Payroll Processing for Foreign-Owned Companies in India

Introduction

For any foreign company hiring employees in India — whether through a wholly-owned subsidiary, a branch office, or a joint venture — payroll is the compliance function that begins on the day your first employee starts work. Unlike company registration or tax filing, which involve periodic activity, payroll is a continuous, monthly obligation with multiple deadlines and multiple government agencies involved.

India's payroll compliance framework is a patchwork of central and state legislation. The Provident Fund is governed by a central Act but administered through regional offices. ESI is central but implemented area-wise. Professional Tax is entirely state-level, with each state having its own rates, slabs, and filing procedures. TDS on salaries is governed by the central Income Tax Act. Minimum wages are set by both the central and state governments. And the four new labour codes (in force from November 2025, though final Central Rules are expected by April 1, 2026) are layering additional requirements on top of all of this.

For foreign companies unfamiliar with this framework, the risk of inadvertent non-compliance is high. A missed PF deposit attracts not just interest but damages of up to 25% of the arrears. A wrong TDS computation results in either employee grievances (over-deduction) or employer penalties (under-deduction). An incorrect CTC structure can create exposure under the new wage definition rules.

This page covers every aspect of payroll processing for foreign-owned companies in India — from CTC structuring and statutory registrations to monthly processing, expat payroll, and the impact of the new labour codes.

What Is Payroll Processing in India?

Payroll processing in India encompasses the computation of employee compensation, deduction of statutory contributions, deposit of these contributions with the relevant government agencies, and issuance of payslips and tax certificates. It is governed by a web of central and state legislation:

• Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (EPF & MP Act) — Governs provident fund, pension scheme, and deposit-linked insurance for employees.
• Employees' State Insurance Act, 1948 (ESI Act) — Provides social security (medical, sickness, maternity, disability benefits) to low-wage employees.
• Income Tax Act, 1961 — Section 192 — Governs TDS (Tax Deducted at Source) on salary payments.
• Payment of Gratuity Act, 1972 — Mandates gratuity payment to employees on separation after qualifying service.
• Payment of Bonus Act, 1965 — Requires statutory bonus payment to eligible employees.
• Minimum Wages Act, 1948 / Code on Wages, 2019 — Sets floor wages for different categories of workers.
• State Professional Tax Acts — State-level tax on employment in approximately 18 states.
• Payment of Wages Act, 1936 / Code on Wages, 2019 — Regulates timing, mode, and permissible deductions from wages.

A single payroll cycle touches all of these laws simultaneously. Missing any one component can trigger penalties, prosecution, or both.

Eligibility & Requirements

Payroll compliance obligations are triggered the moment your Indian entity hires its first employee. The scope of obligations depends on the number of employees and their wage levels:

Foreign-Specific Requirements

Foreign-owned companies have the same payroll obligations as domestic companies. There are no exemptions based on foreign ownership. However, additional requirements arise when:

• Expat employees are deployed in India — Tax residency determination, DTAA benefit claims, social security agreement exemptions, and perquisite valuation for housing, car, and other expatriate benefits.
• Salary is funded from abroad — The parent company remits funds to the Indian subsidiary to cover payroll. This inward remittance must be documented and reported under FEMA regulations.
• Shadow payroll applies — When an expat's salary is partly paid in India and partly in the home country, the Indian entity must compute TDS on the total global compensation (not just the India portion).

Step-by-Step Process

Step 1: CTC Structuring

Before processing the first payroll, the CTC structure must be designed. In India, CTC (Cost to Company) is the total annual cost the employer incurs for an employee. A typical CTC structure includes:

Under the Code on Wages, 2019 (effective November 2025), the definition of 'wages' requires that basic salary plus dearness allowance must constitute at least 50% of total remuneration. This is a significant change — many companies previously structured basic salary at 30-40% of CTC to minimize PF and gratuity costs. The new definition increases the base on which PF and gratuity are calculated, resulting in higher employer contributions but also higher retirement benefits for employees.

