How to Pay Employees in India 2025: A Complete Guide

Hiring and paying employees in India isn't as simple as it might seem. With a complex web of state-specific labor laws, varied minimum wages, and intricate social security regulations, global companies need a structured approach. Without careful planning, you risk compliance issues and can create a rocky experience for your new team.

How do you determine the correct wage in India?[toc=Determine the Correct Wage]

When you look to hire & pay employees in India, a common mistake is thinking there's a single, nationwide minimum wage. The reality is far more complex, with rules varying significantly by state and even by industry.

Understanding the Minimum Wage Puzzle

Determining the correct wage is the first critical step when you decide to pay employees in India. Unlike a uniform national minimum wage, the minimum wage for employees in India is set at the state level. This means what's compliant for a remote employee in one state might not be for a factory worker in another.

We've seen global companies get tripped up by this, as the variations are considerable based on factors like the specific industry, job function, and the worker's skill level, be it unskilled, semi-skilled, or skilled. Navigating these local regulations is essential to avoid compliance risks and is a key part of setting a fair employee's basic salary.

The 48-Hour Workweek and Overtime

Beyond the minimum wage, India's employment laws strictly regulate working hours. The standard workweek is 48 hours. Any time an employee works beyond this, they are legally entitled to overtime pay. Our experience shows that clear communication about working hours and overtime payment in the employment contract is vital. Indian labor laws mandate that overtime pay must be at least twice the regular rate, a detail that many foreign businesses overlook.

By carefully structuring an employment agreement and adhering to these rules, you not only protect your company but also build trust with your team. This focus on compliance is a cornerstone of responsible global employment.

What registrations are needed for tax and social security?[toc=What Registrations Needed]

Setting up a payroll system in India requires specific registrations with the Indian government to ensure legal compliance. Failing to secure these can expose your business to significant compliance risks.

Onboarding Step: Legal Entity or Employer of Record (EOR)

Before even applying for PAN, TAN, EPF, or ESI, foreign companies must ensure they have the right presence in India. You cannot directly employ and pay staff in India without either (a) setting up a legal entity such as a subsidiary, or (b) partnering with an Employer of Record (EOR) that already has the necessary registrations and can hire employees on your behalf. This step is essential for compliance and is often the first hurdle global businesses face.

Based on our experience, once this foundation is in place, the next critical step is obtaining the necessary tax and social security numbers:

1. PAN: The Permanent Account Number

The Permanent Account Number (PAN) is a ten-digit alphanumeric identifier issued by the Income Tax Department. Think of it as the foundational tax ID for your business in India. Every legal entity, be it a local subsidiary or a foreign company with a permanent establishment, must have a PAN to conduct financial transactions and, most importantly, for all tax-related matters, including paying an employee's basic salary.

2. TAN: The Tax Deduction and Collection Account Number

The Tax Deduction and Collection Account Number (TAN) is a mandatory registration for any entity that needs to deduct income tax at source. This is vital because as an employer, you are legally required to deduct withholding income tax from your employees in India before paying them.

The TAN is used to deposit these taxes with the Indian government and file the TDS (Tax Deducted at Source) returns. Without a TAN, you can't properly manage your payroll deductions and will face penalties.

3. EPF: The Employees' Provident Fund

The Employees' Provident Fund (EPF) is a retirement savings scheme and is a key component of social security. It is mandatory for any establishment with 20 or more Indian workers. The employer and the employee's basic salary are both subject to a mandatory contribution towards the provident fund.

This is one of the most significant aspects of payroll and Indian labor laws, and it’s a non-negotiable part of the employment relationship for most workers. The employees pension scheme is a crucial part of this fund, providing long-term financial security.

4. ESI: The Employee State Insurance

For businesses with 10 or more employees in India earning up to a specific wage limit, registration with the Employee State Insurance (ESI) Corporation is required. This scheme provides health insurance and other social security benefits to employees and their family members. The ESI contribution, like EPF, is a shared responsibility between the employer and employee.

