India payroll for foreign companies: PF, ESI, TDS explained

India payroll looks deceptively simple from the outside. An employee has a salary, you deduct taxes, you pay them. Three moving parts. Except India has about twelve moving parts, and several of them shift depending on which state the employee sits in.

Foreign companies routinely get tripped up by the gap between gross salary and total employer cost. They confuse employee deductions with employer contributions. They miss that TDS is not a flat percentage but a personalized tax computation that changes based on the employee's income level, chosen tax regime, and declared exemptions. They assume professional tax works the same way in Karnataka as it does in Maharashtra. It doesn't.

This guide breaks down PF, ESI, TDS, professional tax, filing deadlines, and real payroll calculation examples with actual rupee amounts. Not high-level overviews. Line-by-line payroll math. If you're running payroll in India through an EOR like Kaamwork or building an internal payroll function, this is the operational reference you need.

India payroll: master summary

Sources: EPFO contribution schedule, ESIC official rates, CBDT Section 192 and tax deposit calendar, Payment of Gratuity Act 1972.

How India payroll works for foreign companies

India payroll has three layers

Most countries have two payroll layers: what the employee earns and what gets withheld for taxes. India adds a third: mandatory employer contributions that sit on top of gross salary and never appear on the employee's payslip.

Layer one is employee deductions. The employer withholds PF (12% of PF wages), ESI (0.75% if applicable), TDS (variable), and professional tax from the employee's gross salary before paying them. Layer two is employer contributions. The employer pays its own 12% PF contribution, 3.25% ESI (if applicable), and accrues gratuity liability. These amounts go directly to government agencies. The employee never sees this money. Layer three is filing obligations. Every deduction and contribution has a specific deposit deadline, a specific government portal, and a specific return format. Miss the deadline, and penalties start accruing automatically.

Gross salary is not the same as employer cost

This is where foreign employers get confused most often. Take an employee with a gross salary of ₹1,00,000/month. The employee takes home less than that after PF, ESI, TDS, and professional tax are deducted. But the employer pays more than ₹1,00,000 because employer PF, employer ESI, gratuity accrual, and admin charges sit on top.

The terms in play: take-home pay (what hits the bank account), gross salary (before employee deductions), CTC or cost-to-company (gross plus employer statutory contributions and benefits), and total employer cost (CTC plus any admin fees, insurance premiums, or EOR charges). A ₹12,00,000 annual gross salary can easily become ₹14,50,000 to ₹15,00,000 in total employer cost once you layer in statutory contributions, gratuity accrual, and medical insurance.

Why this matters more for foreign employers

Domestic Indian companies grew up with this system. Their finance teams know that gross salary is a starting point, not the final number. Foreign companies, especially those in the US, UK, or EU, tend to think of salary as the total line item, maybe with a benefits package on top. India's statutory contribution system means the employer cost structure is baked into law, not a discretionary benefits choice.

Because the gap between gross salary and total employer cost runs 15% to 25% depending on salary level and structuring, foreign employers who budget based on gross salary alone will consistently underestimate their India payroll spend. An EOR handles this math automatically, but understanding it yourself protects you from surprises when reviewing payroll reports or comparing proposals from different providers. Worth learning regardless of how you run payroll.

PF explained: Employee Provident Fund

What PF is

PF is India's primary retirement savings mechanism, administered by the Employees' Provident Fund Organisation (EPFO). Both the employer and employee contribute a percentage of the employee's PF wages every month. The money sits in the employee's PF account, earns interest (the EPFO declares the rate annually), and is accessible at retirement or under specific withdrawal conditions like home purchase or medical emergencies.

Think of it as a mandatory 401(k) with employer match, except the match isn't optional. It's required by law.

PF contribution rates

The employee contributes 12% of PF wages. The employer also contributes 12% of PF wages, but the employer's 12% is split: 3.67% goes to the employee's EPF account, and 8.33% goes to the Employees' Pension Scheme (EPS), capped at a pension salary of ₹15,000/month (per EPFO rules). On top of this, the employer pays 0.50% in EDLI (Employees' Deposit Linked Insurance) and admin charges.

PF wages are determined by salary structure. In the standard setup, PF is calculated on basic salary plus dearness allowance. After the November 2025 Labour Code on Wages, "wages" for PF purposes must constitute at least 50% of total remuneration. This means companies can no longer push basic salary below 50% to reduce PF liability. A salary structure with basic at ₹40,000 on a ₹80,000 gross gives you a PF base of ₹40,000. Employer PF contribution: ₹4,800/month. Employee PF deduction: also ₹4,800/month.

