India’s emerging economy is an ideal place for businesses who are expanding globally. Since an economic liberalization in the 1990’s, the national economy has blossomed into an economic powerhouse and darling among emerging markets. Not only do companies enter India for highly-skilled workers, domestic demand is growing at a rapid rate. It is expected to grow at a compound rate of 9.2% from 2010 to 2030. As Indian citizens gain wealth, they also gain the means to spend it on products and services.
India, like most countries, has complex labor and tax laws that can trip up experienced multinational firms as well as businesses new to the global arena. What do you need to know for Indian payroll requirements?
Indian tax law differentiates between categories of people with income. There are different rates for people under 60 years-old, over 60 years-old, and over 80 years-old. Income tax rates range from 10% for income over INR 250,000 to a maximum marginal rate of around 34% with older demographics taxed at lower rates. Additionally, all income is subject to an education tax of 3%.
Employers are required to withhold taxes for their employees. Indian income taxes are pay-as-you-earn, so taxes are deposited to the appropriate department on a monthly basis. The amount deducted each month is based on an estimated income. If the withholding is too little, the employee may need to pay an “advance tax,” which is a self-assessment to make up the difference. The advance tax is payable in four unequal installments over the year, according the government issued schedule.
The Employees’ Provident Fund and Miscellaneous Provisions Act 1952 establishes three separate schemes for social security: The Provident Fund Scheme (PF), The Pensions Scheme, and the Employee Deposit Linked Insurance Scheme (EDLI).
The Provident Fund Scheme is a mandated retirement account for employees who make no more than INR 15,000 a month. The employee and employer both pay 12% of the employee’s salary in companies with 20 or more employees, or 10%, in companies with fewer than 20 employees. , Most of these funds go into an account that accrues interest. 8.33% of the employer’s contribution is diverted from the PF scheme to the Pension Scheme. When the employee retires he or she receives a lump-sum payment. Employees making more than INR 15,000 per month may participate in the scheme if:
• The employee has been a member of the scheme in the past
• The employer and employee voluntarily seek coverage
• The employee is a foreign national, where the contributions are applicable without a salary threshold
When people switch jobs, they may withdraw the balance of their PF. The withdrawal is not taxable if they have had five years of continuous service. When an employee transfers the PF balance to a new employer, it counts as continuous service.
Additionally, the Employee Deposit Linked Insurance Scheme requires the employer to contribute 0.5% of basic wages.
Finally, the Employee’s State Insurance Act requires that the employee pay 1.75% and the employer 4.75% to that fund.
When foreign nationals receive income in India, it is subject to income tax unless the foreign national comes from one of the 80 countries with which India has a double taxation exception treaty. If the foreign national stays in India for more than 182 days in a year, the employee is considered a resident for taxation purposes. However, the first three years the foreign national’s resident status is deemed “not ordinary,” meaning that only his/her income generated in India is taxable. After the three-year period, all global income is taxable.
The same principle works for Indian nationals who are working abroad. If they are in their host country less than 182 days in a year, they are taxed only on income generated in India.
The Minimum Wages Act 1948 gives local municipalities the authority to set the minimum wage, overtime pay, and work hours. Regional differences in these policies make calculating payroll in India much more complex than most countries. The minimum wage also depends on:
• The nature of employment
• The industry of employment
• Employee’s age
The Payment of Gratuity Act 1972 requires that employers pay a “gratuity” to their employees when the relationship is terminated. The gratuity is 15 days wages, at the rate of the last salary, for each year of service at the company. It applies to every employee who has had five or more years of service. Termination can be for resignation, retirement, death, or disability.
India has several categories of income allowances that it includes in its definition of “salary”. Each of them has different income tax, gratuity, and PF implications. Here are the major ones to expect:
• Housing Rent Allowance – Usually 40% to 50% of basic income, and it has some tax benefits
• Medical reimbursements up to INR 15,000 are not considered taxable
• Conveyance Allowance to pay the cost of commuting
• Children Education Allowance
• Leave Travel Allowance to cover travel expenses
Indian payroll requirements are complex. Between varying minimum wage laws across regions and allowances with varying tax implications, it can be a daunting task to understand and implement payroll in this diverse and fast-growing country. If you’re looking for a partner that can guide you through the payroll process, get in touch with our team today!
**This article is for informational purposes only. It is not intended to constitute legal advice.