This is a crucial element of comprehensive benefits administration and highlights the country's commitment to worker welfare. We've found that getting these registrations right from the start is paramount for any legal entity looking to establish a compliant and trusted presence in India.

How do you calculate and deduct payroll taxes and contributions?[toc=Calculate & Deduct Payroll Taxes]

Once you have the necessary registrations, the next step is the actual calculation and deduction of payroll taxes. This is where many foreign companies find themselves navigating a new set of rules, as the responsibility for these deductions rests squarely with the employer.

For any legal entity in India, accurate and timely deductions are not just a best practice; they are a legal requirement under various labor laws.

1. TDS (Tax Deducted at Source)

TDS is essentially withholding income tax on salaries. As the employer, you must calculate and deduct this tax from each indian employee's salary every month. The amount of income tax to be deducted depends on the employee's total annual income, which includes their basic salary, allowances like house rent allowance (HRA), and other benefits. You must account for any tax-saving investments declared by the employee to arrive at the net taxable income.

Our work with global employment has shown that for remote employees, this calculation can be complex, as their salary structure might be different from traditional employees. We help foreign businesses ensure these calculations are precise to avoid future audits and penalties.

2. EPF (Employees' Provident Fund) Contributions

The provident fund is a cornerstone of social security for employees in India. Both the employer and the employee contribute a mandatory 12% of the employee's basic salary (and a few other allowances, if applicable) to this fund. The employer's contribution is further split between the Employees' Provident Fund (3.67%) and the Employees' Pension Scheme (8.33%).

It's crucial to understand that the employer's portion is an additional cost on top of the employee's gross salary. These contributions must be remitted monthly to the Employees' Provident Fund Organisation (EPFO).

3. ESI (Employee State Insurance) Deductions

If your business has 10 or more employees in India with a salary below a specific limit, ESI deductions are mandatory. This provides health insurance and other benefits. The Employee State Insurance contribution is also a shared responsibility.

A small percentage is deducted from the employee's wages, while the employer contributes a higher percentage. The exact percentage rates are set by the central government and are subject to change, so staying updated is key to avoiding compliance risks.

4. Professional Tax

Finally, there's the professional tax. This is a state-level tax, so it’s not applicable everywhere, but where it is, it's a mandatory monthly deduction. The amount is usually a small fixed sum and is based on salary slabs. For example, a company with employees in India's states of Karnataka or Maharashtra will have to deduct this tax, whereas a company with remote employees in Delhi will not.

As with all other payroll deductions, the employer is responsible for deducting the tax and remitting it to the respective state government. This is a perfect example of how granular India payroll can be, requiring attention to local laws and regulations.

How should payroll be processed and payments made?[toc=Payroll & Payment Processing]

After calculating all the necessary taxes and contributions, the final and most visible step for your employees in India is getting paid. This process has its own set of rules and best practices that are crucial for any global employment operation.

1. Payroll Frequency & Compliance Risks of Delays

In India, the most common payroll frequency is monthly. While some industries might use weekly or bi-weekly cycles for hourly or unskilled workers, paying salaried staff once a month is the standard. Importantly, Indian labor laws require that salaries be paid by a specific deadline, usually before the 7th of the following month. Missing this deadline can result in labor disputes, fines, or reputational damage. A predictable monthly cycle tied to a fixed date helps ensure compliance and employee trust.

2. Salary Currency and Payment Method

Under Indian law, specifically the Foreign Exchange Management Act (FEMA), all salaries to resident employees in India must be paid in Indian Rupees (INR). You cannot legally pay employees their monthly salary in a foreign currency like USD or GBP, even if the employment contract is denominated in that currency. The amount must be converted and disbursed in INR.

The most common and secure payment method is a direct bank transfer. The Unified Payments Interface (UPI) and other electronic funds transfer systems have made this process seamless. We always recommend that international employees working in India have a local bank account to receive their salary directly.

3. Contractors vs. Employees: Different Rules

While employees must be paid in INR, companies often engage freelancers or independent contractors. Unlike employees, contractors can be paid in foreign currency (e.g., via international wire transfer or global payment platforms), as their arrangement falls outside the scope of local payroll rules.

