Although the excitement of hiring your first set of employees in India is one thing that your foreign business that is moving into India would certainly feel in the beginning, there is one more thing which comes after some time – how do you plan to pay your employees in an organized manner without having any penalty imposed on you due to non-compliance in the third month of your operation? Payroll processing for your foreign business in India is definitely not easy. This is the stage where corporate laws, labor laws, taxations and certain registrations at state level start becoming relevant for HR.
Choosing Your Entity, Documenting Employees and Structuring Salary
Before payroll management can even begin, a foreign company needs a legal entity capable of employing people in India. Most global businesses choose between a wholly owned subsidiary (private limited company), a branch office or for early-stage exploration, an Employer of Record arrangement that lets them hire without incorporating immediately. A subsidiary offers the most control and is usually the right long-term choice but it takes several weeks to incorporate, obtain a PAN and TAN and open a corporate bank account. Many foreign companies use an EOR for their first one or two hires while the subsidiary is being set up, then transition employees onto direct company payroll once registrations are complete.
Once the entity is ready, every new hire needs a clean documentation trail. This is where India payroll services for foreign companies typically add the most value, because the paperwork requirements are more granular than in most Western markets. At minimum, HR should collect and verify:
• PAN card and Aadhaar (for identity and tax purposes)
• Bank account details for salary disbursal
• Educational and previous employment certificates
• Form 12B if the employee has had prior employment income in the same financial year
• Nomination forms for provident fund and gratuity
• A signed offer letter and appointment letter that clearly states designation, compensation, and notice period
The next step is building the salary structure, formally called the Cost to Company (CTC) breakup. This is where employee payroll India differs most sharply from flat-salary markets abroad. A CTC is not just a number it is broken into basic pay, dearness allowance, house rent allowance, special allowance, employer PF contribution, gratuity and other statutory and non-statutory components. Getting this breakup right matters because it determines the base on which provident fund, gratuity and other statutory contributions are calculated. This is no longer a minor design choice. Under the new wage code framework, discussed below, the proportion of basic pay in the CTC now has direct legal consequences, not just tax implications.
Payroll Registrations, Statutory Contributions and the New Labour Codes
Before running your first payroll cycle, a foreign company must complete several registrations. These are the backbone of payroll setup for a foreign company in India and cannot be skipped or backdated easily:
• TAN (Tax Deduction and Collection Account Number) from the Income Tax Department, required to deduct and deposit TDS on salaries
• PF registration with the Employees' Provident Fund Organization (EPFO), mandatory once the company crosses 20 employees, though many companies register voluntarily from day one
• ESI registration with the Employees' State Insurance Corporation, generally mandatory once headcount crosses 10 (or 20 in some states) employees earning below the wage ceiling
• Professional tax registration, applicable in states like Maharashtra, Karnataka, West Bengal and several others, with rates and slabs varying by state
• Labour welfare fund registration, again state-specific and often overlooked by foreign entrants
• Shops and Establishments registration, the baseline state-level licence needed to operate an office and employ staff at all
With this consideration, in the current scenario, the contribution of 12% to the Provident Fund Scheme will comprise the contribution of both the employer and the employee contribution where the contribution from the employer will be split into the schemes of EPF and EPS. In relation to ESI, the deduction from the gross salary will be done by the employer and the employee at 3.25% and 0.75%, respectively, on the notified ceiling limit. Professional tax is a nominal deduction on a monthly basis and is in the few hundreds of rupees.
This is the area where HR compliance for India entry has changed the most recently and it is not something a blog written even a year ago would capture accurately. On 21st November 2025, all four codes of labour law were enacted into law by the Government of India, which are:
Labour Codes on wages, Labour Codes on industrial relations, Labour Codes on social security and Labour Codes on occupational safety, health and working conditions. All four codes of labour law replace 29 old labour laws existing for over 100 years now. Central rules under all four codes were finalised around 1 April 2026, though state-level rules are still rolling out unevenly, with states like Maharashtra, Gujarat and Karnataka furthest along and others still catching up.
