India Payroll for US Employers: EPF, ESI, TDS, and Employment Law Explained

India's payroll system is significantly more complex than US payroll. The CTC structure, multiple statutory deduction schemes, TDS tied to employee investment declarations, and the interaction between central and state labor laws create a compliance landscape that surprises most US employers on their first India hire.

This guide explains every component of India payroll that US employers need to understand.

CTC: India's Compensation Framework

India uses CTC (Cost to Company) as the primary compensation metric — not base salary. CTC is the total annual cost to the employer, including salary, employer statutory contributions, and benefits. Understanding the difference between CTC, gross salary, and net take-home is essential for making accurate offers to Indian candidates.

CTC breakdown example (₹24 LPA CTC)

• Basic salary: ₹9,60,000 (40% of CTC) — the foundation for all statutory calculations
• HRA (House Rent Allowance): ₹4,80,000 (50% of basic in metro cities) — partially tax-exempt
• Special allowance: ₹5,40,000 — fully taxable
• LTA (Leave Travel Allowance): ₹60,000 — partially tax-exempt
• Employer EPF contribution: ₹1,15,200 (12% of basic) — part of CTC
• Medical insurance premium (employer-paid): ₹25,000
• Total CTC: ₹22,00,200 (~₹22 LPA + ₹2 LPA employer EPF = ₹24 LPA CTC)

The employee's monthly net take-home after TDS, EPF deduction, and professional tax on a ₹24 LPA CTC is approximately ₹1,40,000–₹1,55,000/month depending on tax-saving investments.

Employees' Provident Fund (EPF)

Applicability

EPF is mandatory for organizations with 20+ employees. EOR providers aggregate across clients, so EPF applies to all employees from day one under EOR employment.

Contribution rates

• Employee EPF contribution: 12% of basic salary
• Employer EPF contribution: 12% of basic salary (split as 8.33% to EPS — Employees' Pension Scheme, and 3.67% to EPF account)
• Both contributions go to the employee's EPF account at the EPFO

Employer obligations

• Register on the EPFO unified portal (employer code assignment)
• Monthly ECR (Electronic Challan cum Return) submission by 15th of following month
• Annual PF account reconciliation
• UAN (Universal Account Number) generation for each employee
• PF passbook update — employees access via EPFO portal with UAN

Employees' State Insurance (ESI)

Applicability

ESI is mandatory for employees earning up to ₹21,000/month gross (₹25,000 for persons with disabilities). Most junior and mid-level roles fall within this threshold in Tier 2 cities; senior roles in Bengaluru/Mumbai often exceed it.

Contribution rates

• Employee ESI contribution: 0.75% of gross salary
• Employer ESI contribution: 3.25% of gross salary

Benefits provided

ESI provides: medical care for employee and family, sickness benefit (70% of daily wages during sickness absence), maternity benefit for ESI-enrolled women, disability benefit, and dependent benefit.

TDS (Tax Deducted at Source)

How TDS works

The employer withholds income tax (TDS) from each salary payment based on the employee's estimated annual income tax liability. At the start of each financial year (April 1), employees submit Form 12BB declaring planned investments under Chapter VIA (80C, 80D, etc.), HRA exemption, and other deductions. The employer uses these declarations to calculate the monthly TDS amount.

TDS rates

India uses a slab-based income tax system with two regimes: Old Regime (with deductions) and New Regime (lower rates, no deductions). For FY 2026-27:

• New Regime: 0% up to ₹3L; 5% ₹3L–₹7L; 10% ₹7L–₹10L; 15% ₹10L–₹12L; 20% ₹12L–₹15L; 30% above ₹15L
• Old Regime: 0% up to ₹2.5L; 5% ₹2.5L–₹5L; 20% ₹5L–₹10L; 30% above ₹10L (with deductions reducing taxable income)
• Education cess: 4% on total income tax in both regimes

TDS filing obligations

• Monthly TDS remittance: by 7th of following month
• Quarterly TDS return (Form 24Q): by 15th of month following quarter end
• Form 16 issuance to employees: by June 15 following the financial year end (March 31)
• TDS certificate (Form 16A) for non-salary TDS: within 15 days of quarterly return due date

Gratuity

Gratuity is a statutory retirement benefit payable under the Payment of Gratuity Act, 1972. It becomes payable when an employee completes 5 years of continuous service (or on death or disability regardless of tenure).

Gratuity calculation

Formula: (Last drawn monthly salary × 15 / 26) × years of service completed. 'Last drawn monthly salary' = basic salary + dearness allowance. '15/26' represents 15 days per 26 working days per month.

Example: Employee with basic ₹80,000/month and 7 years service: (80,000 × 15/26) × 7 = ₹3,23,077 gratuity payable on exit.

Accounting for gratuity

EOR providers accrue gratuity liability monthly and include it in the employee cost model. Own entities should maintain actuarial gratuity provisions in annual accounts.

Professional Tax

Professional Tax is a state-level levy on salaried employees. Rates vary by state. Karnataka (Bengaluru): ₹200/month for employees earning above ₹15,000/month. Maharashtra (Mumbai/Pune): up to ₹2,500/year. Tamil Nadu (Chennai): ₹2,400/year maximum. Some states (Delhi, Haryana, Rajasthan) do not levy professional tax.

India Payroll Calendar

• April: new financial year starts; collect investment declarations (Form 12BB); update TDS calculations
• 7th of each month: salary payment deadline and TDS remittance
• 15th of month following quarter end (July 15, Oct 15, Jan 15, May 15): quarterly TDS return (Form 24Q)
• 15th of each month: EPF ECR submission and contribution payment
• 20th of each month: ESI contribution payment
• December 24: 13th month pay equivalent (ex gratia bonus) — not legally mandatory for private employers unless specified in contract, but market standard
• March 31: financial year end; payroll reconciliation, year-end TDS adjustment
• June 15: Form 16 issuance to all employees