Indian Payroll Service for Foreign Companies: Compliance Made Simple

Payroll services in India are not a single national system; they operate at the central, state and sector levels simultaneously, making India one of the most compliance-intensive payroll structuring that any foreign company will come across.

For foreign companies hiring in India for the first time, this complexity is rarely visible until the first missed deadline triggers a penalty notice. This guide is written to change that, giving you a complete picture of what India payroll management involves, what the 2025 labor codes changes are, and how to run it compliantly from day one without getting buried in registration and filings.

Vandey Global has been managing payroll services in India for foreign companies since 2017, ISO 9001:2015 certified, with 600+ professionals onboarded and 50+ international clients across Israel, Portugal, Poland and Lithuania.

Why India Payroll Is More Complex Than Most Foreign Companies Expect

Most foreign companies entering India assume payroll is simple: agree on a salary, transfer funds and done. No, that assumption is quite expensive. India’s compliance framework is not confined to one rulebook; it is three-layered on top of each other, all with independent deadlines and penalties.

The cost of errors is solid and immediate. Miss a TDS remittance by one month, and you owe 1.5% interest per month on the outstanding amount for every affected employee. Miss the PF deposit deadline and interest accrues at 12% per annum under Section 14B of the EPF & Miscellaneous Provisions Act, plus damages that can reach 25-100% of the arrears depending on the duration of the default.

Now, for a team of 20 employees, a single missed deadline costs ₹8,000+ in interest charges, aligned before any formal penalties are applied.

The Three-Level Compliance Framework Every Foreign Employer Must Understand

India’s payroll compliance framework operates at three different levels altogether, and each requires separate registrations, filings and deadlines:

• Central level: EPF and ESI are administered by central government bodies (EPFO and ESIC) and apply nationwide with uniform rates, EPF at 12% employer + 12% employee of basic salary, ESI at 3.25% employer + 0.75% employee for employees earning ≤ ₹21,000/month. TDS is governed by the Income Tax Act and remitted to the central government by the 7th of each following month.
• State level: Professional Tax is state-specific and varies materially. Karnataka (Bengaluru) charges ₹2,400/year with a revised exemption threshold of ₹25,000/month under the 2025 Amendment Act. Maharashtra (Pune/Mumbai) charges ₹2,500/year. Delhi and Haryana: not applicable. The Shops & Establishments Act also varies by state. The registration requirements, working hour limits, and leave policies for your Bengaluru team are governed by Karnataka law, not the same rules that apply to your Mumbai team.
• Sector level: Certain industries carry additional compliance layers. The Karnataka Shops & Commercial Establishments (Amendment) Act, for example, extended its scope to IT and ITeS companies, adding specific requirements around working hours, women's night shift employment, and employment registers that don't apply uniformly across all sectors or all states. A foreign company hiring IT professionals in Bengaluru faces a different compliance stack than one hiring operations staff in Hyderabad.

What Does India Payroll Management Actually Cover?

A compliant payroll services setup in India must be capable enough to manage every statutory obligation attached to employment, and not just salary disbursement. Here is the complete breakdown:

Note: Form references are subject to Income Tax Act 2025 amendments effective April 2026. Vandey's compliance team tracks all regulatory updates in real time.

India payroll management also covers: salary structure design, compliance payslip generation, Form 24Q quarterly TDS returns, Form 6 issuance to employees annually, and Full & Final Settlement processing on employee exit, including notice pay calculation, leave encashment, gratuity disbursement, and PF settlement.

Further Reading: Payroll Advance Guide: How It Works, Rules & Setup

How the 2025 Labour Codes Changed India Payroll, And What It Means for Foreign Companies

All four Labor Codes, covering Wages, Industrial Relations, Social Security and Occupational Safety, came into legal force on November 21, 2025, consolidating 29 previously fragmented statutes. Two specific changes directly affect payroll costs for every employer in India.

The 50% Wage Rule and Its Direct Impact on Payroll Costs

Basic salary plus Dearness Allowance must now constitute at least 50% of total CTC. This matters because both EPF and gratuity are calculated on basic salary, so restructuring CTC to comply directly increases statutory costs.