However, companies must carefully classify workers correctly, since treating employees as contractors to bypass payroll compliance carries significant legal risks.

4. The Importance of the Payslip

A detailed payslip is more than just a summary of a salary, it's a legal document. Every payment of an employee's salary must be accompanied by a comprehensive payslip that clearly breaks down all earnings (like basic salary, allowances, and bonuses) and all payroll deductions (TDS, provident fund, etc.). This is a mandatory statutory requirement and is essential for both your internal record-keeping and for the employee's own tax filing.

For foreign employers, navigating this complex process can be challenging. Many choose to partner with local payroll service providers or use best payroll software for India to ensure compliance and accuracy in their Indian payroll operations.

Why is proper payroll record-keeping important?[toc=Importance of Payroll]

For any foreign company with employees in India, meticulous payroll record-keeping isn't just a good idea, it's a legal and business necessity. Here’s why it’s so critical, based on our experience helping global companies:

1. Ensuring Compliance and Avoiding Penalties

Under various Indian labor laws, including those governing minimum wages and the employees provident fund, employers are legally required to maintain detailed records for each Indian employee. This includes their employee's basic salary, attendance, and every single payroll deduction. In the event of an audit by a government body, these records are your primary evidence. Without them, your business is exposed to significant compliance risks, including heavy fines and legal action.

We've found that a clear audit trail for every income tax and provident fund contribution is non-negotiable for global employment.

2. Building Employee Trust

Transparency in international payroll is a cornerstone of a healthy employment relationship. When an employee works and receives a clear, itemized payslip that breaks down their basic salary and deductions, it builds confidence. Knowing that contributions to their employees pension scheme and health insurance are being managed correctly fosters trust and can reduce employee turnover. A lack of transparency can quickly lead to misunderstandings and dissatisfaction.

3. Protecting Sensitive Data

Payroll records contain highly sensitive personal information. With India’s evolving data protection laws, safeguarding this data is a legal obligation. This means implementing strong security measures to prevent unauthorized access. Managing this information securely is a key part of our global payroll services, ensuring your business adheres to all relevant regulations and protects the privacy of your team members.

What other factors should global companies keep in mind?[toc=Factors to Consider]

Beyond the fundamental payroll mechanics, there are several other critical aspects of global employment that foreign companies must be aware of to ensure compliance and mitigate compliance risks.

1. Salary Structure & Allowances

The take-home employee's salary in India is rarely just a basic salary. It's a complex structure with various components and allowances that have different tax implications.

• House Rent Allowance (HRA): A common allowance for employees renting a home, which is partially or fully exempt from income tax.
• Conveyance Allowance: An allowance for commuting expenses, which is also tax-exempt up to a certain limit.
• Variable Dearness Allowance (VDA): A periodic adjustment to the minimum wage to offset inflation. This is a key detail that can be missed by those unfamiliar with India's employment laws.
• Other allowances: This can include medical allowances, education allowances, and more, all of which must be correctly factored into the total compensation.

Curious about how your CTC translates to in-hand pay? Try our Salary Breakdown Calculator for a quick, personalized estimate!

2. Gratuity & Leave Obligations

You must also consider end-of-service benefits and employee leave.

• Gratuity: This is a mandatory lump-sum payment given to an Indian employee as a token of appreciation for long-term service. An employee becomes eligible after completing at least up to five years of continuous service with the same company. This is a legal obligation under the Payment of Gratuity Act and is a significant cost to factor into your long-term budget.
• Paid Leave: Indian labor laws also mandate entitlements like paid annual leave and sick leave. The number of days can vary by state and industry. For instance, sick leave is typically a statutory benefit that must be provided. For pregnant employees, maternity leave is another critical, legally mandated benefit.

3. Employee vs. Contractor Classification

Misclassifying a worker as an independent contractor is a major source of legal and financial risk for foreign businesses.

