India Payroll for Foreign Companies: What You're Required to Do and What Trips People Up

This guide is written for founders, CFOs, and HR leads at foreign companies who have employees or are planning to hire in India. We're not going to drown you in jargon. We're going to tell you exactly what's required, what people typically get wrong, and how to stay clean.

The Four Things You Cannot Skip

Indian payroll has four mandatory statutory components. Every employer with employees in India must handle these correctly every month. There are no exceptions based on company size, funding stage, or how the employment is structured.

1. Provident Fund (PF)

Provident Fund is India's mandatory retirement savings scheme. The employer contributes 12% of the employee's basic salary every month. The employee contributes another 12%. Both contributions are deposited with the EPFO (Employees' Provident Fund Organisation) by the 15th of the following month.

Basic salary in India is typically structured as 40 to 50% of total CTC (Cost to Company). So for an employee earning ₹30 lakhs per year, basic salary might be ₹12 to 15 lakhs, and employer PF contribution is ₹1.44 to 1.8 lakhs per year. It's a meaningful cost that needs to be in your employment budget from day one.

Late deposits attract 12% per annum interest plus a penalty of up to 25% of the amount due. This is one of the most common surprises for foreign companies that underestimate the administrative load of PF compliance.

2. Employee State Insurance (ESI)

ESI covers employees earning below ₹21,000 per month — a threshold that applies to many junior and entry-level hires. Employer contribution is 3.25% of gross wages. Employee contribution is 0.75%. ESI provides employees with health insurance, disability, and maternity benefits through government facilities.

For most technology companies hiring experienced professionals above the ₹21,000 threshold, ESI is not applicable. But junior roles, operations staff, and support roles often fall below it, so it's worth checking by role rather than assuming across the board.

3. Tax Deducted at Source (TDS)

Employers in India are required to deduct income tax from salaries at source each month and deposit it with the Income Tax Department. The amount depends on the employee's projected annual income and applicable tax slab.

Employees submit their tax declarations early in the year — investments under 80C, HRA claims, home loan interest, and so on — and employers calculate TDS accordingly. The final TDS amount is reconciled in the last quarter of the financial year (January to March). Form 16 is issued to employees at the end of the financial year as their income tax summary.

Getting TDS calculations wrong — or failing to deposit on time — results in interest at 1% per month and potential disallowance of the salary expense for the employer.

4. Professional Tax

Professional tax is a state government levy. In Karnataka (Bangalore), it's ₹200 per month for most employees — ₹2,400 per year. It's small but mandatory, and employers are responsible for deducting it from employee salaries and remitting it to the state government.

Different states have different rates and slabs. Maharashtra charges up to ₹2,500 per year. Some states have no professional tax. It's worth checking the rate for the state where your employees are based.

The Payroll Cycle in India

Most Indian companies run monthly payroll. The typical cycle looks like this: salaries are processed and paid by the last working day of the month. PF and ESI contributions are deposited by the 15th of the following month. TDS is deposited by the 7th of the following month. Quarterly TDS returns are filed within 31 days of the quarter end.

That's a fairly tight compliance calendar. Missing deadlines doesn't just mean a late fee — it can mean employees' PF accounts aren't credited on time, which creates HR problems quickly.

What Actually Goes Wrong

The most common payroll mistakes we see foreign companies make in India — not in theory, but in practice.

Wrong salary structure. Indian salary structures have components that affect tax and statutory calculations — basic salary, HRA, special allowance, LTA. Many foreign companies pay a flat salary without structuring it, which means employees pay more tax than necessary and PF calculations may be off. A proper salary structure saves both the employer and employee money legally.

Not registering for PF before the first payroll. PF registration must happen before you process the first salary. Doing it retroactively is messy and involves backdated contributions plus interest. This is a very common mistake when companies hire their first India employee without local support.

Using the wrong TDS calculation. TDS must be calculated based on each employee's actual tax projection, including their declared investments. Using a flat rate or ignoring declarations leads to either under-deduction (employee owes money at year end) or over-deduction (employee needs a refund). Both create problems.

Forgetting the new tax regime elections. India has two tax regimes — old (with deductions) and new (lower rates, no deductions). Employees must choose between them, and the choice affects how TDS is calculated. Foreign HR teams often aren't aware of this and don't build the declaration process into onboarding.

Why Foreign Companies Use an EOR for Payroll

Running compliant Indian payroll requires EPFO registration, ESIC registration, TAN (Tax Deduction Account Number), proper salary structuring, monthly calculation, monthly filings, quarterly TDS returns, and annual Form 16 issuance. That's a meaningful compliance load for a foreign company hiring a handful of people.

An Employer of Record takes all of this off your plate. The EOR already has all registrations, handles every monthly and quarterly filing, ensures payroll is processed correctly, and manages the entire compliance calendar. You receive a single invoice. Your employees receive their salary on time, with all statutory compliance in order.

XMS has been managing payroll compliance for international companies in India since 2015. We handle the full payroll cycle — salary processing, PF, ESI, TDS, Form 16, and everything in between — so your India team runs on clean, compliant employment from day one.