Let’s understand this by taking a practical example: a ₹1,00,000/month CTC employee. Under the previously common 30% basic structure, basic salary = ₹30,000 - monthly employer EPF contribution = ₹3,600. Under the new 50% structure, basic = ₹50,000 - monthly employer EPF contribution = ₹6,000.

The EPF cost alone increases by ₹2,400/month. Add the proportional increase in gratuity provisioning (~₹962/month additional), and the combined monthly statutory cost increase is approximately ₹3,362 - or ₹40,344 per year, per employee affected.

Any payroll services provider in India must have already restructured salary templates to reflect the 50% wage rule. Ask them directly: "Have you updated all employment contracts and payroll calculations to reflect the 2025 Labour Code wage definition?" The answer will tell you everything.

Gratuity From Year One for Fixed-Term Employees

Under the new Labor Codes, gratuity accrues from year one for fixed-term workers, down from the previous five-year threshold. The provisioning formula is: (last drawn basic salary × 15) ÷ 26 × years of service.

For a ₹50,000 basic salary employee on a fixed-term contract, year-one gratuity liability = ₹28,846. This must be provisioned from month one in the payroll system, not recognised at the point of exit.

Foreign companies using legacy payroll setups or global platforms that have not updated their India gratuity logic are carrying an underprovided liability that compounds with each month of non-accrual. A compliant india payroll outsourcing provider will have corrected this from November 21, 2025, onwards.

India Payroll Outsourcing vs. Managing Payroll In-House: What Makes Sense for Foreign Companies?

For a foreign company hiring 1-15 employees in India, managing payroll in-house without a local entity is not just complex but often structurally impossible without disproportionate setup overhead.

Managing in-house without an entity requires: obtaining a TAN (Tax Deduction Account Number, 7-10 working days), EPF registration (3-7 working days after document submission), ESI registration, Professional Tax registration in every state where employees work, a local payroll accountant or compliance manager, and continuous monitoring of regulatory updates, including the 2025 Labor Code changes. For 1-10 employees, this infrastructure costs more to build and maintain than the payroll it runs.

India payroll outsourcing through a specialist provider eliminates this completely. Each registration runs the provider’s existing codes. Payroll is processed on time every month. Salary structures are updated to reflect the 50% wage rule. Gratuity accrues from month one for fixed-term hires. A single monthly invoice replaces the entire compliance operations layer.

For foreign companies without an Indian entity, payroll outsourcing in India is not just convenient; it is the only practical solution to running a compliant payroll from day one.

At Vandey Global, India payroll management is managed by a dedicated in-house compliance team and not a third-party partner or aggregator. When the 2025 Labour Codes came into force, our team updated salary templates, recalculated EPF liabilities, and began provisioning gratuities for all fixed-term employees on the same day. That is what in-house means.

Important Reading: Things You Should Know Before Switching Payroll Providers in 2026

Multi-State Payroll in India: The Complexity Most Companies Underestimate

The state in which your employees work, not where your company or EOR is registered, determines which state-level compliance applies. A foreign company with employees in three Indian cities is not managing a single payroll stack. It is managing three.

• Bengaluru (Karnataka): Karnataka Shops & Commercial Establishments Act. Professional Tax: ₹2,400/year (exemption below ₹25,000/month). Karnataka state minimum wages apply.
• Mumbai or Pune (Maharashtra): Maharashtra Shops & Establishments Act. Professional Tax: ₹2,500/year. Maharashtra's minimum wages apply and differ from Karnataka's.
• Delhi vs. Gurgaon (NCR): Delhi Shops & Establishments Act applies to Delhi employees. Professional Tax: not applicable in Delhi or Haryana. For employees based in Gurgaon, it is Haryana's minimum wages that apply, not Delhi rates. Many foreign companies assume Delhi compliance covers the entire NCR. It does not.

A compliant payroll services India provider must hold its own registrations in every state where its employees work, not just where its head office sits. This is the most common gap in global EOR platforms that operate through local aggregators. The aggregator may be registered in one state and file everything under that registration, creating compliance exposure in every other state where your employees are actually located/

Vandey Global manages multi-state India payroll management under its own registrations across all major hiring cities in India, including Bengaluru, Pune, Mumbai, Hyderabad, Delhi and Gurgaon. No aggregators. No coverage gaps.

