Payroll in India 2026: A Complete Guide for Employers

Running payroll in India means paying salaries each month while handling four sets of statutory obligations: Provident Fund (PF), Employees’ State Insurance (ESI) for lower earners, income tax withheld at source (TDS), and state-level professional tax. Since 2025 and 2026, three big changes apply: India’s four Labour Codes took effect on 21 November 2025, the Income-tax Act 2025 replaced the 1961 Act from 1 April 2026, and the PF wage ceiling rose from ₹15,000 to ₹25,000 a month from 17 September 2026.

This guide explains how payroll in India works in 2026, what employers must contribute, a worked monthly example, the compliance calendar, and your options for running payroll if you’re a foreign company. Figures were checked against the sources listed at the end on 12 October 2026.

Payroll in India at a glance

What changed in 2025–2026

The Labour Codes (in force from 21 November 2025)

India consolidated 29 labour laws into four Codes: Wages, Social Security, Industrial Relations, and Occupational Safety, Health and Working Conditions. For payroll, the key changes are:

• One definition of “wages” used to calculate PF, gratuity, bonus, overtime and leave encashment.
• The 50% rule. Basic pay, dearness allowance and retaining allowance must make up at least half of total pay. If allowances exceed 50%, the excess is added back to wages for statutory calculations. Many older salary structures, with a low basic and large allowances, now need redesigning.
• Faster exits. Wages due to a departing employee must be paid within two working days of the last working day.
• Gratuity for fixed-term staff after one year of continuous service, instead of five.
• Mandatory appointment letters.

Central rules followed in May 2026. Where a state hasn’t yet notified its own rules, older state laws can still apply, so check the state where your employee works. Our Labour Codes guide covers what employers must do.

The Income-tax Act 2025 (from 1 April 2026)

The new Act replaced the Income-tax Act 1961. The salary tax rates themselves were carried over, but forms and terminology changed. For example, the annual salary TDS certificate employers issue is now Form 130 instead of Form 16.

The higher PF wage ceiling (from 17 September 2026)

The statutory PF wage ceiling rose from ₹15,000 to ₹25,000 a month. October 2026 is the first full month under the new ceiling. For employees whose PF wages were capped at ₹15,000, both the employee and employer contributions rise.

Provident Fund (PF)

• Employee: 12% of PF wages, deducted from salary.
• Employer: 12% of PF wages. Of this, 8.33% goes to the Employees’ Pension Scheme (EPS) and the rest to the Provident Fund.
• Extra employer costs: about 0.5% for EDLI insurance and 0.5% for administration charges.
• Ceiling: mandatory on wages up to ₹25,000 a month. Employers and employees can agree to contribute on full basic salary instead, which raises the cost.

For example, on PF wages of ₹20,000 a month, the employee pays ₹2,400. The employer pays ₹2,400, split as ₹1,666 to EPS and ₹734 to EPF.

Employees’ State Insurance (ESI)

ESI provides medical and cash benefits for lower-paid employees.

• Applies to: employees earning up to ₹21,000 a month gross
• Employer: 3.25% of gross wages
• Employee: 0.75% of gross wages
• Deposit: by the 15th of the following month

Most software engineers and other professional hires earn above ₹21,000 a month, so ESI usually doesn’t apply. Those employees typically get private group health insurance instead.

Income tax withholding (TDS)

Employers deduct income tax from salary each month and deposit it with the government.

New tax regime (the default) — tax year 2026-27:

• Salaried employees get a ₹75,000 standard deduction.
• A rebate means no tax on taxable income up to ₹12 lakh.
• A 4% health and education cess applies on top of tax.
• Employees can choose the old regime instead, which allows more deductions but has higher rates.

Employers must deposit TDS by the 7th of the following month, file quarterly TDS returns, and issue the annual Form 130 certificate to each employee.

Professional tax

Professional tax is a state tax on employment. Each state sets its own slabs, and some states don’t levy it at all. The total can’t exceed ₹2,500 per employee per year. Employers register in each state where they have employees, deduct the tax from salary and pay it to the state.

Gratuity

Gratuity is a lump sum paid when an employee leaves.

• Amount: 15 days’ wages for each completed year of service
• Eligibility: after 5 years of continuous service for permanent employees; after 1 year for fixed-term employees
• Tax-free limit: up to ₹20 lakh
• Timing: payable within 30 days of exit

Employers commonly set aside about 4.81% of basic salary each year to fund gratuity.

Statutory bonus

Employees earning up to ₹21,000 a month are entitled to an annual statutory bonus of 8.33% to 20% of wages, depending on the employer’s profits and the applicable rules.

Worked example: monthly employer costs for one hire

Say an engineer in Bengaluru has a monthly basic salary of ₹50,000 within a compliant structure. Gross pay is above ₹21,000, so ESI and statutory bonus don’t apply.