PF due date

PF remittance is due by the 15th of the following month, per EPFO's ECR (Electronic Challan cum Return) filing schedule. Pay April salaries by April 30, remit PF by May 15. Late remittance attracts penal damages at rates that escalate from 5% to 25% of the arrears depending on the delay period, per EPFO's penal provisions under Section 14B.

What foreign employers misunderstand

The biggest misunderstanding: PF is an employer cost, not only an employee deduction. When you see "12% PF" in a payroll summary, you need to ask: is that the employee's 12% that's deducted from their gross, or the employer's 12% that's added on top? Both exist. Both are 12%. They go to different places. One reduces the employee's take-home pay. The other increases your total employer cost.

Foreign employers reviewing Indian payroll for the first time often assume PF is like a tax withholding, something you deduct and forward. Half of it is. The other half comes straight from the company's pocket.

ESI explained: Employees' State Insurance

What ESI is

ESI is India's social insurance program covering medical expenses, sickness benefits, maternity benefits, and disability benefits for covered employees. It's administered by the Employees' State Insurance Corporation (ESIC). Both employer and employee contribute, and the covered employee gets access to ESIC hospitals, dispensaries, and cash benefits.

ESI contribution rates

The employer contributes 3.25% of gross wages. The employee contributes 0.75% of gross wages. These are the rates per ESIC's official contribution schedule, unchanged since the last revision.

On an ESI-applicable salary of ₹20,000/month, the employer pays ₹650 and the employee pays ₹150, totalling ₹800/month in ESI contributions.

ESI due date

ESI contributions must be deposited within 15 days of the last day of the calendar month to which the contribution relates, per ESIC rules. In practice, this means by the 15th of the following month. The filing is done through the ESIC portal along with the monthly contribution statement.

When ESI applies

Here's what trips up foreign employers: ESI does not apply to every employee. It applies only when the employee's gross salary is ₹21,000/month or below (per the current ESIC wage ceiling). Any employee earning above ₹21,000/month in gross wages is not covered under ESI.

For most foreign companies hiring mid-level to senior engineers in India, very few employees will fall under the ESI threshold. A software engineer earning ₹80,000/month is well above the ceiling. ESI simply does not apply to them. But if you're hiring junior roles, support staff, or operations team members at lower salary bands, ESI kicks in and both contributions become mandatory.

Once an employee's salary crosses the threshold during a contribution period, the coverage continues for the remainder of that contribution period even though they're above the ceiling. The contribution periods run April-September and October-March.

TDS on salary explained

What TDS is

TDS is tax deducted at source. Under Section 192 of the Income Tax Act, every employer paying salary is required to estimate the employee's annual taxable income, compute the income tax due, and deduct a proportional amount from each monthly salary payment. The deducted tax is deposited with the government on the employee's behalf.

The employee does not file a separate monthly tax return. The employer does the withholding, deposits the TDS, and issues Form 16 at year-end, which the employee uses to file their annual income tax return.

TDS due date

TDS deducted from salaries paid in a given month must be deposited by the 7th of the following month, per the CBDT tax calendar. April salary TDS goes to the government by May 7. This is the earliest payroll deadline each month, eight days before PF and ESI are due.

Late TDS deposit attracts interest at 1.5% per month (or part of a month) under Section 201(1A) of the Income Tax Act. And this interest is on the employer, not the employee.

Why TDS is harder than PF and ESI

PF is a flat 12%. ESI is a flat 3.25% and 0.75%. You know the rate, you apply it, you remit it. TDS does not work that way.

TDS depends on the employee's estimated annual income after all applicable deductions and exemptions. It depends on whether the employee has opted for the old tax regime (with exemptions under Section 80C, 80D, HRA, etc.) or the new tax regime (lower rates, no exemptions). It depends on whether the employee has other sources of income, prior-employer income in the same financial year, or investment declarations that change the taxable amount.

The employer is responsible for getting this estimate right. Under-deduction means the employer could face penalties. Over-deduction means the employee's cash flow is unnecessarily reduced until they file their return and claim a refund.

Salary TDS workflow

The process runs like this. At the start of the financial year (or when the employee joins), the employer collects investment declarations and proof from the employee. Based on these declarations, the employer estimates the employee's annual taxable income. The employer computes the annual tax liability under the applicable regime. That annual tax amount is divided by the remaining months in the financial year and deducted monthly.

