Understanding Payroll in India: What Global Companies Need to Know About India Payroll

Nov 27, 2016  | Topic: Country Payroll

Over one billion residents and sustained 7 percent growth in recent years make India a focus for any multinational company that is looking to expand into a burgeoning economy. The private sector of India is globalizing rapidly, giving even more incentive for the local government to standardize and streamline the processes for companies that look to enter its borders. India’s restrictive and burdensome regulatory environment, however, remains a hindrance for many companies.

Bilateral trade between India and the United States hit a total of $109.3 billion in 2015. However, this encouraging number is as much a challenge as it is a magnet: High caliber opportunities are growing thinner by the moment, because India has been recognized as a target. Alongside other administrative hazards of process, businesses coming into India blind risk having their paperwork lost in the shuffle due to the sheer volume of applications at once. As you work with trusted partners to establish payroll operations in India, here are some of the pertinent guidelines to know.

Getting Started

The process of doing business in India begins online: Business people must obtain a Class II digital signature certificate that is authorized by the Ministry of Corporate Affairs before moving forward. This signature lasts for a maximum of 2 years and can be administered with one of many private agencies including NIC and E-Mudhra, among others. Fees for this signature start at INR 700 ($10.70, £8.65, €9.97) and usually take a maximum of 3 days to process.

The next step is a director ID number (DIN) from the Ministry of Corporate Affairs, another procedure that can be done online. The fee here is INR 500 ($7.64, £6.18, €7.12) for one DIN. It is here that companies begin to run into other requirements for doing business in India, including the requirement that each private company must have at minimum 2 directors. This takes one day.

The Registrar of Companies will register the company name in the country, a process that takes a maximum of 7 days and costs INR 1,000 ($15.29, £12.36, €14.24). Stamp dues must then be paid before the Certificate of Incorporation can be procured. Expect this process to take 5 days. After obtaining a company stamp, one must then obtain a Permanent Account Number from an authorized agent in the country – either the NSDL or the UTI. This cost starts at INR 93 ($1.42, £1.33, €9.97)and may take up to 10 days.

From there the company must open a domestic bank account and register with the Employees' Provident Fund Organization. There is no charge for either of these activities; however, it will take around 10 days to do this. Simultaneously, organizations should also register with the Employees' State Insurance Corporation for medical insurance and the value added tax (VAT) with the Department of Trade and Taxes. Each of these procedures takes 10 days but may be done concurrently. The VAT registration costs a minimum of INR 500 ($7.64, £6.18, €7.12).

The final two steps include getting a Tax Account Number (TAN) from the NSDL, a 7-day process that costs INR 55 ($0.84, £0.68, €0.78). Lastly, companies need to register in compliance with the Delhi Shops and Establishments Act.

Payroll Assessment

Employment Considerations

Having a written employee contract is not required in India, but is advisable. Failing to establish employment agreements can complicate payroll or cause problems if a business is in an industry that is dominated by collective bargaining associations, as the pharmaceutical, banking and auto industries are.

A foreign national will generally apply for an Indian employment visa to the Indian Embassy/High Commission in his country of residence. Following the receipt of a visa, all labor laws regulating employment relationships in India also apply to foreign nationals working in India. Indian legislation recognizes two categories of employee – workmen and non-workmen – with only workmen covered under the provisions and protections of the Industrial Disputes Act. Broadly, the entitlement to statutory employment rights depends on the category of employee and other factors (such as remuneration, location, and industry).

Compensation, Bonuses & Severance Pay

Local governments set the minimum wage in India under the auspices of the Minimum Wages Act 1948. Overtime, piece and time work are all addressed in the document, and are considered in all industries. Working hours are governed by a variety of statutes depending on the nature of the activity undertaken by the establishment.

Employers are responsible for two major types of severance pay at the termination of employment, including a gratuity payment and a leave encashment. If there is a written contract, the employer is required to adhere to the tenants of that document as well.

Minimum bonuses are grounded into Indian business culture through the Payment of Bonus Act. Employers are responsible for an 8.33% - 20% bonus of annual wages if a company employs more than 20 people and wages are not above INR 10,000 ($142.49, £123.58, €142.49) per month. As for payroll and tax compliance, foreign nationals are taxed under the auspices of the Income Tax Act 1961, Section 10(6)(vi). India considers different tax rates on people who are aged above 60, and reconsiders taxation again for those above 80 years of age.

Leave Considerations

Employment contracts generally detail the terms of leave; however, most businesses have a range of 12-24 days of sick leave and casual leave. The Factories Act requires employers to give all factory workers one day leave with pay for every 20 days of work, and there are other conditions of leave that are covered by the Employees' State Insurance Act 1948. Public holidays differ from region to region and range from between four to ten days' holiday each year.

Maternity leave is provided to every woman employed in an establishment for at least 80 days preceding the expected date of delivery, up to a maximum period of 12 weeks (of which not more than six weeks can precede the date of delivery). The employee receives her salary during the statutory maternity period. Indian employment law does not provide for paternity leave.

Date India's Public Holiday Schedule*
 January 26th  Republic Day
 August 15th  Independence Day
 October 2nd  Mahatma Gandhi Birthday
*Only the secular holiday are observed nationally. Public holidays tend to be observed on a strictly regional basis. 

In Conclusion

The long process for registering a business in India can be incredibly taxing without professional help – as can establishing and maintaining success payroll operations in-country. Outsourcing Indian payroll to a trusted global payroll service can help organizations apply their focus elsewhere in the business and achieve ongoing compliance with all applicable Indian payroll guidelines.

This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.