Step 2: Monthly Payroll Computation

The monthly payroll cycle typically runs in the last week of the month:

1. Attendance and leave data — Collect attendance records, approved leave, overtime hours, and loss-of-pay days.
2. Earnings computation — Calculate gross earnings including basic, HRA, special allowance, variable pay, arrears, and reimbursements.
3. Statutory deductions — Compute: PF employee contribution (12% of basic + DA), ESI employee contribution (0.75% of gross wages, if applicable), Professional Tax (as per state slab), and TDS on salary (based on annual income projection and chosen tax regime).
4. Employer contributions — Compute PF employer contribution (12% of basic + DA, split between EPF 3.67% and EPS 8.33%), ESI employer contribution (3.25% of gross wages, if applicable), and EDLI contribution (0.5%).
5. Net pay — Gross earnings minus all employee deductions equals net pay (take-home salary).
6. Bank file generation — Generate the bank transfer file (typically in NEFT/RTGS format) for salary credit.
7. Payslip generation — Generate individual payslips with full breakup of earnings and deductions.

Step 3: Statutory Deposits

After payroll processing, statutory deposits must be made within prescribed deadlines:

• TDS on salary — Deposit by the 7th of the following month using Challan 281 through the income tax e-filing portal or authorized bank. For March TDS, the extended deadline is April 30.
• PF contribution — Deposit by the 15th of the following month through the EPFO portal by filing the ECR (Electronic Challan cum Return). The ECR contains employee-wise contribution details.
• ESI contribution — Deposit by the 15th of the following month through the ESIC portal.
• Professional Tax — Deposit by the state-specific deadline (varies from the 15th to the 30th of the following month, depending on the state).

Documents Required

For All Employees

• PAN card (mandatory for TDS computation)
• Aadhaar card (required for PF/UAN linkage and ESI registration)
• Bank account details (for salary credit via NEFT/RTGS)
• Investment declaration (Section 80C investments, rent receipts for HRA, insurance premiums, home loan interest — under old tax regime)
• Previous employer Form 16 (if joining mid-year, for correct TDS computation)

Additional Documents for Foreign Employees

• Valid passport with employment visa (or Business visa with appropriate endorsement)
• PAN card (mandatory for all individuals earning income in India — application can be made using passport as identity proof)
• Tax Residency Certificate (TRC) from the home-country tax authority (for claiming DTAA benefits)
• Form 10F filed on the Indian income tax e-filing portal (self-declaration for DTAA benefits)
• Certificate of Coverage from home-country social security authority (for PF exemption under SSA)
• Secondment or assignment letter from the parent company (documenting the terms of the India posting)
• Details of global compensation including home-country salary, allowances, and benefits (for shadow payroll and total TDS computation)

Key Regulations & Legal Framework

Employees' Provident Funds and Miscellaneous Provisions Act, 1952

The EPF Act mandates that both employer and employee contribute 12% of basic salary plus DA to the provident fund for establishments with 20 or more employees. The three schemes under the Act are:

• EPF (Employees' Provident Fund) — Retirement savings. Employee's 12% plus employer's 3.67% of basic (subject to wage ceiling).
• EPS (Employees' Pension Scheme, 1995) — Pension on retirement. Employer's 8.33% of basic, subject to a wage ceiling of INR 15,000/month (maximum contribution to EPS: INR 1,250/month).
• EDLI (Employees' Deposit Linked Insurance, 1976) — Life insurance. Employer contributes 0.5% of basic (maximum on wage ceiling of INR 15,000/month).

The EPFO administers these schemes through regional offices. All contributions are deposited via the ECR on the EPFO unified portal (unifiedportal-emp.epfindia.gov.in).

Income Tax Act — Section 192 (TDS on Salary)

Section 192 places the obligation of tax deduction on the employer. Key provisions:

• The employer must estimate the employee's total salary income for the financial year and deduct TDS in monthly installments.
• The employee can furnish evidence of other income or losses (e.g., house property loss) for the employer to factor into TDS computation (Section 192(2B)).
• If the employee has income from more than one employer (e.g., an expat with a split payroll), the employee can choose one employer to deduct TDS on the combined salary (Section 192(2)).
• The employer is liable for any shortfall in TDS — under Section 201(1), the employer is treated as an assessee in default and must pay the TDS amount plus interest at 1% per month (for non-deduction) or 1.5% per month (for non-deposit).

