Payroll Services in India for US Companies

Payroll Services for US Companies in India

The United States remains India's largest source of foreign direct investment in cumulative terms, with American companies operating thousands of subsidiaries, branch offices, and liaison offices across the country. Every one of these entities that employs staff in India must run a compliant payroll — and Indian payroll is fundamentally different from anything US employers are accustomed to.

India's payroll landscape underwent its most significant reform in decades when the four new Labour Codes took effect in November 2025. These codes consolidated 29 legacy labour laws into four unified statutes — the Code on Wages (2019), Code on Social Security (2020), Industrial Relations Code (2020), and Occupational Safety, Health and Working Conditions Code (2020). For US companies, this means restructured salary components, expanded social security coverage, stricter digital record-keeping mandates, and compressed settlement timelines.

Unlike the US federal/state payroll model (where employers withhold federal income tax, FICA, and state taxes), Indian payroll requires employers to manage Employees' Provident Fund (EPF), Employee State Insurance (ESIC), Professional Tax (state-specific), Tax Deducted at Source (TDS) on salaries, gratuity, and Labour Welfare Fund contributions — each with its own registration, calculation rules, filing deadlines, and penalty regime.

BeaconFiling provides comprehensive payroll processing services designed specifically for US-owned Indian entities, ensuring every statutory obligation is met from day one.

How the India-US DTAA Affects Payroll

The India-US Double Taxation Avoidance Agreement, signed in 1989 and amended through the 2000 protocol, has direct implications for how payroll is structured for US companies operating in India — particularly for expatriate employees and intercompany payroll recharges.

Employment Income Taxation (Article 16)

Under the DTAA, salaries and wages paid to employees are taxable in the country where the employment is exercised. This means that US nationals working in India are subject to Indian income tax on their India-sourced salary. However, a short-stay exemption applies if: (a) the employee is present in India for fewer than 183 days in the relevant fiscal year, (b) the remuneration is paid by an employer who is not resident in India, and (c) the remuneration is not borne by a permanent establishment in India. If all three conditions are met, the salary remains taxable only in the US.

Shadow Payroll Considerations

Many US companies deploy expatriates to India while keeping them on the US payroll. In such cases, a shadow payroll must be maintained in India to calculate and deposit Indian TDS on the portion of compensation attributable to Indian workdays. The India-US DTAA allows credit for taxes paid in India against the US tax liability (via IRS Form 1116), but the Indian payroll team must ensure TDS is deposited correctly to avoid penalties and interest.

No Bilateral Social Security Agreement

Unlike India's treaties with Germany, France, and several other nations, India and the US do not have a bilateral Social Security Agreement (SSA) in force. This means US employees working in India may face dual social security contributions — paying into both the US Social Security system and India's EPF. US employers must enroll all eligible employees (including US expatriates on Indian payroll) in EPF and ESIC unless a specific exemption applies. Read our blog on expatriate salary structuring in India for detailed guidance.

Fees for Included Services (FIS) on Payroll Recharges

When the US parent recharges payroll costs or management fees to the Indian subsidiary, these payments may be classified as Fees for Included Services (FIS) under Article 12 of the India-US DTAA, subject to a 15% withholding tax. However, the unique "make available" clause means that routine payroll processing services — where no technical knowledge is made available to the Indian entity — may fall outside the FIS definition. Proper structuring of intercompany agreements is essential to minimize withholding exposure.

Document Requirements from the USA

The USA is a member of the Hague Apostille Convention, which simplifies document authentication for Indian compliance filings.

Documents for Payroll Setup

• Certificate of Incorporation of the US parent — apostilled copy required for entity verification during EPF and ESIC registration
• Board Resolution authorizing the appointment of an Indian payroll service provider — notarized and apostilled
• PAN (Permanent Account Number) and TAN (Tax Deduction Account Number) of the Indian entity — mandatory before the first salary disbursement
• Intercompany service agreement covering payroll recharge arrangements — critical for transfer pricing compliance, must specify the cost allocation methodology and arm's length benchmarking
• Employee details: offer letters, PAN cards, Aadhaar numbers, bank account details, and Form 16 from previous employer (if applicable)

Ongoing Documentation

• Tax Residency Certificate (TRC) from the IRS — required annually to claim DTAA benefits on intercompany payroll recharges
• Form 10F — self-declaration filed with Indian tax authorities alongside the TRC
• Certificate of Coverage (if bilateral SSA is enacted in future) — currently not applicable for US employees
• Digital Signature Certificate (DSC) — mandatory for authorized signatories filing EPF, ESIC, and TDS returns electronically

Step-by-Step Payroll Setup Process

Here is the structured process BeaconFiling follows when setting up payroll for US-owned Indian entities:

Step 1: Entity Registration with Statutory Authorities

Register the Indian entity with the Employees' Provident Fund Organization (EPFO) to obtain an EPF establishment code, with the Employee State Insurance Corporation (ESIC) to obtain an ESIC code, with the Income Tax Department to obtain a TAN for TDS deduction, and with the relevant state authority for Professional Tax registration. Each registration has its own eligibility thresholds — EPF applies to establishments with 20+ employees, while ESIC applies to establishments with 10+ employees. Read our blog on setting up payroll from day one.

