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Payroll in India
India’s regulatory environment in terms of employment and taxation is notoriously complex, with legislation varying nationally, state-wide, and locally. Non-compliance not only carries legal and financial risks but also has the potential to tarnish your hard-earned reputation.
Companies that opt to establish an in-house payroll system must deal with the specific requirements of India’s labour laws and tax regulations. This often involves significant investment in time, technology, highly skilled personnel, and infrastructure.
To overcome these hurdles, companies can partner with a reputable payroll provider, such as CXC, that has the expertise to navigate the complexities involved in hiring talent in India.
By partnering with a global payroll service provider, you can eliminate overhead costs while ensuring you pay only for the services you need—enabling you to focus on other important aspects of your business, such as market expansion, innovation, and growth.
Leveraging over 30 years of experience managing international payroll, we crafted this detailed guide to arm you with the essential knowledge regarding payroll in India. It includes information on the laws governing payroll and wages, statutory benefits, and other supplementary employee benefits, all of which are intended to help you establish a competitive compensation package for your top-tier talent in India.
Minimum wage in India
Minimum wage per month in India
The revised minimum monthly wages will see an increase for unskilled workers to INR 17,494 (approximately USD 210.17) from the previous INR 17,234 (about USD 207.04). Similarly, semi-skilled workers’ minimum wages will also increase to INR 19,279 (USD 231.64) from INR 18,993 (USD 228.20). Skilled workers, on the other hand, will increase their monthly minimum wages to INR 21,215 (USD 254.87) from INR 20,903 (USD 251.12).
Minimum wage per hour in India
It is important to note that India does not typically calculate its minimum wage on a per-hour basis but rather on a daily or monthly basis, depending on the state and the sector of employment. India’s national-level minimum daily wage is approximately INR 178 (equivalent to USD 2.13). When translated to a monthly wage, this amounts to around INR 5340 (approximately USD 63.97).
To convert this into an hourly wage, additional calculations based on standard working hours would be required, which can vary by region and specific job contract.
National minimum wage in India
The Code on Wages Act, legislated in 2019, ensures that all industrial workers across India are eligible to receive minimum wages that are established by the state governments they operate within. As per the country’s constitutional law, the area of labour and its welfare are simultaneously governed by both state and central authorities, which leads to a layered regulatory environment.
Since the enactment of the wage code in 2019, the implementation of a national minimum wage in India has not progressed.
Calculation of the minimum wage in India
The calculation of the minimum wage can vary significantly between different states, industries, and based on whether the work is categorised as unskilled, semi-skilled, skilled, or highly skilled. Also, other allowances, such as dearness allowance, might be added to account for inflation.
The responsibility for determining minimum wages lies with both the Central and State Governments, as the employers are obligated to legally pay a worker this minimum amount. It is a measure aimed at ensuring workers can meet their basic needs and maintain an adequate standard of living.
Regulation on minimum wage and payroll in India
The Code on Wages, 2019, is a significant legislative reform in India that aims to amend and consolidate the laws related to wages, bonuses, and related matters. The Parliament enacted it on August 8, 2019, integrating four major previous legislations: the Minimum Wages Act, 1948; the Payment of Wages Act, 1936; the Payment of Bonus Act, 1965; and the Equal Remuneration Act, 1976.
The Code on Wages, 2019, ensures that workers receive their rightful wages and bonuses in a timely manner. For international companies doing business in India, there are several key aspects of the Code on Wages, 2019, to keep in mind:
- Universal application: The Code applies to all employees across all sectors, simplifying wage regulations for employers, including international businesses, by providing a unified legal framework regarding wage payment.
- Minimum wages: One of the crucial components of the Code is the establishment of a statutory minimum wage, which is applicable to all employees. Companies must ensure that they comply with this minimum wage standard, which may vary across different geographical regions within India based on living expenses and other factors.
- Payment of wages: The Code mandates the timely payment of wages and establishes appropriate payment intervals (daily, weekly, fortnightly, or monthly) for various worker types.
- Payment of bonus: While the Act consolidates the laws relating to the payment of bonuses, it’s vital for companies to understand eligibility criteria, the calculation of bonuses, and the disbursement timelines to comply appropriately.
- Equality in remuneration: The Code enforces the principle of ‘equal remuneration for equal work’ regardless of gender, which is crucial for promoting gender equality in the workplace. Companies in India must ensure their compensation structures are gender-neutral and comply with this provision.
Non-compliance with the Act can result in penalties, including fines and imprisonment for employers. Companies looking to hire workers in India or expand in the market should make a thorough review of their wage and bonus policies to ensure compliance.