Payment of Gratuity Act, 1972

Gratuity is a lump-sum payment made to an employee on separation (resignation, retirement, death, or disability) after completing at least 5 years of continuous service (reduced to 1 year for fixed-term employees under the new labour codes). The formula is: (Last Drawn Basic + DA) × 15 × Years of Service ÷ 26. The maximum statutory gratuity is INR 20 lakh. Gratuity applies to establishments with 10 or more employees. The employer must provision for gratuity as a liability — it is not deducted from the employee's salary. Under Ind AS 19 (Employee Benefits), the gratuity obligation must be actuarially valued each year.

The Four New Labour Codes (Effective November 21, 2025)

India's four new labour codes have replaced 29 existing labour laws:

1. Code on Wages, 2019 — Redefines 'wages' (basic + DA must be ≥ 50% of remuneration), introduces a National Floor Wage, mandates equal remuneration for equal work regardless of gender.
2. Social Security Code, 2020 — Extends social security coverage to gig workers and platform workers, allows Central Government to notify ESI and PF coverage thresholds, introduces a Social Security Fund.
3. Industrial Relations Code, 2020 — Simplifies trade union registration, introduces fixed-term employment with pro-rata benefits, raises threshold for government permission for retrenchment/closure to 300 workers.
4. OSH Code, 2020 — Consolidates factory safety, inter-state migrant worker provisions, and working conditions. Sets maximum 48-hour work week, mandates annual health check-ups for workers in hazardous processes.

While the Codes are in force from November 21, 2025, the final Central Rules are expected by April 1, 2026. Companies should restructure CTC and payroll policies proactively.

Foreign-Specific Considerations

Expat Payroll — Tax Residency and DTAA

When a foreign employee works in India, their tax liability depends on their residency status:

• Resident — Present in India for 182 days or more in the financial year (or 60 days + 365 days in the preceding 4 years, with certain exceptions). Taxed on global income.
• Not Ordinarily Resident (NOR) — Resident but was non-resident in 9 out of 10 preceding years, or was in India for 729 days or less in the preceding 7 years. Taxed only on India-sourced income and income received in India.
• Non-Resident (NR) — Not present in India for 182 days. Taxed only on India-sourced income.

For expats who qualify as residents, India's Double Taxation Avoidance Agreements (DTAAs) with 94+ countries provide relief from double taxation. The expat must furnish a Tax Residency Certificate from their home country and file Form 10F on the Indian income tax portal to claim DTAA benefits.

Social Security Agreements and PF Exemption

India has SSAs with approximately 20 countries — including Germany, France, Belgium, Netherlands, South Korea, Japan, Australia, Canada, Luxembourg, Hungary, Finland, Sweden, Czech Republic, Norway, and Denmark. Under these agreements:

• An expat seconded to India for up to 5 years (extendable) can claim exemption from Indian PF if they continue contributing to their home-country social security and obtain a Certificate of Coverage.
• Service periods in both countries can be totalized for pension eligibility.
• The employer must maintain records of the Certificate of Coverage and present it during any PF inspection.

For countries without an SSA with India (e.g., the United States, China, Singapore), the foreign employee must contribute to Indian PF at the same rate as local employees if the establishment is covered under the EPF Act.

Tax Equalization and Shadow Payroll

Many multinational companies operate a tax equalization policy for expat employees — ensuring the expat pays no more (and no less) tax than they would have paid had they remained in their home country. This involves:

• Computing a hypothetical tax (what the employee would have paid at home)
• Deducting the hypothetical tax from the employee's pay
• The company pays the actual taxes in both countries
• A year-end true-up settlement based on actual tax liabilities

The Indian entity must still deduct and deposit TDS on the full India compensation (including perquisites). The tax equalization settlement is typically processed through the parent company's global mobility team.