Step 2: Salary Structure Design

Design salary structures compliant with the new Labour Codes — basic pay plus dearness allowance must constitute at least 50% of the total Cost to Company (CTC). This is a significant shift from pre-2025 practices where many US companies in India structured salaries with low basic pay to minimize EPF contributions. The 50% rule now applies universally, increasing employer EPF costs but also raising employee retirement benefits. Read our blog on salary benchmarks for foreign companies.

Step 3: Monthly Payroll Processing

Calculate gross salary, apply statutory deductions (EPF employee share at 12% of basic + DA, ESIC employee share at 0.75% of wages for employees earning up to INR 21,000/month, TDS per income tax slab rates, Professional Tax per state schedule), compute employer contributions (EPF at 12%, ESIC at 3.25%, Labour Welfare Fund per state), and disburse net salary by the 7th of the following month.

Step 4: Statutory Remittances and Returns

Deposit TDS by the 7th of the following month. Deposit EPF and ESIC contributions by the 15th of the following month — late deposits attract interest at 12% per annum for EPF and penalties up to INR 3 lakh. File quarterly TDS returns (Form 24Q) within 31 days of quarter-end. File monthly EPF returns (ECR) and ESIC returns. Read our guides on the EPFO portal and ESIC portal for foreign companies.

Step 5: Year-End Compliance

Issue Form 16 (TDS certificate) to all employees by June 15. File the annual income tax return for the entity. Complete the annual EPF return and ESIC annual contribution statement. Compute and provision for gratuity liability under the Payment of Gratuity Act (now payable after 1 year for fixed-term employees under the new codes). Read about 12 compliance deadlines foreign companies commonly miss.

Timeline & Costs

Setup Timeline

Ongoing Compliance Calendar

Cost Breakdown

Costs vary based on employee headcount, salary complexity, number of states, and expatriate payroll requirements. US companies typically save 60-80% compared to building an in-house payroll team in India.

Common Challenges for US Companies

Financial Year Misalignment

India's financial year runs April 1 to March 31, while most US companies follow the calendar year (January-December). This creates overlapping reporting periods and compressed timelines — US parents need Q1 consolidation data by mid-January, but India's Q3 closes on December 31. Your payroll team must maintain dual calendars for TDS deposits, quarterly returns, and annual filings. See our blog on compliance deadlines foreign companies miss.

The 50% Basic Pay Rule

Under the new Labour Codes effective November 2025, basic pay plus DA must be at least 50% of CTC. Many US companies in India historically structured salaries with 30-40% basic to reduce EPF liability. The mandatory restructuring increases employer EPF costs by 15-25% in many cases. BeaconFiling helps US companies redesign CTC structures to comply while optimizing total employer costs. Read our blog on India's 4 new Labour Codes for foreign employers.

Multi-State Payroll Complexity

US companies with employees across multiple Indian states face a patchwork of Professional Tax (capped at INR 2,500 per year, deducted monthly by slab), Labour Welfare Fund contribution schedules, and Shops and Establishment Act registration requirements. Each state has different minimum wage schedules, leave entitlements, and working hour regulations. Read our blog on Labour Welfare Fund state requirements.

Dual Social Security Contributions

Without a bilateral SSA between India and the US, American employees on Indian payroll may contribute to both US Social Security and Indian EPF. This dual contribution burden is a significant cost for US companies deploying expatriates to India. Some companies apply for EPF exemption for international workers under specific provisions, but the process is complex and not always granted.

Expatriate Salary Structuring

US expatriates working in India require careful salary structuring to address Indian income tax (progressive rates up to 30% plus surcharge and cess), housing allowance exemptions, leave travel allowance rules, and the interaction between Indian TDS and US federal tax obligations. Shadow payroll calculations must be maintained to ensure correct tax credits under the DTAA.

Why Choose BeaconFiling

BeaconFiling specializes in payroll services for US-owned Indian entities — from early-stage subsidiaries with 5 employees to enterprise operations with 500+. Our team handles salary structure design, monthly payroll processing, statutory compliance (EPF, ESIC, TDS, Professional Tax, LWF), expatriate payroll and shadow payroll, and year-end Form 16 generation. We support multi-state payroll across all Indian states and union territories, and our systems are configured for seamless integration with US parent company HRIS platforms (Workday, ADP, Paychex).

Schedule a free consultation to discuss your Indian subsidiary's payroll needs, or explore our payroll processing service for a complete overview.