How Payroll Actually Runs in India: A Month-by-Month Breakdown

You made the offer. Your India engineer accepted. They start Monday. What happens to their payroll from that point is a monthly sequence of calculations, deductions, deposits, and filings that most US employers have never dealt with before.

Understanding how payroll works in India is not optional when you have India-based employees. India payroll does not run like US payroll. The structure is different, the tax regime is different, and the statutory contributions are different. The compliance calendar has deadlines that start generating penalties the day after they pass.

This guide covers the India payroll process explained from the US employer's perspective: the CTC structure, what happens in each phase of the monthly cycle, the two non-negotiable monthly deadlines, year-end obligations, and exactly what your role is when you use an Employer of Record.

How Is Indian Payroll Structured? The CTC Model Explained

Before you can follow the monthly payroll cycle India runs on, you need to understand CTC. It is the first concept that confuses US employers making India offers.

CTC stands for Cost to Company. It is the total annual cost an employer bears for one employee, including basic salary, allowances, and all statutory contributions. CTC is always higher than the employee's net take-home salary. The gap between CTC and take-home can be significant, depending on how the salary is structured.

Under the Labour Codes effective November 2025, basic salary must be at least 50% of total CTC. This is not optional. Getting the basic salary percentage wrong means EPF is calculated on an incorrect base from the first payroll run, which creates retroactive liability.

The practical implication: when your India hire tells you their expected CTC, that figure already includes employer statutory contributions. The cash they take home is lower. The total cost to you as the employer is that CTC figure plus any additional benefits you add on top.

The Monthly India Payroll Cycle: What Happens and When

This is how payroll works in India each month. The cycle runs in four phases with distinct deadlines. Missing any phase creates compounding problems downstream.

Phase 1: Payroll Inputs (1st to 23rd of the month)

Before any salary is calculated, payroll requires inputs. New joiner data must be added first: PAN, Aadhaar, bank account details, date of joining, and the agreed salary structure. Employees who resigned or were terminated during the month need a Full and Final (FNF) settlement calculated, covering notice pay, leave encashment, and any gratuity due.

Variable components are confirmed during this phase. Bonuses or performance awards for the month, expense reimbursements (travel, fuel, WFH allowances), overtime pay based on attendance logs, and Loss of Pay (LOP) adjustments for unpaid leave all feed into the calculation. Most companies use 26 working days as the base for per-day salary calculation, though some use 30. Whichever method is used must be documented in company policy and applied consistently every month.

Phase 2: Payroll Processing and Gross-to-Net Calculation (23rd to 27th)

Gross salary is calculated first: basic salary plus all applicable allowances plus approved reimbursements. Statutory deductions are then applied to arrive at net pay.

One 2026-specific note on TDS: under the Income Tax Act 2025, effective April 1, 2026, the new default tax regime carries lower rates but fewer exemptions. The old regime permits HRA, LTA, and 80C deductions but at higher base rates. Each employee must declare their preferred regime before April 1. Employers calculate TDS based on the declared regime throughout the full financial year. Employees who do not declare are defaulted to the new regime.

Phase 3: Salary Disbursement (28th or last working day)

Net salaries are transferred to employee bank accounts by the 28th of the month in most compliant setups. Salary slips are generated showing gross salary, every deduction applied, and net take-home. Most companies distribute payslips electronically. The Payment of Wages Act mandates salary payment by the 7th or 10th of the following month depending on company size, but compliant employers disburse before month-end. EOR providers including Kaamwork disburse on a fixed schedule.

Phase 4: Statutory Deposits and Filings (by 7th and 15th of the following month)

This is where missed deadlines create the most damage. The penalties are backdated to the day the obligation was due, not the day you catch the error.

To put those penalties in USD terms: for a team of five engineers with a combined monthly EPF contribution of Rs 50,000 (approximately $595), a 3-month delay in EPF deposits triggers Rs 6,000 in interest plus damages at 17% of arrears for the delay period. That is a Rs 8,500 to Rs 10,000 penalty (roughly $100 to $120) on a Rs 1.5 lakh contribution. The penalty grows linearly with both team size and delay duration.