• Control Test: Indian courts often use this test to determine the true nature of the employment relationship. If your company dictates not just the result of the work, but also how and when the remote workers perform their job duties, it is likely an employer-employee relationship, not an independent one.
• Consequences of Misclassification: The penalties for getting this wrong can be severe, including back payment of taxes and social security contributions like provident fund and ESI, as well as fines. It's crucial to understand the distinction before you hire contractors.

Avoid costly mistakes, read our full guide on Contractors vs. Employees in 2025.

4. Foreign Exchange & Data Protection

The way you handle money and data is also heavily regulated.

• FEMA Compliance: Under the Foreign Exchange Management Act (FEMA), all payments to a resident employees in India must be in Indian Rupees (INR). You cannot directly remit salary from a foreign currency account abroad to their personal account in USD, for example. Even if you don’t have a legal entity in India and pay through a service, the final payment to the employee must be in INR.
• Data Protection: India’s Digital Personal Data Protection Act of 2023 mandates that global companies must handle sensitive employee information, like payroll records, with stringent security and consent protocols. Protecting this data isn’t just good practice; it’s a legal requirement that carries significant penalties for non-compliance.

Why Choose Wisemonk for your payroll operations in India?[toc=Why Choose Wisemonk]

Navigating the complexities of India payroll can be daunting, but with the right partner, it becomes a smooth process. Wisemonk acts as your Employer of Record (EOR) in India, taking on the legal and administrative burdens so you can focus on building your team and growing your business.

Key Services for Simplified Payroll & Compliance

• Compliant Hiring and Onboarding: We handle all the complexities of employment laws and local regulations to ensure your team is onboarded quickly and compliantly, from generating the employment agreement to collecting all necessary documents.
• End-to-End Payroll Management: We manage everything from calculating and deducting withholding income tax to remitting statutory contributions for the provident fund and ESI, ensuring every payroll deduction is accurate and on time.
• Comprehensive Benefits Administration: We ensure your employees in India have access to the full suite of statutory and supplementary benefits, including health insurance and contributions to their employees pension scheme, making you a competitive employer.
• Dedicated HR Support: Our expert team is always available to handle your HR-related inquiries and provide guidance on leave policies, terminations, and other sensitive matters, ensuring a smooth employment relationship.

Beyond payroll, we can also help you with recruitment, contractor management, and onboarding in India. Whether you need to hire employees in India, pay freelancers, or build a compliant offshore team, we’ve got you covered with transparent pricing and deep local expertise. If you’re looking to expand further, we offer services like background verification, benefits administration, company registration and even support for setting up a Global Capability Center, making Wisemonk your one-stop partner for all things workforce in India!

Ready to hire & pay employees in India effortlessly? Contact us today and let’s get started.

FAQs

How do you legally pay employees in India?

To legally pay employees, a global company must either establish a local legal entity or use a payroll provider or Employer of Record (EOR) service to manage compliance with local labor and tax laws. All payments must be made in Indian Rupees (INR) via bank transfer.

How does payroll work in India?

Indian payroll involves calculating an employee's gross salary, deducting statutory contributions like Provident Fund (PF) and Employee State Insurance (ESI), and withholding income tax (TDS). The net salary is then paid to the employee, with a detailed payslip provided for transparency.

What is the basic pay of employees in India?

Basic pay is the fixed core component of an employee's salary, serving as the foundation upon which other allowances and statutory deductions (like PF) are calculated. It typically makes up 40-50% of the employee's total compensation.

How much do workers get paid in India?

Wages vary widely based on factors such as state, industry, and skill level, with no single national average. A good wage in India depends on the specific job and location, but a common average for a skilled professional can be around $1,000 USD per month or more.

What is the minimum wage in India in USD?

India's minimum wage is set at the state level and varies by industry and skill. The national floor wage is approximately $2.16 USD per day, but many states have much higher minimums, particularly for skilled workers in urban areas.

How is salary calculated in India?

Salary is structured by adding a basic salary to various allowances (e.g., HRA, conveyance) to get the gross salary. Statutory deductions for taxes and social security contributions are then subtracted from the gross salary to determine the final take-home pay.