India payroll
Payroll laws in India
To ensure your organisation operates seamlessly in India, you must familiarise yourself with the laws governing payroll to maintain compliance. Aside from the Code on Wages, 2019, here are some laws governing payroll in India that you should know:
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
This act establishes provident funds, pension funds, and deposit-linked insurance for employees in factories and other establishments.
Employees’ State Insurance Act, 1948
This law governing payroll in India mandates the provision of certain benefits to employees in cases of sickness, maternity, and employment injury. It covers an array of health-related contingencies that could impact employees.
Payment of Gratuity Act, 1972
The act provides for a gratuity payment to employees working in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments with ten or more employees. Employees who provide long service receive a gratuity, a loyalty benefit that serves as an excellent tool to acknowledge their dedication.
Professional Tax Act
In India, professional tax is levied by various state governments on individuals earning an income by way of salary or practicing a profession. The rates and methods of collection vary from state to state, but compliance with this tax is mandatory for businesses operating within these jurisdictions.
Income Tax Act, 1961
This comprehensive act governs the taxation of the income of individuals, corporations, and other entities. For payroll in India, it mandates the deduction of tax at source (TDS) on salary, which employers need to adhere strictly to ensure compliance with tax regulations.
Payroll structure in India
The payroll structure in India, which outlines the salary breakdown, is designed to divide the Cost to Company (CTC) into various components. These components contribute to determining the employee’s in-hand salary.
Components of payroll in India
The payroll structure in India usually consists of the following elements:
- Basic salary: For payroll, this is the foundational component of an employee’s compensation package, usually 35-50% of the CTC.
- House RentAllowance (HRA): Typically, 40-50% of the basic salary for non-metro cities and 50% for metro cities.
- Conveyance: Reimbursement for travel from home to work, exempted up to a certain limit under the Income Tax Act.
- Medical allowance: Fixed medical reimbursement.
- Leave Travel Allowance (LTA): For travel expenses when an employee is on leave from work.
- Special allowance: In India, it’s common to have a special allowance in place for employees. Any remaining part of the salary after the above components are allocated.
Payroll deductions in India
In India, the employee’s salary is subject to the following payroll deductions:
- Provident Fund (PF): A mandatory contribution towards the employee’s retirement fund, which is 12% of the basic salary and dearness allowance.
- Professional Tax (PT): Levied by state governments, with rates and exemptions varying from state to state.
- Tax Deducted at Source (TDS): Income tax is deducted based on the employee’s applicable tax slab.
These elements reflect the common terms and concepts relevant to the payroll process and compliance with statutory regulations in India.
Payroll cycle in India
In general, the payroll cycle is typically monthly, with wages normally disbursed on or after the 28th of each month.
13th month salary in India
As for the 13th-month pay, it is not universally mandated across India. The payment of a 13th-month bonus is not required by law but can be voluntarily given by employers or stipulated by company policy. When it is provided, it is usually paid at the end of the financial year. For low-income earners, 13th month salary is mandatory and paid as a percentage of the annual salary within eight months of the end of the financial year.
Statutory benefits in India
Businesses in India are legally required to provide their employees with certain statutory benefits. The list of statutory benefits for employees in India ensures a level of protection and welfare for the workforce, while also fostering a sense of security.
List of statutory benefits for employees in India
Administering these statutory benefits is crucial for employers to ensure compliance and employee satisfaction. The following is a list of statutory benefits for employees in India that companies looking to do business in the country should keep in mind:
Employees’ Provident Fund (EPF)
This statutory benefit is a mandatory saving scheme designed to offer employees financial stability upon retirement. Both the employee and the employer make contributions, typically amounting to 12% of the basic salary plus dearness allowances.
This statutory benefit in India provides a number of benefits to employees, including:
- Retirement benefits: EPF serves as a robust retirement savings plan for employees. Contributions accumulate over time, providing a substantial fund upon retirement.
- Pension benefits: Part of the EPF contribution goes towards the Employee Pension Scheme (EPS). This provides a pension for employees who retire after 58 years.
- Life insurance cover: The Employee Deposit Linked Insurance Scheme (EDLI) offers life insurance cover, providing financial security to the employee’s family in the event of the employee’s demise.
- Tax benefits: Contributions made to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act, which can significantly reduce taxable income.
- Emergency withdrawal: Employees can withdraw funds from their EPF account for specific purposes, such as medical emergencies, house purchase or construction, and education or marriage of children, making it a helpful financial resource during emergencies.
- Loan collateral: Employees can use their EPF account balances as collateral to secure loans, giving them an additional financial source when needed.
- Compounded interest: The EPF accounts generate an annual compound interest rate.