The single biggest practical change for payroll is the new statutory definition of "wages" under the Code on Wages. It now requires that basic pay plus dearness allowance make up at least 50% of an employee's total CTC. If a company's current salary structure has basic pay sitting at 20–30% of CTC, which was common practice for years because it kept PF and gratuity costs lower, that structure is no longer compliant. Since PF, gratuity, bonus and leave encashment are all calculated as a percentage of wages, raising the wage base under the 50% rule can increase overall employer statutory cost by anywhere from 3% to 15%, depending on how aggressively basic pay was minimized before. Any foreign company designing its first salary structures in India right now should build the CTC breakup around this 50% rule from the outset rather than retrofitting it later. The Social Security Code also extends coverage, for the first time, to gig and platform workers, which is relevant if your India entity plans to engage contractors or delivery-style roles alongside full-time staff.
Salary TDS, Leave Rules and the Monthly Payroll Cycle
In contrast, in respect of India, all the salary payment is taxable and has come within the purview of taxation as mentioned in Section 192 of Income Tax Act. Choice between the two systems is open to the employees, where in case of old system, HRA, 80C and housing loan interest may be deducted but the slab rates have been lowered in the new system.
For FY 2025-26 and FY 2026-27, the new regime slabs remain unchanged following Budget 2026, which made no adjustments to rates. Income up to Rs. 12 lakh remains tax-free under the new tax regime, and for salaried individuals the effective tax-free limit rises to roughly Rs. 12.75 lakh after the standard deduction, with the Section 87A rebate holding at Rs. 60,000. Employer contributions to the National Pension System also got a boost, with the deductible limit for employer NPS contributions rising to 14% of basic salary under the new regime, up from 10% previously, which is a useful lever for structuring senior-employee compensation tax-efficiently. HR teams should collect investment declarations and Form 12BB proofs at the start of the year and reconcile them before issuing Form 16 at year-end, since incorrect TDS deduction is one of the most common compliance slip-ups foreign employers make in their first year.
Leave and attendance policy is the other piece that needs to be finalised before the first payroll run, since unpaid leave, encashment and attendance data feed directly into the salary calculation. Most states mandate a minimum number of earned leave, casual leave, and sick leave days, along with public holidays, and these vary by state Shops and Establishments Act. The encashment of leave and earned leaves, both are also affected by the new definition of wages. Thus, all those policies which had been developed before April 2026 should be revised because of the change in the law.
After completion of the employee registration, salary structure formation and payroll taxes, the payroll process of each month takes the following general route: attendance and leave data collection, dealing with the variable pay, net-to-gross payroll process, PF, ESI, Professional Tax and TDS calculations, generation of payslip, salary payment (end of month usually), and lastly filing of PF/ESI Challans, payment of professional tax and TDS. The delay in filing of these returns is also punishable with interest, thus, many multinational companies prefer running their payroll cycles through Indian payroll management firms.
First-Payroll Checklist and Final Thoughts
Before processing your first salary in India, confirm the following are in place: entity incorporation and PAN/TAN, PF and ESI registration where applicable, professional tax and Shops and Establishments registration in every state you employ people, a CTC structure aligned with the 50% wage rule, signed offer and appointment letters, investment declarations collected for TDS calculation and a leave policy reviewed against current state rules. It is also worth building a simple compliance calendar covering PF, ESI, professional tax and TDS due dates, since these fall on different days of the month and are easy to lose track of in the first few payroll cycles.
Setting up payroll and HR for a first India hire is genuinely more involved than in most markets foreign companies are used to and the recent overhaul of India's labour codes means the rules are still settling even for domestic employers. But none of it is unmanageable once the sequence is clear get the entity and registrations right first, design a compliant salary structure around the new 50% wage rule, get TDS and statutory contributions correct from the very first payslip and build a repeatable monthly workflow rather than reinventing the process every cycle. Companies that get this foundation right in their first quarter of India operations tend to avoid the compliance headaches that catch up with those who treat payroll as an afterthought. Given how much has shifted with the new labour codes since late 2025, it is worth a final compliance review with an India payroll or legal advisor before your very first payroll run, just to confirm state-specific rules in your city have caught up with the central framework.