Through the year, as the employee submits actual investment proofs (usually between January and March), the employer adjusts the monthly TDS. If the employee invested less than declared, the final months' TDS increases. If they invested more, TDS for the remaining months drops. The March salary payment often carries a heavier or lighter TDS adjustment to true up the annual total.

This is why payroll teams in India spend disproportionate time on TDS compared to other statutory components. PF and ESI are mechanical. TDS requires judgment, communication with the employee, and periodic recalculation.

Professional tax by state: why India payroll is not uniform

Professional tax is a state-level tax, not a national one. The Constitution of India allows states to levy professional tax, capped at ₹2,500/year per individual. But the rates, slabs, filing frequencies, and collection mechanisms differ by state. This is one of the reasons you cannot run a single payroll template across all Indian states.

Karnataka

Karnataka's professional tax is relatively simple. For salaried employees earning above ₹15,000/month, the employer deducts ₹200/month for eleven months and ₹300 in February, bringing the annual total to ₹2,500 (the constitutional cap). The deduction and filing happen through the Karnataka Commercial Taxes portal.

Straightforward. One rate, one adjustment month, no slabs.

Maharashtra

Maharashtra uses a slab-based system. The rates depend on the employee's monthly salary bracket, with different amounts for different income bands, filed through the MAHAGST portal. Employees earning above ₹10,000/month pay professional tax, but the amount varies. Men and women have had different rates historically (women earning up to ₹25,000/month were exempt under previous rules, though this has been updated). The slab structure makes Maharashtra PT marginally more complex to implement than Karnataka's flat approach.

Telangana

Telangana's professional tax is governed by the Telangana Tax on Professions, Trades, Callings and Employments Act, 1987, administered through the state's Commercial Taxes Department. The rates are slab-based, similar to Maharashtra's approach but with Telangana-specific brackets. Employees earning above ₹15,000/month pay ₹200/month, with the February payment at ₹300 to hit the ₹2,500 annual cap.

What foreign companies should take away

PT is a small amount per employee, about ₹200/month in most states. But the operational complexity is real. Each state has its own portal, its own filing frequency, its own registration requirements, and its own penalty structure for non-compliance. A company with employees in Bangalore, Mumbai, and Hyderabad is dealing with three separate PT regimes.

This is one of the quiet reasons payroll outsourcing or EOR makes sense for multi-state India operations. The per-employee tax amount is tiny. The administrative overhead of staying compliant across four states is not.

Monthly filing calendar for India payroll

Every month, India payroll has three hard deadlines and one variable one. Miss any of them, and penalties or interest charges kick in automatically.

By the 7th: TDS deposit

TDS deducted from salaries in the previous month must be deposited with the government by the 7th. Filed via the Income Tax e-filing portal, paid through authorized bank challans. This is the first deadline each month and the one that carries the steepest interest penalty for delays (1.5% per month per Section 201(1A), Income Tax Act).

By the 15th: EPF and ESI remittance

Both EPF and ESI contributions (employer and employee portions) for the previous month must be remitted by the 15th. EPF goes through EPFO's Unified Portal. ESI goes through the ESIC portal. These are separate filings to separate agencies with separate login credentials.

Late EPF remittance carries penal damages under EPFO Section 14B. Late ESI carries a penalty of 12% annual interest on unpaid contributions.

State PT timeline

Professional tax filing timelines vary by state. Some states require monthly filing, others accept quarterly filing. Karnataka allows monthly deposit with annual return filing. Maharashtra requires monthly challan payment. The key point: PT deadlines do not align neatly with PF and TDS deadlines, so payroll teams track them separately.

Why payroll teams need a recurring checklist

Four different government portals. Four different sets of credentials. Four different penalty structures. And this repeats every single month for every employee. Foreign employers who handle this manually with a small team find that the operational burden grows faster than headcount. Kaamwork runs this entire cycle for every employee under its EOR model, which is why the flat $599/month fee exists instead of charging per-transaction.

Real payroll calculation examples

Theory is useful. Numbers are better. Here are three worked examples showing exactly how India payroll math plays out.

Example 1: mid-level employee in Bangalore (₹80,000/month gross)

Assumptions: basic salary at 50% of gross (₹40,000), HRA and other allowances making up the rest. Employee is under the new tax regime. ESI does not apply (gross exceeds ₹21,000 threshold). Location: Karnataka.

Employee deductions (from gross):

Employer costs (on top of gross):

The employee sees ₹69,800 in their bank account. The employer pays about ₹86,900, actually closer to ₹87,500 once you add medical insurance premiums, which most EOR providers bundle. That's a roughly 9% gap between gross salary and total employer cost just from statutory contributions.

