How to Set Up Payroll for Your First 10 Indian Employees

Why Getting Payroll Right from Day One Matters

When a foreign company hires its first employees in India, payroll is often treated as a back-office task to be figured out later. That is a costly mistake. India's payroll compliance framework involves at least six separate statutory obligations, each with its own registration, calculation formula, and monthly deadline. Missing any one of them triggers penalties, interest charges, and in some cases, criminal liability for directors.

Consider the scale of the challenge: your Indian wholly-owned subsidiary must register with the Employees' Provident Fund Organisation (EPFO), the Employee State Insurance Corporation (ESIC), the Income Tax Department (for TDS), and the relevant state professional tax authority, all before processing your first payroll. Each registration feeds into monthly filings, and the deadlines are as early as the 7th and 15th of each month.

This guide walks you through every step of setting up payroll for your first 10 Indian employees, from structuring CTC to filing your first monthly returns. It is designed for foreign companies establishing a subsidiary in India or those that have recently incorporated and need to begin hiring.

Step 1: Understand India's CTC Structure

What is CTC and How Does It Work?

In India, employee compensation is expressed as Cost to Company (CTC), which represents the total annual cost an employer incurs for an employee. CTC is not take-home pay. It includes the employer's contributions to statutory benefits like Employees' Provident Fund (EPF), Employee State Insurance (ESI), and gratuity, which are deducted before the employee receives their net salary.

Under India's new labour codes, which came into effect on November 21, 2025, basic salary plus dearness allowance must constitute at least 50% of total CTC. This is a critical rule that many foreign companies miss. If your CTC structure allocates less than 50% to basic pay, it will be deemed non-compliant, and your EPF and gratuity calculations will be recalculated on the higher base.

Sample CTC Breakdown for INR 12 Lakh Per Annum

Note: ESI applies only when an employee's gross salary is INR 21,000 per month or below. For employees earning above INR 21,000, ESI is not applicable, and the employer's ESI contribution is reallocated to other components.

Step 2: Obtain Mandatory Registrations

PAN and TAN

Your company needs a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) before processing any payroll. PAN is your company's primary tax identity. TAN is specifically required for deducting and depositing TDS on salaries and other payments. Apply for TAN using Form 49B online through the NSDL portal or the Income Tax Department's e-filing portal. TAN is typically issued within 7-10 business days.

EPF Registration

Registration with the Employees' Provident Fund Organisation (EPFO) is mandatory for establishments with 20 or more employees. However, establishments with fewer than 20 employees can register voluntarily, and most foreign subsidiaries do so from day one for two practical reasons: (1) it is a strong employee benefit that Indian employees expect, and (2) it avoids the disruption of mid-year registration when you cross the 20-employee threshold.

Register online at the EPFO Unified Portal (unifiedportal-emp.epfindia.gov.in). You will need your company's Certificate of Incorporation, PAN, bank account details, and the Digital Signature Certificate (DSC) of an authorised signatory. The EPFO assigns an establishment code within 3-5 working days.

ESI Registration

Registration with the Employee State Insurance Corporation (ESIC) is mandatory for establishments with 10 or more employees in most states. ESI provides medical, maternity, disability, and unemployment benefits. The salary threshold for ESI coverage is INR 21,000 per month. Register online at esic.gov.in using your company's PAN, Certificate of Incorporation, and employee details. ESIC assigns an employer code within 3-7 working days.

Professional Tax Registration

Professional tax is a state-level tax on employment income. It is levied in 21 states and one union territory. Notable states that levy professional tax include Maharashtra (maximum INR 2,500/year), Karnataka (INR 2,400/year), West Bengal (INR 2,500/year), and Tamil Nadu (INR 2,500/year). Delhi, Haryana, Punjab, Rajasthan, and Uttar Pradesh do not levy professional tax.

Register for professional tax with the relevant state authority. In Maharashtra, register through the Maharashtra GST portal. In Karnataka, register through the Karnataka Commercial Taxes Department portal. You need both an employer registration (for deducting PT from employees) and an establishment registration (for the company's own PT liability).

Shops and Establishment Act Registration

Every commercial establishment must register under the Shops and Establishment Act of the relevant state within 30 days of commencing business. This registration governs working hours, leave entitlements, holidays, and conditions of employment. Apply through the state labour department portal. Most states now offer online registration with same-day or next-day approval.

Step 3: Set Up Statutory Deductions

Employee Provident Fund (EPF)

Both the employer and employee contribute 12% of basic salary (plus dearness allowance) to EPF. The employee's entire 12% goes to the EPF account. The employer's 12% is split: 3.67% to EPF and 8.33% to the Employees' Pension Scheme (EPS), subject to a wage ceiling of INR 15,000 per month for EPS. Above INR 15,000, the excess employer contribution also goes to EPF.

Additionally, the employer pays 0.50% towards EDLI (Employees' Deposit Linked Insurance) and administrative charges of 0.50% on EPF. The total employer cost for PF-related contributions is approximately 13% of basic salary.

Key deadline: EPF contributions must be deposited by the 15th of each month. Late payment attracts interest at 12% per annum and damages up to 100% of the arrears.