How to Run Payroll in India Without Setting Up an Entity

For foreign companies without a registered Indian entity, there are two compliant payroll structures. The right one depends on our headcount, timelines and long-term India commitment.

EOR-based payroll outsourcing: The Employer of Record is the registered legal employer in india. All payroll runs under the EOR’s PAN, TAN, EPF, and ESI registrations; your foreign company needs none of them. So, you pay one monthly invoice covering salary, statutory contributions and the EOR service fee. For a single state hire, Vandey Global typically completes the full onboarding from contract issuance, statutory registrations, and first payroll processing, within 7-10 business days. This is the model that makes global hiring india operationally simple and with zero entity overhead.

Entity-based payroll: Once you have incorporated a Private Limited Company in India, a process that takes 6–12 months and costs $16,000–$32,000+ in first-year legal and registration fees, you can run payroll directly or outsource to a payroll services provider under your own registrations. This structure only makes financial sense at 15–20+ employees, when EOR fees approach entity maintenance costs.

At Vandey Global, we provide EOR-based payroll service in India through GreytHR (India's leading statutory payroll platform) with Bajaj Allianz Corporate Health Insurance integrated from day one. ISO SO 9001:2015 certified, India-first and operations since 2017, with compliance partnerships with Grant Thornton and ALMT Legal. For Israel-based companies specifically, Vandey has the deepest India-Israel employment track record of any EOR provider in the market.

Conclusion: Getting India Payroll Right From Day One

India payroll is not really a monthly task; it is a compliance system that operates at three levels, updates with every regulatory change, and carries real financial consequences for errors. The 2025 Labour Codes have made that system more demanding: the 50% wage rule has increased EPF and gratuity costs by an average of ₹3,362/month per affected employee, and gratuity now accrues from year one for fixed-term workers.

For foreign companies looking to hire employees in India compliantly and without entity setup overhead and without the risk of multi-state compliance gaps, the fastest and most reliable route is through a specialist payroll services india provider that already has the registrations, the in-house compliance expertise, and the updated payroll methodology in place.

Here are some key deadlines to keep in mind: TDS remittance by the 7th of each month, EPF and ESI by the 15th, Professional Tax filing by state-specific deadlines, Form 16 issuance annually, and gratuity provisioning from month one for all fixed-term hires under the new Labour Codes.

Ready to run compliant payroll in India from day one? Vandey Global's payroll services are built for exactly this: India-first, fully managed, and updated for the 2025 Labour Codes. Contact Vandey Global to get your India payroll structure in place within 7–10 business days.

Not ready to engage yet? Download our India Payroll Compliance Checklist 2025, covering every statutory obligation, filing deadline, state-specific requirement, and 2025 Labour Code update, your payroll setup must reflect.

FAQS

What is included in payroll services in India for foreign companies?

Indian payroll services include salary processing, TDS deductions, EPF and ESI compliance, Professional Tax filing, payslips, Form 16, payroll filings, and employee settlements. EOR providers also handle these compliances under their own registrations.

Can a foreign company run payroll in India without setting up a legal entity?

Yes, of course. Foreign companies can use an Employer of Record (EOR) to legally hire employees and manage payroll in India without opening a local entity.

What are the mandatory statutory contributions employers must make in India?

Key employer contributions include EPF (12% of basic salary), ESI (3.25% for eligible employees), TDS, gratuity, Professional Tax, and statutory bonus, depending on employee eligibility and state laws.

How do the 2025 Labour Codes affect payroll processing in India?

The 2025 Labour Codes require basic salary to be at least 50% of total CTC and mandate gratuity benefits for fixed-term employees from year one, increasing payroll compliance requirements.

Does a payroll provider need separate registrations for each Indian state?

Yes. Payroll compliance in India is state-specific. Providers need registrations based on the employee's work location to comply with local labor laws, Professional Tax, and Shops & Establishments regulations.