For foreign companies operating in India, payroll is one of the fastest areas where compliance gaps turn into notices, penalties, and employee dissatisfaction. India payroll is not just salary processing. It involves multiple statutory registrations, recurring filings, tax withholding, and labour law alignment.
This guide explains how to set up payroll correctly, what statutory deductions apply, and a practical monthly checklist that finance and HR teams can follow.
Step 1 Set Up Payroll the Right Way
1 Choose the employing entity
Payroll compliance depends on whether you are operating through a private limited subsidiary, LLP, branch office, or project office. The employing entity determines registrations, signatories, and reporting.
2 Create a compliant salary structure
A salary structure should be designed to balance compliance, employee expectations, and cost predictability. Key components typically include:
- Basic salary
- House rent allowance where applicable
- Special allowance
- Employer and employee PF
- Employer and employee ESI where applicable
- Gratuity provision
- Bonus where applicable
- Reimbursements and allowances as per policy
3 Define payroll policies
Document clear policies for:
- Pay cycle and cut off dates
- Leave and attendance rules n- Overtime and shift allowances where applicable
- Reimbursements and expense claims
- Variable pay and incentives
- Full and final settlement
4 Build payroll master data
Maintain accurate employee master data including:
- PAN, Aadhaar, bank details
- Address and contact details
- Date of joining, designation, department
- Salary structure and effective date
- PF UAN and ESI IP number where applicable
- Investment declarations and proofs for TDS
Step 2 Understand Statutory Deductions and Compliance
1 Provident Fund EPF
EPF is a retirement benefit scheme. Applicability depends on establishment coverage and employee eligibility.
Key compliance actions:
- PF registration and establishment code
- UAN creation and linking
- Monthly ECR filing and payment
- Proper wage definition and contribution calculation
2 Employees State Insurance ESI
ESI provides medical and cash benefits for eligible employees.
Key compliance actions:
- ESI registration and employer code
- Monthly contribution calculation
- Monthly filing and payment
- Employee onboarding in ESIC portal
3 Professional Tax PT
Professional tax is a state level tax and rules vary by state.
Key compliance actions:
- PT registration in applicable state
- Monthly or quarterly payment as per state rules
- Periodic returns filing
4 Labour Welfare Fund LWF
LWF is applicable in certain states with periodic contributions.
Key compliance actions:
- Identify state applicability
- Deduct and deposit as per schedule
- Maintain records for audit
5 TDS on Salary
Employers must deduct income tax at source on salary based on employee declarations and proof submissions.
Key compliance actions:
- Compute annual taxable income per employee
- Consider regime selection old or new as applicable
- Deduct monthly TDS and deposit within due dates
- File quarterly Form 24Q
- Issue Form 16 annually
Step 3 Monthly Payroll Checklist
Use this checklist every month to keep payroll clean and defensible.
Pre payroll
1 Freeze attendance and leave data 2 Validate new joiners and exits 3 Confirm salary revisions and variable payouts 4 Collect reimbursement claims as per policy 5 Validate employee declarations for TDS
Payroll processing
1 Run payroll computation and deductions 2 Validate PF ESI PT LWF calculations 3 Review TDS working and variance vs prior month 4 Generate salary register and payslips 5 Obtain maker checker approvals
Post payroll
1 Upload bank transfer file and execute salary payments 2 Deposit PF contributions and file ECR 3 Deposit ESI contributions 4 Deposit PT and LWF where due 5 Deposit TDS on salary and generate challans 6 Post payroll accounting entries and reconcile
Reporting and records
1 Maintain payroll working papers and approvals 2 Update employee master and statutory IDs 3 Maintain statutory registers and supporting documents 4 Prepare monthly payroll MIS for management
Common Payroll Compliance Risks
- Incorrect PF wage definition leading to short contribution
- Missing PT registration for a new state location
- TDS miscalculation due to late proof collection
- Non alignment between payroll and employment contracts
- Poor documentation for reimbursements and allowances
- Delays in depositing statutory dues
How Perfect Accounting Can Help
Perfect Accounting and Shared Services supports end to end payroll compliance for foreign and Indian businesses:
- Payroll setup and salary structure design
- PF ESI PT registrations and monthly compliance
- TDS on salary computation, Form 24Q, Form 16
- Payroll processing and maker checker controls
- Employment law alignment and documentation support
- Payroll MIS and audit ready working papers
Conclusion
A compliant payroll system in India requires the right setup, accurate statutory deductions, and disciplined monthly execution. For foreign companies, getting payroll right from day one reduces compliance risk, improves employee experience, and supports scalable hiring.
If you want a structured payroll process with strong controls and complete statutory compliance, Perfect Accounting and Shared Services can help you implement and run payroll smoothly.