We handle payroll for international companies with employees in India. It's one of the core things we do at XMS, and we've been doing it since 2015. What we've learned is that most payroll problems for foreign companies don't come from bad intentions — they come from not knowing how different Indian payroll is from what companies are used to back home.
This guide covers everything: what payroll management in India actually involves, what changed in 2026 that you need to know about, what it costs to outsource it, and how to choose the right partner. If you have even one employee in India, this is worth reading carefully.
What Payroll Management in India Actually Covers
In the US or UK, payroll is relatively straightforward — calculate gross salary, deduct income tax, pay the employee. India has more layers, and each layer has its own deadline, its own government portal, and its own penalty for getting it wrong.
Here's what full payroll management in India involves every single month:
- Salary calculation and disbursement — calculating gross pay based on the employee's salary structure, applying approved leaves and deductions, and transferring the net salary to the employee's Indian bank account by the agreed payroll date.
- Provident Fund (PF) — calculating the employer's 12% contribution and the employee's 12% contribution on basic salary, generating the PF challan, and depositing with the EPFO by the 15th of the following month. A separate ECR (Electronic Challan cum Return) must also be filed.
- Employee State Insurance (ESI) — applicable for employees earning up to ₹21,000 per month. Employer contribution is 3.25%, employee is 0.75%. Challan deposit due by the 15th of the following month.
- Tax Deducted at Source (TDS) — calculating income tax liability based on each employee's annual projection and their tax declarations (old regime vs new regime, 80C investments, HRA, LTA), deducting the correct amount monthly, and depositing with the Income Tax Department by the 7th of the following month.
- Professional Tax — deducting the state-specific professional tax from employee salary and remitting to the state government. In Karnataka (Bangalore), this is ₹200/month for most employees.
- Payslips — generating compliant payslips for every employee every month showing all earnings, deductions, and net pay.
That's the monthly cycle. Then there's the quarterly and annual layer on top:
- Quarterly TDS returns (Form 24Q, now updated to Form 138 under the Income Tax Act 2025) — due within 31 days of each quarter end.
- Annual Form 16 — the TDS certificate issued to every employee by June 15th each year, which they use to file their personal income tax return.
- PF annual return filing.
- ESI half-yearly return filing.
Miss any of these and you're looking at interest, penalties, and in some cases notices from government departments. The compliance calendar is tight and it doesn't pause.
What Changed in 2026 That Every Foreign Company Must Know
2026 is the most significant year for India payroll compliance in a decade. Two major reforms came into effect back to back and if your payroll process hasn't been updated for both of them, your filings are already non-compliant.
The Four Labour Codes — Active Since November 2025
India consolidated 29 separate labour laws into four Labour Codes covering wages, social security, industrial relations, and occupational safety. The most operationally significant change for payroll is the 50% basic wage rule.
Under this rule, at least 50% of an employee's total CTC must now be basic salary plus dearness allowance. This is a big deal because PF is calculated as a percentage of basic salary. If basic salary was previously structured at 30-35% of CTC to keep PF contributions low, that structure is now non-compliant. The result is higher PF contributions for both employer and employee.
For example: an employee with a ₹24 lakh CTC previously might have had ₹7.2 lakh basic (30%), resulting in ₹86,400 annual employer PF. Under the new rule, basic must be at least ₹12 lakh (50%), pushing employer PF to ₹1,44,000. That's a ₹57,600 increase per employee per year — significant when you have a team of 10 or 20.
Income Tax Act 2025 — Effective April 1, 2026
The Income Tax Act 2025 replaced the Income Tax Act 1961 on April 1, 2026. For payroll purposes, the key change is the updated TDS form references. The quarterly TDS return previously filed as Form 24Q is now Form 138. Section references for salary TDS have changed. Any payroll system or spreadsheet still using old form numbers is generating non-compliant filings.
Employees now also need to choose between the old and new tax regimes in updated declaration formats. If your HR process hasn't captured fresh declarations from employees under the new Act, TDS calculations may be incorrect.
If your payroll hasn't been reviewed since November 2025, it's worth doing a quick compliance check. The 50% basic wage rule and the new TDS form references are the two most common gaps we see when new clients come to us.
The Real Cost of Running Payroll In-House vs Outsourcing
Many foreign companies try to manage India payroll themselves — either through their global payroll software, a spreadsheet, or an accountant they found locally. Here's what that typically costs in practice.
The hidden cost of managing payroll in-house is the time your finance or HR team spends tracking five different government portals, chasing compliance deadlines, and dealing with queries from employees about PF balances and Form 16. For a 5 to 20 person India team, that's a meaningful drain on people who should be doing more strategic work.
The hidden cost of a low-cost local accountant is quality and accountability. Payroll compliance in 2026 requires staying current with regulatory changes — the Labour Code updates, the new Income Tax Act, ESI threshold changes. A solo accountant handling dozens of clients may not keep up, and you won't find out until you receive a notice.
What to Look For in a Payroll Partner in India
Not all payroll providers are the same. Here's what actually matters when you're evaluating someone to manage payroll for your India team.
They handle everything, not just salary processing. Some providers process payroll but leave PF filings, ESI, and TDS to you. That's not outsourcing — that's partial service. A genuine payroll management partner owns the entire compliance calendar.
They're current on regulatory changes. Ask them specifically about the 50% basic wage rule and the Income Tax Act 2025 changes. If they can't explain how they've updated their processes for these, look elsewhere.
They provide payslips and employee support. Your employees will have questions about PF balances, TDS deductions, and Form 16. A good payroll partner handles these queries directly without routing everything through you.
They have a clear escalation process. When something goes wrong — a government portal is down, a PF challan bounces, an employee gets a tax notice — you need someone who picks up the phone and sorts it. Ask how they handle escalations before you sign up.
They understand salary structuring. The difference between a payroll provider who just runs numbers and one who understands Indian salary structuring can be lakhs of rupees in unnecessary tax for your employees. Good structuring — optimising basic, HRA, LTA, special allowance — saves employees money legally and keeps you compliant.
How XMS Handles Payroll for International Companies
XMS manages payroll as part of our Employer of Record service. When you have employees in India through XMS, here's exactly what we handle every month without you having to think about it.
We process salary calculations based on each employee's approved structure, attendance, and leave. We calculate and deposit PF, ESI (where applicable), and TDS by their respective deadlines. We handle professional tax state-by-state for wherever your employees are based. We generate payslips and share them with employees directly. We file quarterly TDS returns and issue Form 16 annually.
If there's a query from EPFO, ESIC, or the Income Tax Department, we handle it. If an employee has a question about their PF balance or TDS deduction, they come to us. You manage your team's work — we handle the compliance that keeps their employment clean.
We've been doing this for companies from the US, UK, Singapore, and Australia since 2015. Our clients include early-stage startups running payroll for their first India hire and established companies with teams of 20 to 30 people.
Need payroll management for your India team?
Whether you have one employee or twenty, we handle the full payroll cycle — salary processing, PF, ESI, TDS, Form 16. Get in touch and we'll explain exactly how it works.