Employee State Insurance (ESI)

ESI contributions apply only to employees earning gross wages up to INR 21,000 per month. The employer contributes 3.25% and the employee contributes 0.75% of gross wages. Once an employee's salary exceeds INR 21,000, ESI coverage continues until the end of the contribution period (six months) but does not restart if the salary remains above the threshold.

Key deadline: ESI contributions must be deposited by the 15th of each month. Late payment attracts simple interest at 12% per annum.

Tax Deducted at Source (TDS) on Salary

As an employer, you must deduct income tax at source from employee salaries under Section 192 of the Income Tax Act. For FY 2025-26, the new tax regime (Section 115BAC) is the default. Under the new regime, income up to INR 4 lakh is exempt, and slab rates range from 5% to 30%. Salaried individuals with income up to INR 12.75 lakh (after the standard deduction of INR 75,000) pay zero tax under the new regime.

To calculate TDS, estimate each employee's total annual taxable income, apply the applicable slab rates, and divide by 12 for the monthly deduction. Employees can opt for the old tax regime by submitting a declaration, which allows deductions under Section 80C, 80D, HRA exemption, etc.

Key deadline: TDS must be deposited by the 7th of the following month (30th April for March deductions). File quarterly TDS returns in Form 24Q. Issue Form 16 to employees by June 15 each year.

Professional Tax Deduction

Deduct professional tax from employee salaries based on the state-specific slab rates. In Maharashtra, the maximum deduction is INR 200 per month (INR 300 in February). In Karnataka, it is INR 200 per month for employees earning above INR 25,000. Deposit the deducted amount monthly or as prescribed by the state authority.

Step 4: Choose Your Payroll Processing Method

Option 1: In-House Payroll

Processing payroll in-house requires dedicated HR/payroll staff and payroll software compliant with Indian regulations. Common Indian payroll software options include Zoho Payroll, greytHR, Keka, and RazorpayX Payroll. These platforms handle CTC structuring, statutory calculations, and government portal integration. Monthly cost ranges from INR 3,000 to INR 15,000 depending on the number of employees and features.

Option 2: Outsourced Payroll

For a company with 10 employees, outsourcing payroll to a professional services firm is often more cost-effective and reduces compliance risk. A typical outsourced payroll processing engagement costs INR 1,500 to INR 3,000 per employee per month and covers salary processing, statutory calculations, government filings, and payslip generation. This is the approach most foreign subsidiaries take for their first 1-2 years.

Option 3: Employer of Record (EOR)

If you have not yet incorporated in India, an Employer of Record can hire employees on your behalf. However, EOR is a temporary solution. Once you have more than 5-10 employees, incorporating a subsidiary and running your own payroll is almost always more cost-effective and gives you greater control. See our comparison of entity setup vs. EOR for a detailed analysis.

Step 5: Process Your First Payroll

Monthly Payroll Cycle

India's standard payroll cycle is monthly. Salaries are typically paid on the last working day of the month or the 1st of the following month. Most states require salary payment within 7 days of the end of the wage period under the Code on Wages.

Here is the step-by-step monthly payroll process:

1. Collect attendance and leave data by the 25th of the month
2. Calculate gross salary based on CTC components and attendance
3. Compute statutory deductions: EPF (12% of basic), ESI (0.75% of gross if applicable), TDS (as per estimated annual tax), professional tax (state-specific slab)
4. Calculate net salary = Gross salary minus all deductions
5. Process bank transfers to employee accounts by the last working day
6. Generate payslips showing all components, deductions, and net pay
7. Deposit TDS by the 7th of the following month
8. Deposit EPF and ESI contributions by the 15th of the following month
9. Deposit professional tax as per state deadline
10. File monthly EPF return (ECR) by the 15th of the following month

Setting Up Employee Bank Accounts

Indian labour law requires salary payments in INR to Indian bank accounts. Help your employees open salary accounts with the company's banking partner. Most banks offer zero-balance salary accounts with benefits like free debit cards and preferential loan rates. Salary accounts can be opened within 3-5 working days with Aadhaar and PAN verification.

Step 6: Navigate India's New Labour Codes

India's four new labour codes, which came into force on November 21, 2025, have significant implications for payroll:

Code on Wages, 2019

The most impactful change is the redefinition of "wages." Basic pay plus dearness allowance must be at least 50% of total remuneration. This means if your CTC includes large special allowances or perquisites that push basic below 50%, you must restructure. The practical impact: higher EPF and gratuity contributions, lower take-home pay for employees, but better retirement benefits.

Code on Social Security, 2020

This code extends social security coverage to gig workers, platform workers, and fixed-term employees. For foreign companies, the key change is that fixed-term employees are now entitled to gratuity on a pro-rata basis regardless of tenure (the earlier 5-year minimum service requirement is removed for fixed-term workers). If you use fixed-term contracts for project-based hiring, budget for gratuity from day one.

Industrial Relations Code, 2020

This code consolidates laws on trade unions, standing orders, and industrial disputes. For companies with fewer than 300 workers, retrenchment and closure no longer require government permission. However, you must still provide 30-60 days' notice and severance pay of 15 days' wages per year of service.

