India has a population of 1.36 billion and growing day by day. Multinationals continue to flock to India and set up operations that are growing and robust. Therefore, it is important to understand the nuances that govern the payroll in India and learn how to navigate them especially because bureaucracy is highly decentralized.
India is the world’s most populous democratic nation and is made up of 28 states and 7 union territories. When it comes to payroll rules, they are generally applied on a federal basis, however, state rules are relevant in various areas that impact payroll.
There are several key legislations that outline the regulations around employees:
- Payment of Wages Act of 1936 – dictates some of the following:
- Wages should be paid on time
- There are to be no illegal deductions
- Employers are to keep employment records
- When an employee terminates they should be paid residual wages within 2 days of termination…etc.
- Minimum Wages Act of 1948 – dictates some of the following:
- Applies a maximum working week of 48 hrs with a weekly holiday
- Work in excess of 48 hrs is considered overtime
- Rates set by each Indian state covering 60+ industries
- Payment of Gratuity Act of 1972 – outlines the rules around payment of Gratuity (mandatory lump sum payment that is payable in certain circumstances)
- Covers all employers with 10 or more employees
- Provides that a compulsory lump sum is paid upon termination for qualifying employee
- Calculation is: Monthly salary/26 x 15 x number of years of service…etc.
The Ministry of Labor and Employment has the overall responsibility for employment legislation in India. There are departments established in each State/Union and Inspectors appointed to visit employers to ensure compliance.
Employers are required to deduct tax under a PAYE scheme known as Tax Deduction at Source Scheme (TDS). The tax deducted is deposited into the relevant government account and an annual certificate, Form 16, is issued to the employee to submit with their tax return. As an employer, you must also file quarterly statements of income and tax deducted, Form 24Q.
Professional tax is the tax levied and collected by the state governments. An employee earning an income from salary or anyone practicing a profession such as chartered accountant, lawyer, doctor…etc. are required to pay this professional tax. Rates depend on the state.
Social Security in India historically has not been a universal scheme. The government announced its commitment to make it universal back in 2015/16 and is working towards that goal. The formal workforce is covered, which is a percentage of the entire workforce. The Scheme provides insurance for various risks including pension insurance, Health and medical insurance, maternity, disability and gratuity payments.
The Employees Provident Fund Organization (EPFO) acts as the umbrella authority for Pension Insurance. Provident Fund or PF is mandatory for businesses with at least 20 employees. Mandatory contributions are due from the employee and employer up to INR 15,000 per month. The scheme is not mandatory if the employee earns more than INR 15,000 per month. It is then voluntary. EPFO returns are managed electronically as there are multiple forms that need to be submitted at any given time.