Perquisite Valuation for Expats

Foreign employees in India often receive non-cash benefits — accommodation, car and driver, club membership, children's education, home leave travel. Under Section 17(2) of the Income Tax Act, these are valued as perquisites and added to taxable salary. Key valuation rules:

• Accommodation — If provided by the employer, the perquisite value is 15% of salary (for metros) or 10% (for non-metros), or the actual rent paid by the employer, whichever is lower.
• Motor car — Valued based on engine capacity and whether the employer or employee bears the running costs.
• Education — If the employer pays for the expat's children's education at an institution not owned by the employer, the full amount is a perquisite.

Benefits & Advantages

• Single-window compliance — PF, ESI, TDS, professional tax, gratuity, minimum wages, and labour code compliance — all managed as one integrated service.
• Accurate take-home salary — Employees receive the correct net pay every month, with no surprises from incorrect deductions or missed contributions.
• Zero penalty risk — All statutory deposits made within deadlines, eliminating interest, damages, and prosecution risk.
• Expat payroll handled correctly — DTAA benefits claimed, social security agreements applied, perquisites valued accurately, and shadow payroll computed — ensuring the company does not over-withhold or under-withhold taxes.
• Scalable for growth — Whether you hire 5 employees or 500, the payroll service scales without the need to hire additional in-house staff.
• Parent company reporting — Monthly payroll MIS reports delivered in the parent company's format and currency.
• New labour code readiness — CTC structures restructured to comply with the 50% wage definition requirement, gratuity eligibility updated for fixed-term employees, and overtime computed at the correct rate.
• Employee satisfaction — Accurate payslips, timely Form 16 issuance, and proper PF/ESI documentation contribute to employee trust and retention.

Common Mistakes to Avoid

• Structuring basic salary below 50% of CTC — Under the Code on Wages, 2019 (effective November 2025), basic salary plus DA must be at least 50% of total remuneration. Non-compliance exposes the company to penalties under the Code and potential PF/gratuity claims on the higher wage base.
• Not registering for PF when crossing 20 employees — Many startups miss the 20-employee threshold, especially when counting contract workers. Late registration triggers backdated contributions with 12% interest and up to 25% damages.
• Ignoring professional tax in applicable states — Professional tax is a small amount (max INR 2,500/year) but non-compliance can trigger notices from the state tax authority. Each state has its own registration and filing requirements.
• Not computing TDS on expat perquisites — When a foreign employee receives housing, car, or other benefits, the value must be added to taxable salary for TDS purposes. Missing this creates an underpayment of TDS, exposing the company to interest and penalties under Section 201.
• Assuming social security agreements apply automatically — PF exemption for foreign employees under an SSA requires a valid Certificate of Coverage from the home country. Without the CoC, the employer must deduct and deposit PF on the foreign employee's salary.
• Not revising minimum wages after state notifications — Minimum wages in India are revised periodically (every 6 months for VDA). If your subsidiary's lowest-paid employees earn just above the previous minimum, a VDA revision can push them below the new minimum, creating a compliance gap.
• Late PF deposit by even one day — The EPFO system tracks deposits in real-time. Even a one-day delay beyond the 15th triggers 12% interest. Repeated delays escalate to damages of 5-25% and potential criminal prosecution.

Timeline & What to Expect

For a newly incorporated subsidiary, the complete setup (registrations, CTC structuring, software configuration) takes 7-15 business days. The first payroll cycle can run within 2-3 weeks of onboarding employees.

Comparison with Alternatives

In-House Payroll vs. Outsourced Payroll Processing

For foreign-owned subsidiaries with fewer than 100 employees, outsourced payroll processing is typically the more practical and cost-effective choice. The compliance complexity in India — with its multiple agencies, state-level variations, and frequent regulatory changes — makes it difficult for a single in-house hire to stay current across all fronts.

Companies with larger headcounts (100+) may choose to bring payroll in-house using software like Darwinbox, greytHR, or SAP SuccessFactors, while engaging an external firm for statutory compliance review, expat payroll, and Form 16 issuance.