Sometimes the most challenging part of an expansion is determining how to pay your employees. Will you add them to an internal payroll, or will you outsource? What taxation rules do you need to follow?
Taxation rules in India
Income tax is a direct tax that every individual, local authority, company, or corporate firm is legally required to pay to the government if they come under the tax slab. Income tax is calculated on the net taxable income of a person. In India, there are incremental tax slab rates to determine the tax applicable to income. There is a lower slab rate for lower income and a higher slab rate for higher income. The income tax cycle in India starts with the fiscal year on April 1 and ends on March 31 of the next year.
The Budget 2020 introduced a new giving option to pay income tax at lower rates. The new system is applicable for income earned from Apr. 1, 2020 (FY 2020-21), which relates to AY 2021-22.
The tax rates under the new tax regime and the existing tax regime are:
- New slab rates for FY 2023-24 (AY 2024-25)
- Income from INR 3 lakh to INR 6 lakh > 5%
- Income from INR 6 lakh to INR 9 lakh > 10%
- Income from INR 9 lakh to INR 12 lakh > 15%
- Income from INR 12 lakh to INR 15 lakh > 20%
- Income above 15 lakhs > 30% (surcharge applicable for CTC above 50 lakhs)
- Existing slab rates
- Income from INR 2.5 lakh to INR 5 lakh > 5%
- Income from INR 5 lakh to INR 10 lakh > 20%
- Income above 10 lakhs > 30% (surcharge applicable for CTC above 50 lakhs)
India payroll options for companies
Not only will you need to set up payroll in India, but you’ll also have to decide which payroll option is the best for your company. The 3 main India payroll options include:
- Internal: If you already have an established subsidiary in India, you can hire an in-house team to run payroll. An internal payroll is an excellent option for larger companies with more time, money, and commitment to India.
- India payroll processing company: India payroll outsourcing can benefit companies lacking the time or bandwidth to run their own payroll. You can work with a company in India to pay your employees. However, you’ll still be held liable for any oversights.
- Global Growth Platform™: G-P offers the best of both worlds. Through our India employer of record services, we can both pay employees and ensure your company is compliant with local regulations.
How to establish a payroll in India
First, you’ll need information from every employee such as a permanent account number, proof of investments, details of dependents, certification from their previous employer, a written employment contract, and more. To register for social security, you’ll also need a provident fund number and the employee’s state insurance number.
Entitlement/termination terms
Probationary periods are commonly used in India with 3 months being a typical probation timeframe. The average initial probation is 3 months, and then the employer can extend the probation for up to an additional 3 months.
Procedures for termination of employment vary based on the reason why an employee is terminated, the classification of their position, and even the state in which they are employed. For most employees, termination must be for a reasonable cause, which may include redundancy, underperformance, misconduct, insubordination or any other similar reason.
Termination notice by either the employer or employee must be given in writing as per the employment contract. There is generally a 15-day notice during probation, but this may be extended to 30 days or more after the employee is regularized.
Employees who have worked for 5 or more years may receive gratuity payment.
Streamline global payroll management with G-P.
G-P streamlines each step of the payroll management process with our market-leading Global Growth Platform™. Pay your team with confidence anywhere in the world in 150 currencies with our 99% on-time automated payroll system — all with just a few clicks. Our products also integrate with leading HCM solutions, syncing employee payroll data across platforms automatically to create one reliable, convenient source of truth for HR teams.
Contact us to learn more about how we can support you.