Occupational Safety, Health and Working Conditions Code, 2020

This code mandates a maximum of 48 working hours per week. Overtime pay must be twice the normal wage rate. Establishments with 10 or more workers must register under this code. For office-based operations, key requirements include adequate lighting, ventilation, drinking water, separate washrooms, and first-aid facilities.

Step 7: Understand Monthly Compliance Calendar

Step 8: Handle Gratuity and Leave Encashment

Gratuity

Gratuity is payable to employees who have completed 5 years of continuous service (or any period for fixed-term employees under the new labour codes). The formula is: Last drawn salary x 15/26 x number of years of service. The statutory tax-free gratuity ceiling for private-sector employees under the Payment of Gratuity Act, 1972 is INR 20 lakh (the INR 25 lakh limit applies only to Central Government employees, effective January 1, 2024). While gratuity is a terminal benefit paid on separation, prudent employers provision for it monthly at approximately 4.81% of basic salary.

Leave Encashment

Employees are entitled to encash unused earned leave upon separation. The Code on Wages allows carry-forward of earned leave. Most companies allow 18-30 earned leave days per year and cap accumulation at 30-45 days. Leave encashment upon separation is taxable, with certain exemptions under Section 10(10AA) of the Income Tax Act.

Step 9: Employee Onboarding Documents and Payroll Data

Documents to Collect from Every Employee

Before you can process payroll, collect the following documents from each new employee. Missing documents will delay statutory registrations and filings:

• PAN card: Mandatory for TDS calculations and Form 16 issuance. Without PAN, TDS must be deducted at 20% (the highest marginal rate)
• Aadhaar card: Required for EPF registration and UAN generation. EPFO mandates Aadhaar-PAN linking for all members
• Bank account details: Account number, IFSC code, and a cancelled cheque for salary credit verification
• Previous employer Form 16: If the employee joined mid-year, the previous Form 16 helps calculate correct TDS for the remaining months
• Tax regime declaration: Employee must declare whether they opt for the old or new tax regime. The new regime is default if no declaration is submitted
• Investment declaration (old regime only): Details of planned 80C investments, home loan interest, health insurance premiums for computing TDS
• Nomination forms: EPF nomination (Form 2), ESI nomination, and gratuity nomination must be collected and filed with the respective authorities
• Qualification certificates: Educational certificates, experience letters, and relieving letter from previous employer for employment records

Universal Account Number (UAN)

Every employee enrolled in EPF receives a Universal Account Number (UAN) that remains constant throughout their career. If a new employee already has a UAN from a previous employer, link it to your establishment code through the EPFO employer portal. If they are first-time EPF members, a new UAN will be generated upon registration. Ensure the UAN is activated and linked to the employee's Aadhaar and bank account for seamless claims and transfers.

Step 10: Set Up Payroll Reporting

Reports for the Parent Company

Foreign parent companies typically need the following payroll data for their own statutory and management reporting:

• Monthly payroll summary: Total CTC, gross pay, net pay, employer contributions by category
• Headcount report: Active employees, new joiners, separations
• Statutory compliance tracker: Confirmation of all filings and payments made on time
• Annual compensation review data: CTC benchmarking, increment budgets
• Intercompany recharge: Total employment costs recharged to the parent under the service agreement. Ensure this is at arm's length to avoid transfer pricing issues

Employee Self-Service

Indian employees expect access to payslips, Form 16, and investment declaration portals. Most modern payroll platforms include employee self-service (ESS) portals. If you outsource payroll, confirm that your provider offers an ESS portal for employees.

Step 11: Common Mistakes Foreign Companies Make

1. Structuring basic salary below 50%: Under the new labour codes, this is non-compliant and will result in recalculated statutory contributions with interest and penalties
2. Missing the EPF registration deadline: Even with fewer than 20 employees, failing to register voluntarily before crossing the threshold creates retroactive liability
3. Paying salaries in foreign currency: Indian employees must be paid in INR to Indian bank accounts. You cannot pay Indian employees in USD from the parent company's account
4. Ignoring state-specific compliance: Professional tax, Shops and Establishment registration, and labour welfare fund requirements vary by state. What applies in Maharashtra does not apply in Delhi
5. Not obtaining TAN: Processing any salary payment without TAN means you cannot deposit TDS, which triggers penalties from the first month
6. Treating contractors as employees: Misclassification of contractors vs. employees can result in retroactive EPF, ESI, and gratuity liability, plus penalties. See our guide on hiring employees in India
7. Ignoring FEMA reporting: The capital used to fund employee salaries in India must be properly infused through the FC-GPR route. Paying Indian employees directly from overseas accounts violates FEMA regulations

Key Takeaways

• Register for PAN, TAN, EPF, ESI, professional tax, and Shops & Establishment before processing your first payroll
• Structure CTC with basic salary at minimum 50% of total remuneration under the new labour codes
• Deposit TDS by the 7th and EPF/ESI contributions by the 15th of each month without exception
• Consider outsourcing payroll for your first 1-2 years to reduce compliance risk and cost
• Budget for employer contributions of approximately 17-20% above gross salary (EPF 13%, ESI 3.25%, gratuity 4.81%)