India Payroll for Foreign Companies: The 2026 Guide

If you’re hiring in India for the first time, Indian payroll will look unfamiliar — a salary called “CTC,” statutory acronyms (PF, ESI, PT, LWF, TDS), a compliance calendar with real penalties, and rules that change by state. This guide explains all of it in plain terms, written for a decision-maker in the US, Europe or APAC with no India background. It’s by TMS, an Indian HR firm that has run payroll and compliance for foreign companies for over a decade — 450+ clients from 50+ countries, zero statutory penalties.

The #1 confusion first: CTC vs gross vs net

India quotes salaries as CTC — “Cost to Company.” It is not the employee’s take-home pay, and it is not quite your total cost either. Untangle it once and everything else makes sense:

• CTC = everything the employer commits annually: basic salary + allowances + employer’s statutory contributions (PF, gratuity accrual) + benefits (insurance, sometimes perks). A candidate “on ₹12 lakh CTC” is quoting this whole envelope.
• Gross salary = CTC minus employer contributions and benefits — the amount before employee-side deductions.
• Net (take-home) = gross minus the employee’s own deductions: employee PF, professional tax, income tax (TDS).

Why it matters commercially: two offers with identical CTC can have very different take-homes depending on structure. TMS structures each CTC within Indian law to maximise employee take-home and minimise your employment cost — it’s included in our EOR fee, not an add-on.

Inside the CTC: the anatomy. A typical structure = Basic salary (the anchor — PF and gratuity are calculated on it; under the Labour Codes, “wages” must be ≥50% of total remuneration) + House Rent Allowance (HRA) + special/other allowances + employer PF + gratuity accrual (+ insurance and any variable pay).

Statutory contributions: what you actually pay

The employer-side items, at standard national rates:

Item	Rate	Applies to	Notes
Provident Fund (PF) — retirement fund	12% employer (+12% deducted from employee)	% of basic wages	India’s 401(k)-equivalent, administered by EPFO. Mandatory for virtually all organised-sector employees. Small additional EPF charges apply: admin 0.50% of PF wages + EDLI 0.50% capped at the ₹15,000 wage ceiling.
Employee State Insurance (ESI) — medical/social insurance	3.25% employer / 0.75% employee	Only where gross ≤ ₹21,000/month	Most professional hires earn above the ceiling — they get group medical insurance instead.
Gratuity — statutory tenure bonus	4.81% of basic (accrual)	Payable after 5 years’ continuous service (fixed-term employees: pro-rata after just 1 year under the Code on Social Security, 2020)	A lump sum owed at exit after qualifying tenure. TMS bills gratuity only if and when it actually becomes payable — never provisioned upfront.
Professional Tax (PT)	State-specific — capped at ₹2,500/year (Article 276 of the Constitution)	Levied by around 21 states	Small amounts, but a per-state registration and filing obligation. Some states (e.g., Delhi) levy none; slabs confirmed per state in your cost sheet.
Labour Welfare Fund (LWF)	Small state-specific amounts (typically tens of rupees per cycle — confirmed per state)	Varies by state	Half-yearly or annual in most states that levy it.

The rule of thumb: total employer cost ≈ gross salary × 1.10–1.25, depending on salary level and state. Lower salaries carry proportionally more statutory load (ESI, statutory bonus); senior salaries settle nearer 1.10.

TDS and the monthly compliance calendar

TDS (Tax Deducted at Source) is India’s payroll income-tax withholding: the employer computes each employee’s annual tax, deducts it monthly, and deposits it with the government. Miss a deadline and interest and penalties accrue automatically.

A typical month for an Indian employer:

Deadline	Obligation
7th of the month	Deposit TDS deducted from the previous month’s salaries (March TDS: 30 April for non-government deductors)
15th of the month	PF deposit for the previous month · ESI deposit for the previous month
State-specific dates	Professional tax payment/returns — each state sets its own schedule; confirmed per deployment state
Quarterly	TDS return (Form 24Q)
Annually	Form 16 (employee tax certificate) by 15 June · PT/LWF annual returns on each state’s own schedule

Two more things foreign employers rarely expect: employees choose annually between India’s old and new income-tax regimes (different slabs and deductions — payroll must handle both), and employees submit investment declarations and proofs that change their monthly TDS. Your payroll engine has to absorb all of it.

Bonus: yes, some of it is mandatory

India has a statutory bonus — historically under the Payment of Bonus Act, now subsumed into the Code on Wages (in force since 21 November 2025). In outline: employees below a wage eligibility threshold (₹21,000/month under the predecessor Payment of Bonus Act; the Code empowers the government to notify the ceiling) are entitled to an annual bonus of 8.33% to 20% of salary, calculated on a capped wage base (₹7,000/month or the applicable minimum wage, whichever is higher, under the predecessor Act), payable within 8 months of the financial-year close. Most professional-level hires fall above the threshold — but if you’re building support, operations or manufacturing-adjacent teams, budget for it. This is separate from any performance bonus you offer contractually. (India has no blanket “13th-month salary” convention like Brazil or the Philippines — statutory bonus is the nearest equivalent, and it’s eligibility-based.)