Example 2: senior employee above ESI threshold (₹2,00,000/month)

Assumptions: basic salary at 50% of gross (₹1,00,000). New tax regime. Karnataka location.

Employee deductions:

Employer costs:

At higher salary levels, the statutory employer contribution as a percentage of gross drops. The ₹15,000 PF wage ceiling (when employer and employee mutually agree to restrict PF contributions) caps the PF liability. Gratuity, which is pegged to basic salary, becomes the larger statutory cost item. TDS becomes the dominant employee deduction, consuming about 16% of gross.

Example 3: same salary, different states (₹80,000/month in Karnataka vs Maharashtra vs Telangana)

Same employee, same ₹80,000/month gross. Only the state changes.

At the ₹80,000/month level, the PT differences across these three states are marginal, maybe ₹100 to ₹200 difference annually depending on slab positioning. But at lower salary levels (₹15,000-₹25,000 range), the slab differences become more noticeable, and Maharashtra's historically different treatment of male vs female employees adds another layer.

The bigger operational difference is not the rupee amount. It's the filing. Three states means three portals, three registration numbers, three compliance calendars.

The formula that governs all of this:

Gross salary - Employee PF - Employee ESI (if applicable) - TDS - Professional tax = Net take-home pay

Gross salary + Employer PF + Employer ESI (if applicable) + Gratuity accrual + Admin charges = Total employer cost

India payroll terms foreign companies commonly misunderstand

Gross salary vs net salary

Gross salary is the pre-deduction number. Net salary (take-home pay) is what arrives in the employee's bank account after PF, ESI, TDS, and PT are subtracted. The gap between these two numbers can be 15% to 30% depending on the employee's income level and tax regime. Foreign employers who promise candidates a "salary of ₹1,00,000" need to clarify whether that's gross or net, because the employee will interpret it as take-home.

CTC vs payroll cost

CTC (cost-to-company) is an Indian payroll concept that bundles gross salary with employer contributions like PF, ESI, gratuity, and sometimes medical insurance. When a candidate says their CTC is ₹15,00,000, their monthly gross is lower, perhaps ₹1,05,000 to ₹1,10,000, with the rest going to employer statutory contributions and benefits.

But CTC still does not capture everything. EOR fees, laptop procurement, learning budgets, and other operational costs sit outside CTC. Total payroll cost to the foreign employer is CTC plus these additional line items.

Deduction vs employer contribution

Deductions reduce the employee's gross to arrive at net pay. They come out of the employee's money. Employer contributions are amounts the employer pays on top of gross salary directly to government agencies or benefit funds. Both PF and ESI have employee deductions AND employer contributions. They are not the same thing, and treating them as interchangeable is how foreign employers miscalculate total payroll cost.

Salary structure vs tax withholding

Salary structure determines how total compensation is split between basic pay, HRA, special allowance, and other components. This split affects PF contribution amounts (calculated on basic), HRA tax exemption eligibility, and overall tax efficiency. Tax withholding (TDS) is a separate calculation based on estimated annual taxable income. Changing salary structure changes TDS because it changes which components are tax-exempt. The two are connected but operate on different logic.

State PT vs national payroll taxes

PF and ESI are national programs with uniform rates. Professional tax is a state-level tax with different rates, slabs, and filing procedures in each state. Foreign employers sometimes assume India has one unified payroll tax system. It doesn't. The national components (PF, ESI, TDS) are the same everywhere. The state component (PT) is different everywhere.

Payroll outsourcing vs EOR vs in-house payroll in India

Payroll outsourcing

Best for companies that already have an India entity (subsidiary, branch office, or LLP) and need help with payroll processing, statutory filings, and compliance administration. A payroll outsourcing firm processes your payroll, files returns, and generates payslips, but you remain the legal employer. Your entity holds the PF registration, ESI registration, and tax registrations. The outsourcing firm is an administrator, not the employer.

This works when you have the entity infrastructure but don't want to build or maintain an internal payroll team. Typical cost: ₹1,000 to ₹3,000 per employee per month depending on the provider and scope.

EOR (Employer of Record)

Best for companies without an India entity. The EOR is the legal employer. They own the employment contract, hold the registrations, run payroll, handle all statutory filings, and bear the compliance risk. Your company manages the employee's work. The EOR manages the employment infrastructure.

