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What is Payroll Taxes? Importance & Calculations for Employers in India

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Team sumHR
March 13, 2023

Navigating the intricate tax system may be challenging for companies operating in India. The primary challenge for any company is that they must agree to obey Indian income tax laws, including individual income taxes (IIT) for employees in India, social security fees, VAT, withholding tax, business tax, and permanent establishment issues.

The employer deducts payroll taxes from an employee's salary with the help of Human Resource Management. Payroll income taxes are frequently deducted from an employee's compensation as a modest percentage. These taxes are used for several purposes, including social security and employee health insurance. Employers withhold the money and then transmit taxes to the appropriate government authorities. 

Types of Payroll Taxes in India

Every employee must pay TDS, or income tax is the primary professional tax. In addition, companies and Human Resource Management must comply with several deductions and rules. We have covered all the information you might require. 

1. Income Tax

Payroll taxes must be paid in India by every individual with a source of income, including Hindu Undivided Families, individuals, businesses, and other entities. Additionally, professional taxes owed on capital gains, business profits, and income from other sources, such as gambling, dividends, etc., must be paid by every salaried employee in India. 

Every person may have a different tax slab depending on the new and old tax regimes. TDS is often withheld at the source based on the tax bracket. Employees can receive a portion of this payroll tax by filing ITR reports based on their exemptions and deductions. 

2. Social Securities

There are several payroll schemes in India, including health insurance, pension plans, gratuities, etc. Social security is also a part of these schemes. A payroll-based pension contribution is known as the Employees' Provident Fund (EPF) Scheme. The employer and the employee contribute to the EPF based on their incomes. 

National Health Services are also included in the Indian payroll. These programmes do not provide employees with free medical attention or health insurance premiums. It provides money for maternity, illness, and other expenses.

According to compliance regulations, females are required to take 12 weeks of maternity leave before and after the birth of the kid.

When salaried employees have worked for one firm for more than five years in India, the gratuity is subtracted from payroll taxes. Employees receive 15 days of additional pay each year they work for the same employer. 

3. Employer and Employee Contributions 

Both the employee and the employer make various contributions to payroll in India. Employers with 20 or more workers must make Employee Provident Fund and Employee Pension Scheme contributions. Any firm with ten or more workers is required to pay into the Employee State insurance. The employee and the employer make the above deductions or payments at differing rates. Here are the specifics of employer payroll taxes: 

  • No taxes on income earned between INR 0.0 and INR 2.5 lakhs: this slab comes under tax exemption.
  • If income is between INR 2.5 lakhs and INR 5 lakhs: a 5% tax is applicable.
  • If income exceeds INR 5 lakhs but is less than INR 10 lakhs: 20% tax is applicable.
  • If income exceeds INR 10 lakhs: 30% tax is applicable.

4. Minimum Wage

A minimum wage statute in India, i.e., the Minimum Wages Act 1948, governs wage-related laws and regulations. Every job function has a minimum payment prescribed under the act based on employment and other categories. Employers must refer to the rule regarding the different types of employment.

5. Working Hours and Leave

According to payroll regulations, the typical working day for each employee in India is nine hours or 48 hours per week. Any hour worked above this is considered overtime and paid at double the standard pay rate in some companies. 15 paid leaves are provided to one employee in a single year. As a result of national holidays, there are several additional leaves. Over this, paid leaves might be taken.

Income Tax Slab According to Employee Salary 

In India, a new tax system/regime known as 115BAC has come into effect. It is optional for the taxpayer to pay taxes according to the new or old regime. Taxpayers may have already made one of the two choices when submitting their ITR returns. Although the system lowers taxes, some employee exemptions are not available. Below are the tax slabs as per section 115 BAC:

No taxes on income earned between INR 0.0 and INR 2.5 lakhs per year: this slab comes under basic tax exemption.

  • If annual income exceeds INR 2.5 lakhs and below INR 5 lakhs: a 5% tax is applicable.
  • If annual income exceeds INR 5 lakhs and below INR 7.5 lakhs: a 10% tax is applicable.
  • If income is between INR 7.5 lakhs and INR 10 lakhs: 15% tax is applicable.
  • If income is between INR 10 lakhs and INR 12.50 lakhs: 20% tax is applicable.
  • If income is between INR 12.5 lakhs and INR 15 lakhs: 25% tax is applicable.
  • If income exceeds 15 lakhs: a 30% tax is applicable.

