Payroll in India: The Complete 2026 Guide for US Companies 

This is the single most important update to payroll in India in over a decade, and it’s the part most generic payroll guides still haven’t caught up with.

On November 21, 2025, the Indian government brought into force four consolidated Labour Codes, replacing 29 separate central labour laws with a single, more uniform framework. If a payroll guide you’re reading doesn’t mention this, it’s already out of date.

The change with the biggest payroll impact: the 50% wage rule

For US employers, the 50% wage rule is one of the most important payroll changes introduced under India’s Labour Codes. It doesn’t necessarily increase an employee’s salary, but it can increase employer obligations for Provident Fund (PF), gratuity, and other statutory benefits. The infographic above explains why this matters when budgeting for India-based employees.

India Wage Base Rule (Code on Wages, 2019, effective November 21, 2025)

If Basic Pay + Dearness Allowance < 50% of total CTC,
 then the statutory wage base = 50% of total CTC

This wage base governs Provident Fund (PF) contributions, gratuity, retrenchment compensation, overtime, and notice pay calculations for all employees in India.

Source: Code on Wages, 2019, Section 2(y) — Ministry of Labour & Employment, Government of India

Before this rule, many Indian employers (and EOR providers) kept basic pay artificially low, often 30–35% of CTC, to reduce PF and gratuity outflow. That approach no longer produces the intended outcome: if excluded components (HRA, special allowances, employer PF) exceed 50% of total remuneration, the excess is added back into the wage base automatically.

A point worth being precise about: this is a deeming provision for statutory computation, not a blanket mandate to physically rewrite every salary structure to a literal 50/50 split. The 50% threshold governs how wages are computed for PF, gratuity, and retrenchment purposes, not the contractual breakup itself. In practice, since the Ministry confirms “total remuneration” means full CTC, most companies restructure anyway to avoid a mismatch between contractual CTC and statutory wage base.

Gratuity eligibility dropped from 5 years to 1 year for fixed-term hires

This is the change most US companies miss entirely. 

Previously, gratuity, a lump-sum payout (roughly 15 days’ wages per year of service), was owed only after 5 years of continuous service. 

Under the Code on Social Security, fixed-term employees now qualify for pro-rata gratuity after just 1 year. If your India team includes project-based or contract-length hires, this directly changes your cost-per-hire math, even for short engagements.

Statutory Payroll Deductions in India: PF, ESI, PT, and TDS Explained

These four deductions form the backbone of payroll compliance in India. Every one of them has a US-equivalent concept, but none of them work quite the same way.

While each statutory deduction has a rough equivalent in the United States, payroll compliance in India combines multiple labour laws, social security contributions, tax deductions, and recurring statutory filings into a much more regulated framework. The comparison below highlights why payroll administration in India requires a different compliance approach than payroll in the US. 

For US employers, the biggest shift is that payroll in India is not just about paying employees. It also requires continuous compliance with labour laws, statutory deductions, employee benefits, and government filing obligations throughout the employment lifecycle. 

Provident Fund (PF) — India’smandatory 401(k)

PF approximates a 401(k), except it isn’t optional. 

• Under the Employees’ Provident Fund scheme, both employer and employee contribute 12% of basic salary plus dearness allowance each month into a retirement fund managed by the Employees’ Provident Fund Organisation (EPFO). 
• The employer’s share splits into 3.67% toward the EPF account and 8.33% toward the Employee Pension Scheme (EPS). 
• PF registration is mandatory for any establishment with 20 or more employees.

Employees’ State Insurance (ESI) — closer to subsidized national healthcare

ESI approximates a government health insurance scheme. 

• It applies to employees earning at or below the statutory wage ceiling and is funded by a 3.25% employer contribution and 0.75% employee contribution on gross wages. 
• ESI covers medical care, maternity, and disability benefits through ESIC-run hospitals and dispensaries. 
• Most software, IT services, and knowledge-work hires earn above the ESI ceiling and won’t be covered by it, which is why most US companies hiring engineers and senior professionals add private group health insurance as a market-standard benefit instead.

Professional Tax (PT) — a state-level tax with no US parallel

PT has no real US equivalent; it’s the closest thing India has to a state income surcharge, but it’s a flat or slab-based monthly deduction rather than a percentage of income. 

It is levied by individual state governments, typically ₹150 to ₹300 per month, and not every state charges it, states like Delhi and Haryana levy no Professional Tax at all, meaning an employee there owes zero PT regardless of salary. 

This is the deduction that most often trips up US companies with employees spread across multiple Indian states, because the rate, slab, and filing frequency genuinely differ state by state.

