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Payroll & Tax in India

India payroll & taxation

Foreign companies operating in India may find it challenging to deal with the complexities of the country’s tax system. The primary concerns for a foreign company that needs to comply with tax laws in India are: Individual income tax (IIT) for employees in India, social security costs, VAT, withholding tax, business tax and permanent establishment concerns.

Your Payroll Options in India

Remote Payroll

A remote payroll in India is where a foreign company, i.e. a non-resident company, payrolls a resident employee in India. This applies to both local and foreign employees. One option for a non-resident company to payroll its employees (local and foreign) in India is to use a fully outsourced service like a GEO or PEO which will employ and payroll the staff on their behalf.

Local Payroll Administration

In some cases, a company will register their business in India under one of the forms available but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider.

Internal Payroll

Larger companies with a commitment to India may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete the incorporation, register the business and then hire the necessary staff. There will be a need for in country human resources personnel who have the background needed to manage an Indian payroll and can fulfil all tax, withholding tax and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with Indian employment laws.

Fully Outsourced Payroll & Employment

Companies can outsource the employment and payroll of their staff in India to a GEO, like Shield GEO. This is possible for both foreign workers and Cypriot nationals. This is the easiest, fastest and safest way to payroll staff in India.

Shield GEO manages all aspects of payroll for workers in India, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client.

Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips.

Read more about outsourced payroll and employment through Shield GEO.

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Setting up payroll in India

Information Explanation
Currency ?

Indian rupee (INR), ₹

Employee Information Required ?

Following information is required:
• Permanent Account Number of the employee
• Proof of investments
• Whether he/she resides in rented premises
• Details of dependents
• Form 12B
• Certification of the previous employer
• Deceleration for tax benefits
• Written employment contract
• Work permit (if applicable)

Social Security Registration ?

Provident Fund Number and the Employee State Insurance Number, if applicable and as per act, must also be applied for.

Tax Figures

Information Explanation
Corporate Income Tax ?

The current corporate income tax rate is 30% for resident companies and 40% for non-resident companies (such as a branch) plus a surcharge, bringing the effective tax rate up to 41.2%.

Income Tax Rate ?
Grossed income Tax Rate (%)
0- INR 250,000 0
INR 250,001 - 500,000 10
INR 500,001 - 1,000,000 20
More than INR 1,000,001 30

*A 10% surcharge on total tax payable applies to individuals with total taxable income exceeding INR10 million.

**An education cess of 3% is also levied on taxes payable

Payroll Tax ?

No

Sales Tax ?

VAT is imposed on the supply of most moveable goods and specified intangible goods in India, as well as on the supply of taxable goods and services in India. Taxable persons charge VAT on their taxable supplies (output tax) and are charged with VAT on goods  which they receive (input tax).

The registration threshold for VAT purposes is INR 500,000 in most states.

The current standard rate of VAT imposed on taxable goods and services is 12.5-15%, depending on the state with reduced rates of 1% and 5% in most states.

Withholding Tax ?

India imposes withholding tax (WHT) on certain classes of income earned by non-residents:-

  • Dividends: No WHT applies. However, a a dividend distribution tax of 15% may apply.
  • Royalties: 25%
  • Interest: 10% (residents), ranges from 5-40% for non-residents.
  • Technical service fee: 25%
  • Payments to non-resident contractor companies: 40% plus surcharge and cess
  • Purchase of immoveable property: 1% plus surcharge and cess
 A reduced rate may be available under an applicable Double Tax Treaty.
Employee Social Security (EE SS)

Employees have to contribute 12% of their monthly salary towards the Provident Fund Scheme and 1.75% to the national insurance scheme. For more details, please refer to the section on Employment.

Employer Social Security (ER SS)

Employers have to contribute 12% of the employees’ monthly salary towards the Provident Fund Scheme and 4.75% to the national insurance scheme. For more details, please refer to the section on Employment.

Payments

Information Explanation
Payment Mode ?

Via employee’s bank account.

Frequency of Salary Payment ?

Generally salaries are processed once a month to Employee’s Bank Account. Some company will pay 1st of every month.

As per Payment of Wages Act:

Less than 1000 Employees: Every month before 7th.
More than 1000 Employees: Every month before 10th.

Invoice / Payslips required ?

Payslip is required.

Minimum Wage ?

Varies according to state and sector of industry. For the agriculture sector, there’s a separate minimum wage that’s set by the state governments.

Employee Entitlements

Information Explanation
Working on Sundays ?

No work on Sunday can be performed without prior agreement, and no employee can work for more than 10 days without a rest day of 24 hours.

If an employer requires work on Sundays or Public Holidays, those days of must be given back to the employee within the following 2 months.

Time Off Work ?

Other Leaves – As per bombay shops and establishments act 21 Paid Leave others dependent on the company policy.

Medical Leave ?

This is dependent on the company’s policy and Employee State Insurance

Employment Termination

Information Explanation
Resignation / End of Service Payment ?

The following is required:

  • Copy of approved resignation letter/clearance form
  • Forms and Returns / The De-registration will include Provident Fund Formalities
    and salary certificate.
Termination of Employment ?

The following information is required by law:
• Copy of approved resignation letter/clearance form
• Forms and Returns / The De-registration will include Provident Fund Formalities and salary certificate.

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