So employer statutory costs here run from about ₹5,650 to ₹8,650 a month, depending on whether PF is capped. In India, these amounts are usually included in the employee’s CTC (cost to company) rather than added on top. Always confirm how your offer defines CTC.

For the full salary picture, see the true cost of hiring in India, or estimate employer costs and take-home pay in India and 44 other countries with our Global Payroll Calculator.

Payroll compliance calendar

How foreign companies run payroll in India

You have three main options:

1. Set up your own Indian entity and run payroll in-house or through a local payroll provider. Entity setup typically takes 3–6 months, plus ongoing accounting and compliance. See EOR vs entity in India.
2. Use a payroll provider on top of your own entity. This handles calculations and filings, but you still need the entity and carry the employer obligations.
3. Use an Employer of Record (EOR). The EOR employs your staff through its own Indian entity and runs payroll, PF, ESI, TDS and professional tax for you. You don’t need an entity. See what an EOR is.

For one to a few dozen employees, an EOR is usually the fastest and simplest route. Companies building a large, permanent team often move to their own entity later.

Common payroll mistakes to avoid

• Keeping a low basic salary. Structures where basic pay is under 50% of total pay no longer reduce PF and gratuity under the Labour Codes.
• Missing the 2-day exit rule. Final wages are due within two working days, not at the next payroll run.
• Ignoring the new PF ceiling. Payroll set up for the ₹15,000 ceiling under-deducts from October 2026.
• Paying full-time workers as contractors. If they work like employees, authorities can treat them as employees, with back-payment of PF and penalties.
• Forgetting state rules. Professional tax, leave and other rules vary by state.

Why StratEdge Global: one partner, one platform

Most EORs give you a contract and an invoice. StratEdge Global gives you an employee who works, and feels, like part of your own team. You get one partner and one platform from hiring to exit, with payroll, PF, ESI, TDS, gratuity and Labour Code compliance handled by our own team. Our proprietary platform, EmpleYor, gives clients and employees real-time visibility, so nothing waits on an email or an invoice.

• Real-time cost, no surprises. EmpleYor shows you the actual pay and fee for each hire, line by line, as payroll runs. You don’t have to request a breakdown or wait for an invoice to see what a hire really costs.
• The hire is fully visible. Your manager sees live onboarding status, timesheets, leave, attendance and recognitions: the same view you’d have of a direct employee.
• Engaged employees, not just compliant ones. At no extra cost, every EOR employee gets group health insurance, learning credits and access to our recognition programme, so they grow and get recognised alongside your own team.
• No candidate yet? We find one. Our in-house recruitment team, HireEdge, sources the hire, and we employ them through our India employing entity, StratGrid Private Limited. One contract covers search, employment and HR.
• Simple terms. From $349 per employee per month, no onboarding fee, no salary markup, month-to-month with no lock-in. India hires are onboarded in 48 hours.

Book a free call, read our India payroll and employment guide, or see pricing.

Sources

• Labour Codes in force from 21 November 2025, including gratuity for fixed-term staff after one year: BDO India
• PF wage ceiling of ₹25,000 effective 17 September 2026, and the EPS/EPF contribution split: Business Today
• Union Cabinet approval of the ₹25,000 PF wage ceiling: Moneylife
• Earlier deferral of the PF ceiling hike (July 2026), for context: Angel One
• Income-tax Act 2025 from 1 April 2026 and tax year 2026-27 slabs: TaxHeal
• Form 130 replacing Form 16: SCC Online
• ESI rates, wage ceiling and due dates: Tally Solutions
• 2-working-day final settlement under the Code on Wages, and the 30-day gratuity timeline: Patron Accounting
• Labour Code rules, 50% wage rule, PF, ESI, gratuity and statutory bonus details: StratEdge Global India Payroll & Employment Guide 2026

This guide is general information, not legal or tax advice. Rules can vary by state and change over time.

FAQ

What are the employer’s statutory payroll costs in India?

Typically 12% PF on wages up to ₹25,000 a month, about 1% for EDLI and admin, gratuity accrual of about 4.81% of basic, and — for employees earning up to ₹21,000 a month — 3.25% ESI and statutory bonus.

What is the PF wage ceiling in 2026?

₹25,000 a month, raised from ₹15,000 with effect from 17 September 2026. October 2026 is the first full month under the new ceiling.

When must final salary be paid when an employee leaves?

Under the Code on Wages, wages due must be paid within two working days of the employee’s last working day. Gratuity is due within 30 days.

Which tax regime applies to salaried employees in India?

The new regime is the default. Employees can opt for the old regime if it suits them better. Under the new regime, there’s no tax on taxable income up to ₹12 lakh after the rebate, plus a ₹75,000 standard deduction.

Can a foreign company run payroll in India without an entity?

Not directly. You need either your own Indian entity or an Employer of Record that employs your staff through its entity.

What is Form 130?

Form 130 is the annual salary TDS certificate employers issue under the Income-tax Act 2025. It replaces the old Form 16.