Tax Deducted at Source (TDS) — India’s withholding tax

• TDS approximates US federal income tax withholding. 
• The employer withholds income tax monthly based on the employee’s projected annual income and declared exemptions, then deposits it with the Income Tax Department. 
• Employees choose between the old tax regime (more exemptions, higher slab rates) and the new regime (fewer exemptions, lower slab rates) each year, and the employer must apply whichever the employee has declared.

Form 16 Is Becoming Form 130: The Income Tax Act 2025 Renumbering

This is a detail almost no payroll guide currently covers, and it will affect every payslip and tax certificate issued from Tax Year 2026-27 onward (income earned from April 1, 2026). 

The Income-tax Act, 2025 replaced the 60-year-old Income-tax Act, 1961, effective April 1, 2026, and as part of that transition, the government renumbered the TDS forms every payroll team has used for decades.

Here’s the form mapping that will take effect once Tax Year 2026-27 filings begin:

Salary Structure in India: How CTC Actually Breaks Down

One of the biggest misconceptions US employers have is comparing a US base salary with an Indian Cost to Company (CTC). These are not equivalent. In the US, compensation is typically presented as base salary with benefits listed separately. In India, CTC represents the employer’s total annual cost and includes several statutory and employer-paid components. Understanding this difference is essential for accurate budgeting and salary benchmarking.

The comparison above shows why CTC should be viewed as the total employer investment rather than an employee’s take-home salary. Components such as Provident Fund, gratuity, and statutory benefits are built into the employer’s annual cost in India, whereas similar costs are often budgeted separately in the United States. This distinction helps US finance and HR teams compare employment costs on an equivalent basis and avoid underestimating payroll budgets. 

Indian employers quote compensation as Cost-to-Company (CTC), a single number that bundles in every cost the employer bears, not just take-home pay. 

This differs from a US offer letter, which typically states only base salary and lists benefits separately. 

A US founder seeing an India offer for the first time often assumes CTC is take-home pay; it isn’t, take-home is meaningfully lower once statutory deductions and PF are applied.

Typical Indian CTC structure under the post-November 2025 wage rules. Source: Husys client salary structuring data, 2026, cross-checked against the Code on Wages, 2019 50% basic-pay provision.

Once you understand how payroll works in India and how compensation is structured, the next question is financial: What will it actually cost to hire employees in India? While salaries are significantly lower than in the United States, the real comparison should include statutory employer contributions, payroll administration, compliance obligations, and hiring infrastructure. The dashboard below compares the total employer cost for common roles, helping finance leaders evaluate the business case for expanding into India. 

Comparison highlights that the advantage of hiring in India extends beyond lower salaries. US companies also benefit from lower statutory employment costs, faster onboarding through an Employer of Record (EOR), and reduced administrative overhead. Evaluating the total employer cost, not just base salary, provides a more accurate foundation for workforce planning and expansion decisions. 

What Hiring in India Actually Costs vs. the US

This is the number every US CFO actually wants. Below is a direct comparison using Glassdoor’s 2026 US averages against typical India compensation for the same roles, delivered through an EOR model (salary plus statutory employer cost plus EOR platform fee).

Glassdoor US salary data (2026); Husys client compensation benchmarking, cross-referenced with AmbitionBox and Naukri India salary data.

Take the full stack developer line specifically, since it’s the comparison US founders ask about most. According to  Glassdoor’s 2026 US salary data, the average US full stack developer salary sits at roughly $118,868 per year, with a typical range of $92,000 to $155,000.

The same skill set in India, hired through an EOR with full statutory compliance built in, typically lands between $18,000 and $28,000 in total annual employer cost depending on experience level and city, a reduction in the 70-80% range, even after adding PF, gratuity, ESI where applicable, and the EOR’s platform fee.

Payroll in India by Company Stage: Two Real Scenarios

Scenario 1: An early-stage founder (11-50 employees)

• For a founder running an 11-50 person SaaS, fintech, or health-tech startup, payroll in India is rarely worth building in-house expertise for. 
• At this stage, most founders are optimizing for survival and product velocity, not for owning every HR function. 
• Outsourcing India payroll to an EOR like Husys removes a function that has no strategic upside for a 15-person team and would otherwise consume founder or early-ops-hire time every single month on filings most founders have never seen before.

Scenario 2: A VP of Finance at a mid-size software company (51-200 employees)

• For a VP of Finance evaluating India as an engineering hub for a 51-200 person B2B SaaS or enterprise software company, the EOR model at $99 per employee per month becomes a budgeting-line decision rather than a strategic one. 
• The math is straightforward: a full stack developer with comparable experience costs roughly $120,000 per year in the US versus roughly $20,000 in India for the same skill set, a savings most mid-size companies report in the 65-70% range once total employer cost is compared like-for-like. 
• At this team size, predictable per-employee pricing with no hidden setup fees matters more than at the founder stage, because the finance team is now forecasting India headcount cost across budget cycles, not just approving a single hire.