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What Overseas Employers Need to Know About India Payroll and Tax

Navigating the payroll and tax regulations for your employees on assignment to India does carry some complexity for HR departments.  You can find the full review of Indian payroll and tax rules here, which should give you an idea of what you are facing if you decide to run a DIY payroll without assistance.

There are simpler alternatives such as the Shield GEO employment solution, using our local partner to run payroll, make withholding and meet immigration requirements.

Here are some of more important things to know about Indian payroll and tax rules:

1.    Personal Account Number (PAN) for Taxation and Withholding in India 

Your employee will need a Personal Account Number for both withholding and annual filing of an Indian tax return, which means that the payroll must be run in India rather than remotely.  You must have a locally incorporated entity, or use a third-party service such as Shield GEO to employ and payroll your workers.

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2.    Tax Rates in India

The tax rates in India on personal income range from 10-30% depending on the total amount of compensation.  Taxes are withheld monthly from the paycheck (PAYE system), based on the annual estimate of income after deductions.

There is a basic exemption limit (BEL) of Rs250,000 on which no tax is paid, and after that the rates are as follows:

  • BEL-Rs500,000 = 10%
  • 500,001-1,000,000 = 20%
  • 1,000,001-10,000,000 = 30%

Expats are taxed at the same rate as residents, and it may be necessary to look at tax treaties with your home country to avoid any issues of double taxation.

3.    Per Diem Allowances in India are Non-Taxable

One unique and beneficial rule in India is that per diem allowances are not taxable to the employee as long as they are reasonable and documented.  However, these amounts still need to be included in the payroll for full compliance with Indian tax laws.

4.    Deductions from Income in India 

You can view an article that discusses both taxable and tax-exempt components of income here which should give you some insight to some of the nuances of Indian tax law.  

For example, allowance for housing rentals are partially deductible, but allowances to offset the higher expense of living in metro areas are fully taxable.  There is also a statutory employee contribution to the Employee Provident Fund of 12% that is deductible from the salary when computing income tax.

When you start to consider all of these tax and payroll rules, the Shield GEO employer of record service does look appealing for most HR professionals.  Our local partner will handle the entire Indian payroll for you, including computation of taxes, deductions and withholding.  If you choose a DIY approach, you will still need expert tax advice and guidance, so it may be more cost effective to choose a comprehensive employment solution with Shield GEO.

Need help running payroll in India? Get in touch!

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