such businesses have expertise in handling both legal and financial issues regarding salaries. Furthermore, they help pay international freelancers and full-time employees in local currencies while taking care ofl compliance related issues.

In India, employees have the following entitlements:

Paid Time Off: A minimum of 15 days of paid holiday is given every year after the employee has completed 240 days of service. Many companies allow additional leave days and include terms for carrying forward the unused days to the following year.

Sick Days: Employees associated with the company for a minimum of 3 months are entitled to sick leave of 15 days. However, they must provide a medical certificate within 48 hours of the first day of sick leave.

The rate of sick pay is 70% of the daily salary rate.

Maternity Leave: Expectant mothers are entitled to 100% of their salary for 26 weeks for their first two children. The leave decreases to 12 weeks for every subsequent child.

The eligibility criteria for the leave are that the employee should have worked in the company for 80 days before the expected due date in the preceding 12 months.

Multiplier’s digital platform helps companies expand on a global scale. We help organizations in onboarding and managing distant employees while maintaining payroll rules and regulations in India.

Multiplier helps you expand your base in India without setting up a local entity. Our team of experts assists you in quickly creating offer letters, onboarding employees, paying them via various legal currencies and much more. We ensure your business grows beyond borders without hassles.