You don't need to incorporate in India. You don't need EPFO, ESIC, or TAN registrations. You don't file PF returns or deposit TDS. The EOR does all of that. Kaamwork's flat $599/month per employee covers the full compliance stack: PF, ESI, TDS, professional tax, gratuity, medical insurance, and employment contract management.

In-house payroll

Best for mature India operations with a local finance and HR team that knows Indian payroll compliance. If you have 50-plus employees, a dedicated HR lead in India, and a finance team comfortable with EPFO, ESIC, and IT portal filings, in-house payroll gives you the most control. But you also own all the compliance risk, need to stay current on regulation changes (including the post-November 2025 Labour Code updates), and handle multi-state complexity if your employees are distributed.

Which one foreign employers usually need first

If you have zero employees in India today and want to hire your first 1 to 15, EOR. No question. Setting up an entity just to hire a few people costs $15,000 to $50,000 and takes months. Payroll outsourcing requires that entity to already exist. In-house payroll requires a team to already exist.

EOR lets you start hiring in days and defer the entity decision until your India team reaches a size where entity setup makes economic sense, usually somewhere around 30 to 50 employees. And even then, some companies with 100-plus employees stay on EOR because the compliance burden, especially after the November 2025 Labour Code changes, is not worth internalizing.

Common payroll mistakes foreign companies make in India

Missing the TDS 7th deadline

The 7th-of-the-month TDS deposit deadline is the first one to hit each cycle, and it carries the most punitive interest charges. 1.5% per month on the unpaid amount per Section 201(1A) of the Income Tax Act. Foreign companies that process payroll on the 5th or 6th and then try to deposit TDS on the same day sometimes find bank processing delays push them past the deadline. Build a two-day buffer.

Treating PF and ESI as employee-only deductions

PF has an employer component and an employee component. ESI has an employer component and an employee component. Foreign employers who only account for the employee deductions in their payroll cost models are underestimating their total cost by 12% to 16% of PF wages plus 3.25% of gross (for ESI-eligible employees).

Ignoring state PT differences

Running the same payroll template for employees in Karnataka, Maharashtra, and Telangana will produce incorrect professional tax deductions in at least one state. The amounts are small. The compliance headache from incorrect filings is not.

Confusing gross with full employer cost

An employee earning ₹1,00,000/month gross does not cost ₹1,00,000/month to employ. Employer PF, ESI (if applicable), gratuity accrual, insurance, and admin charges push the true employer cost to about ₹1,12,000 to ₹1,18,000/month depending on salary structure. Foreign employers who set India hiring budgets based on gross salary will overshoot their headcount targets.

Not designing salary structure carefully

The split between basic pay, HRA, special allowance, and other components is not cosmetic. It directly affects PF contribution amounts, HRA tax exemption eligibility, gratuity liability, and overall tax efficiency for the employee. A poorly structured salary costs the employer more in PF and costs the employee more in TDS. Most EOR providers design salary structures as part of onboarding, but foreign employers running their own entity payroll sometimes use a flat structure that leaves money on the table.

Assuming one payroll template works everywhere

India is not one payroll jurisdiction. It's 28 states and 8 union territories, each with their own professional tax rules, shops and establishments regulations, and labour welfare fund requirements. A payroll template built for Bangalore does not transfer cleanly to Mumbai, Hyderabad, or Pune without PT adjustments, registration updates, and filing calendar changes.

How foreign companies should approach India payroll in 2026

India payroll has three pillars: TDS, PF/ESI, and state professional tax. Get those right every month, and you're compliant. Miss any one of them, and penalties start compounding immediately.

The hardest part is not understanding the rates. The rates are published, they're straightforward, and they don't change often. The hardest part is the monthly discipline: processing payroll early enough to hit the 7th TDS deadline, remitting PF and ESI by the 15th, filing state PT on the correct state portal with the correct registration, and doing all of this for every employee in every state, every month, without a miss.

For companies with an existing India entity and internal HR capability, this is operational blocking and tackling. For foreign companies entering India for the first time or running small teams across multiple states, the compliance overhead is disproportionate to the team size. That's the gap EOR fills.

Run your India payroll numbers through the cost calculator at to see the full employer cost breakdown for your specific team size and salary levels. Or talk to someone who can walk you through it at.

This article is for informational purposes and does not constitute legal, tax, or compliance advice. India payroll regulations are subject to change. Consult with qualified tax and legal professionals for decisions specific to your company's situation. Rates and thresholds cited are current as of April 2026 based on EPFO, ESIC, CBDT, and state government published schedules.