Employers typically follow a monthly payment schedule, with salaries aid on the first of every month. Salary prorated for employees joining in the middle of a month. Salary is calculated on monthly basis, not hourly, as is the case in the US and many European countries.
Salary in India has several allowances apart from the basic pay. Most employers break up the total compensation into basic pay, dearness allowance, house rent allowance, medical allowance, and travel allowance. Some of these are tax deductible for employees if they produce a receipt for related expenses.
Salary is paid into employee’s bank account on the first of every month, net of deductions. Employers must deduce income tax at source, contribution to provident fund (social security) and government’s employee health insurance (if applicable).
Individual Income Tax
Only the central government can impose income tax in India.
Indian income system follows a slab structure. It means individuals pay income tax based on their income level. This is also called the progressive tax system in which individuals with higher income also pay higher taxes. These tax slabs are revised in every annual budget. Employers need to stay on top of these changes to be compliant with tax laws.
Employees pay 12% of the salary towards provident fund which is India’s social security scheme.
Employees also pay 1.75% of the salary towards Employee State Insurance Corporation if the gross monthly salary is less than Rs.21,000.
The table is effective for the financial year 2022-23:Rs 0.0 – Rs 2.5 lakh : NILRs 2.5 lakh – Rs 3.00 lakh : 5% (tax rebate u/s 87a is available)Rs 3.00 lakh – Rs 5.00 lakh : 5% (tax rebate u/s 87a is available)Rs 5.00 lakh- Rs 7.5 lakh : 10%Rs 7.5 lakh – Rs 10.00 lakh : 15%Rs 10.00 lakhs – Rs 12.50 lakh : 20%Rs 12.5 lakhs – Rs 15.00 lakh : 25%> Rs 15 lakh : 30%Employer Costs in India
Employers bear the following costs in India:
- Provident Fund: Employers pay 3.67% towards the employees’ provident fund. They also pay an additional 8.33% towards employees’ pension plan.
- Employers also have to pay the Provident Fund authority an administration fee for managing the provident fund contributions.