Leave: set by state, not by company policy alone

Minimum leave comes from each state’s Shops & Establishments Act — your policy can exceed the floor, never undercut it. Broad shape (state-specific floors; we confirm the exact entitlements for each state you hire in):

• Earned/privilege leave: typically ~12–21 days/year depending on state — accrues and is generally encashable at exit.
• Casual + sick leave: commonly ~6–12 days combined, state-dependent.
• Public holidays: ~10–14 days; a few (Republic Day, Independence Day, Gandhi Jayanti) are near-universal, the rest state-notified.
• Maternity leave: 26 weeks paid for eligible employees (central law — uniform nationally).

A US-style “unlimited PTO” policy can sit on top of these floors, but accrual and encashment obligations still exist underneath — one of several reasons copy-pasting your global handbook into India doesn’t work.

Payslips and records

Itemised payslips are mandatory (and expected — Indian employees use them for loans, visas and tax filing). Each shows earnings by component, employee-side deductions (PF, PT, TDS), and net pay. Statutory registers and filings sit behind them. Under TMS EOR, employees get payslips, tax declarations, attendance and expense claims in one HRMS.

Your 3 options for running India payroll

Option 1 — Own entity + local payroll provider. Full control; you carry every registration (PAN, TAN, GST, PF, ESI, PT per state) and every deadline above. Right at scale — most TMS clients incorporate around 50–75 employees, at which point we transition the team to your entity and can keep running compliance behind it.

Option 2 — Employer of Record (EOR). TMS employs your team on your behalf: payroll, PF/ESIC, TDS, insurance, state registrations and exits handled end-to-end. You direct the work; we carry the compliance. First hire onboarded in 24–48 hours; one monthly invoice in USD, EUR or AED with FEMA/AML/RBI/GST handled on our side. From USD 300 per employee per month, all-inclusive. Full detail: Employer of Record in India →

Option 3 — Contractors. Read the risk first. Paying full-time India workers as “contractors” avoids payroll — until it doesn’t. If a contractor works under your direction, on your hours and tools, Indian authorities can reclassify them as an employee, with retrospective PF/ESI dues, interest and damages — and your IP protection is weaker in the meantime. About a third of new TMS EOR clients come to us to fix exactly this. Conversion is painless: same person, same pay date, proper employment in 24–48 hours.

How TMS runs payroll under EOR

Compliant salary structuring (maximising take-home within the law) · payroll processing with both tax regimes and investment declarations handled · all statutory deposits and returns on calendar (zero penalties in 10+ years) · state-level compliance in every state and UT, including industrial towns and the North East · a dedicated HR pod of 5–6 specialists plus a named TMS Partner — your employees get human HR support in Indian time zones, you get answers within 24 hours.

Frequently Asked Questions

What does it actually cost to employ someone in India?

Gross salary × 1.10–1.25 covers statutory add-ons (employer PF, gratuity accrual, insurance, state items). Add the EOR fee — from USD 300/employee/month with TMS — and that’s the whole number. We’ll send a binding cost sheet for any role within one business day.

What is CTC?

“Cost to Company” — the all-in annual package Indian salaries are quoted in: gross salary + employer statutory contributions + benefits. It is neither take-home pay nor exactly your total cost; see the breakdown above.

Can we just pay our India team as contractors?

You can — with reclassification risk. Sustained, directed, full-time work makes “contractors” employees in the authorities’ eyes, with retrospective PF/ESI liability. If you already have contractors in India, converting them via EOR is fast and clean.

What are PF and ESI in simple terms?

PF is India’s mandatory retirement fund: 12% of basic from you, 12% from the employee, into a government-administered account. ESI is state medical insurance for employees earning up to ₹21,000/month gross (3.25% employer / 0.75% employee); above the ceiling, employers provide group medical insurance instead.

What payroll deadlines matter most?

TDS deposit by the 7th of each month; PF and ESI by the 15th; quarterly TDS returns; PT on each state’s own schedule. Miss them and interest/penalties are automatic.

Is a 13th-month salary mandatory in India?

Not as such. India’s statutory bonus (8.33–20% of capped wages, under the Code on Wages) applies to employees below a wage-eligibility ceiling — ₹21,000/month under the predecessor Bonus Act — and most professional hires are above it. Performance bonuses are contractual, not statutory.

Do payroll rules really differ by state?

Yes — professional tax, labour welfare fund, leave entitlements and minimum wages are state subjects. A provider running India from abroad misses these; TMS runs payroll in every state and UT.

How fast can we get our first India employee on a compliant payroll?

24–48 hours from a signed MSA with TMS EOR: digital offer and Labour-Code-compliant appointment letter, PF/ESIC enrolment, HRMS login — done. —