We must bear in mind a few points about the new tax system:  

  • Individuals up to 60 years old, 60 to 80 years old (senior citizen), and above 80 years old (super senior citizen) all fall under the same tax brackets. 
  • According to section 87A, a rebate of INR 12,500 is available to anyone with an income of less than or equal to INR 5 lakhs. 
  • There will be no tax due. 
  • INR 2.5 lakh is the fundamental exemption threshold for NRIs.

Requirements for Adopting the New Tax System 

Any taxpayer may utilise the new system, although they may have to give up several deductions previously permitted under the old system. Here are a few significant deductions that have been eliminated from the current system out of the roughly 70 that were included:

  • Allowance for housing rent 
  • Allowance on leave travel 
  • Allowance for conveyance 
  • Allowance for assistance 
  • Allowance for relocation 
  • Allowance for children's education 
  • Standard deduction of salary u/s 24 
  • Interest on a housing loan 
  • Professional tax 

Which Tax Regime Is Better? 

Many taxpayers benefit from the new system. However, it is thought that this tax regime may be most advantageous to taxpayers earning under INR 15 lakh yearly. Naturally, heavy taxpayers would gain more under the previous system. If you meet the following requirements, you should think about switching to the new tax system: 

  • You have a limited investment portfolio.
  • You refuse to opt for income tax deductions.

The previous system, however, can be advantageous if you have a favourable income tax deduction plan in place, such as insurance, Mediclaim, etc. With wise investments and deductions, the previous tax system may help you lower your tax obligation. 

As a result, choose an income tax returns regime that lowers your tax burden after thoroughly studying and understanding the requirements and advantages. Before submitting the return or choosing a regime, it can be prudent to determine the tax payable under both regimes. 

Why Are Payroll Taxes Important in India? 

One of the most common questions raised by employees is why tax payments are required from employees and how these income tax rates are vital. To understand the importance few instances are mentioned below:

1. Penalties 

To avoid fines, payroll taxes in India should be paid on time in the first place. For employees, there are a variety of professional taxes that may or may not be taken out under TDS at the source. Every earning person in India is required to pay professional taxes. Your tax bracket or tax responsibilities determine this.

According to the laws and regulations, you will have to pay the penalty if you don't pay the tax in full. Fines for failing to pay taxes can go into the thousands. Additionally, this affects your potential employment, credit score, and reputation with employers and other organisations.

2. Responsibility

The employees are ultimately responsible for paying taxes. You must comprehend your taxes as a responsible citizen of the nation and ensure they are paid on time. 

Payroll taxes are withheld by the company's accounting or human resources department based on your declarations and investments. To prevent fines and related trouble, you must pay your professional taxes on time as a responsible citizen.

3. Economy 

Last but not least, India's economy depends on payroll taxes. With the help of these taxes, every nation grows and prospers. This funding supports the development of various industries and improving public areas. 

Wrapping Up

The prosperity of every nation depends on its citizens making tax contributions on their income levels. The country's industries and technological advancements benefit from this money. Overall, payroll taxes in India support a growing economy. It boosts the economy.

sumHR is a cutting-edge, incredibly simple-to-use HR management software that assists startups and SMEs in streamlining their HR & payroll procedures. With our cloud-based human resource management solutions, we have catered to businesses of different sizes. Our features include payroll automation, attendance and leave management, performance management, reimbursement management, enterprise social networking, and human resource analytics.


1. Are there any GST considerations in the case of payroll taxes?

Payments to or concerning employees, such as wages and salaries, do not attract GST.

2. Are payroll tax and direct tax the same thing?

Payroll taxes are paid by an employer to a government agency for an employee, while income taxes are paid directly by the individual to the government.

3. What kinds of organisations are exempt from payroll tax?

Non-profit organisations having wholly charitable, benevolent, philanthropic, or patriotic purposes are exempt under Section 48(1)(c) of the Payroll Tax Act of 2007.

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SumHR is a flexible and configurable end-to-end HR Software/HRMS which help HR teams automate the HR Processes, and improve the employee's HR experience.
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