Gratuity
Gratuity is a gratitude payment made by the employer to employees who have completed five or more years of service in the company. This statutory benefit in India is calculated based on the last drawn salary and the years of service.
Employees’ State Insurance (ESI)
This scheme aims to provide socio-economic protection to employees earning ₹21,000 or less per month, covering medical, maternity, disability, and death benefits. The comprehensive coverage under ESI ensures that employees’ health and well-being are protected, fostering a supportive work environment.
Maternity benefit
The Maternity Benefit Act, 1961, entitles female employees to paid time off from work to take care of their newborn. The period of maternity leave has been extended to 26 weeks, encouraging women to continue their professional journey post-childbirth.
Bonus payments
Employees are eligible to receive an annual bonus based on the organization’s profitability, performance, and statutory obligations under the Payment of Bonus Act, 1965.
Employee benefits in India
In India, to stay competitive and attract top talent, many employers offer a host of non-statutory benefits in addition to the mandatory ones outlined by law. These non-statutory or supplementary employee benefits provide added value to employees, enhancing their overall compensation package and workplace satisfaction.
Here are some non-statutory employee benefits that are common in India:
Health insurance in India
Beyond the mandatory Employees’ State Insurance (ESI), many businesses in India offer comprehensive health insurance plans that cover employees and their families against a wide range of medical expenses. Offering health insurance as a non-statutory benefit helps organisations ensure the well-being of their employees and can help with their attraction and retention efforts.
Travel allowances in India
To ease the financial burden of commuting, companies often provide travel allowances or transportation services. This not only includes the conveyance allowance but can also extend to company-operated vehicles or shuttle services, facilitating easier and more comfortable commutes for employees.
Disability coverage in India
Apart from health insurance, additional disability coverage is another significant benefit provided by some employers. This insurance provides financial protection to employees in the event of disabilities resulting from accidents or injuries, ensuring their financial stability during difficult times.
Employee wellness programs in India
Companies are increasingly focusing on employee wellness, offering programs that promote physical health, mental well-being, and a balanced lifestyle. These programs can include gym memberships, counselling services, recreational activities, and workshops on wellness topics. Employee wellness programs not only contribute to a healthier workforce but also demonstrate an employer’s commitment to employees’ holistic health, thus attracting a more quality workforce.
Retirement benefits in India
Aside from the statutory provident fund contributions, many companies provide an additional layer of financial security through customised retirement plans, such as superannuation benefits, which are pivotal in ensuring long-term workforce stability and loyalty.
Performance bonuses in India
To incentivise high performance, organisations in India often offer bonus schemes based on individual or company performance. This helps align employee objectives with the overarching business goals and boosts motivation and retention.
Additional leave and flexible working options in India
Besides the mandated leave entitlements, businesses frequently offer flexible leave policies that include more generous vacation time, sabbaticals, and flexible working hours. This flexibility is key to supporting employees in balancing their professional and personal lives, leading to a more engaged workforce.
Professional development in India
Investing in employee growth through training programs, upskilling courses, and education assistance is a common benefit. Such opportunities for professional advancement are crucial for attracting and retaining exceptional talent.
Food services or allowances in India
Catered meals, subsidies in company cafeterias, or meal vouchers are additional non-statutory benefits that some employers in India provide.
Employee benefits after resignation in India
In India, employees are entitled to several benefits after their resignation, provided they meet certain criteria. Below are some of the benefits employees can get after they resign:
- Full and final settlement: This process involves settling all dues and benefits accrued to the employee, including unpaid salary, accrued leave payments, and any other compensations owed at the time of resignation. Employers are required to complete this process within a specified period, typically 30 to 45 days after the end of employment.
- Gratuity benefit: This benefit is paid to employees who have completed at least five years of service with an organisation. The amount is a lump sum based on the employee’s last drawn salary and the number of years of service.
- Employee Provident Fund (EPF): When employees in India resign, the EPF allows them to withdraw a portion of their savings post-resignation, assuming they do not take up another job. Specifically, they’re entitled to withdraw up to 75% of their EPF balance after being unemployed for one month. If two months of unemployment have passed, they are allowed to withdraw the entire amount from their EPF account.
Partner with a reputable global payroll service provider
Navigating the complexities of international payroll management can be overwhelming, but it doesn’t have to be. Partnering with a reliable global payroll service provider like CXC can be a strategic advantage as you expand your operations into new markets. With our extensive knowledge and team of compliance experts, you can ensure adherence to labour laws and regulations, mitigate risks, and achieve international success.
Whether you want to outsource your payroll in India or across multiple jurisdictions, we have a tailor-made solution for your unique needs.
Contact our team today
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