What Happens at the End of the Financial Year (April to June)?

India's financial year runs April 1 to March 31. Every year-end triggers four additional filing obligations that US employers frequently miss because there is no direct US equivalent.

One update to flag: Form 16 has been renamed Form 130 under the Income Tax Act 2025, effective April 1, 2026. Verify the current form name at incometaxindia.gov.in before publishing, as both terms are still in circulation and the correct one matters for employee-facing communication.

What Do You Handle vs What Does an EOR Handle?

The monthly payroll cycle India requires is one of the main reasons US companies use an EOR for their first India hires. Here is exactly what the split looks like.

Your role in the monthly cycle when using Kaamwork is approving the payroll summary before disbursement and flagging any changes: new joiners, salary revisions, exits, or variable pay adjustments. Every statutory deposit, filing, and year-end obligation runs through Kaamwork's compliance infrastructure. You own the team. Kaamwork owns the paperwork.

See how Kaamwork's EOR model works and understand the difference between EOR and contractor in India before making your first India hire.

India payroll runs on a tight monthly cycle with two non-negotiable deposit deadlines every month: TDS by the 7th and EPF and ESIC by the 15th. Year-end adds four more filing obligations between April and June. Getting every step right from the first payroll run requires either deep India compliance knowledge in-house or an EOR that handles it automatically.

Understanding how payroll works in India before your first hire prevents the backdated liability that most US employers discover only when they are already behind.

If you want to understand exactly what your payroll obligations look like for your specific India team size and roles, Kaamwork can walk you through the numbers before your first hire. Talk to Kaamwork today.

Frequently Asked Questions

Q: How does payroll work in India for a US company?
India payroll runs on a monthly cycle with a fixed sequence of calculations, statutory deductions, salary disbursement, and compliance filings. The key deadlines are TDS deposit by the 7th of the following month and EPF and ESIC deposits by the 15th. The financial year runs April 1 to March 31, with Form 16 (now Form 130 under the 2025 Income Tax Act) issued to all employees by June 15. US companies without an Indian entity typically use an Employer of Record to handle all these obligations, with the EOR managing the full compliance calendar on the employer's behalf.

Q: What is the India payroll process explained simply?
India payroll starts with gathering monthly inputs in the first three weeks: attendance records, new joiner data, variable pay, and any exit settlements. Gross-to-net salary is then calculated by applying statutory deductions including EPF at 12% of basic salary, ESIC at 3.25% of gross for eligible employees, TDS under the declared tax regime, and state-level Professional Tax. Net salaries are disbursed by the 28th or the last working day of the month. The employer then deposits TDS by the 7th and EPF and ESIC contributions by the 15th of the following month.

Q: What are the mandatory employer contributions in India payroll? Indian employers contribute 12% of basic salary to EPF and 3.25% of gross salary to ESIC for employees earning up to Rs 21,000 per month gross. Both contributions are on top of the employee's gross salary, not deducted from it. Employers also provision for gratuity at 4.81% of basic salary monthly, payable after five years of service. Under the Labour Codes effective November 2025, basic salary must be at least 50% of total CTC, which directly affects the EPF contribution base for every India payroll structure.

Q: What happens if you miss a payroll deadline in India?
Missing the TDS deadline of the 7th triggers interest at 1.5% per month from the date of deduction, plus a penalty of Rs 200 per day until the return is filed. Missing the EPF and ESIC deadline of the 15th triggers interest at 12% per annum and damages ranging from 5% to 25% of arrears depending on how long the delay runs. These penalties are backdated to the missed deadline, not to when the error is discovered. EPFO and ESIC audit routinely and back-assess the full period of non-compliance when arrears are found.

Q: Do I need an entity in India to run payroll there?
No. US companies can run compliant India payroll without a registered Indian entity by using an Employer of Record. The EOR becomes the legal employer on paper, handles all statutory registrations, runs the monthly payroll cycle including EPF, ESIC, and TDS deposits, and issues compliant payslips and year-end tax certificates to employees. Setting up your own Indian entity costs $20,000 to $150,000 and takes 3 to 6 months. An EOR gets your first hire onboarded and on compliant payroll in 48 hours.