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With almost 1.4 billion residents, India is slowly overtaking China as the country with the most population in the world. The private sector is quickly expanding and tightening the ties with the developed economies, becoming a hot destination for multinational companies seeking to expand to new markets.

Foreign and domestic companies who hire in India must comply with rather complex legislation regarding payroll costs. The country’s tax system is more complex than other countries and it keeps developing, making it difficult for foreign companies to stay up to date with all changes.

Employer Payroll Contributions

In simple terms, the payroll contributions are split into three major areas: the employer payroll contributions that make up the employment cost, the payroll contributions that make up the employee cost, and the employee income tax.

The employment cost, or the employer’s payroll contributions, are further split into several components: the Employee’s Provident Fund (EPF) and the Employee’s Pension Scheme (EPS), which are 12%, and the Employee’s State Insurance (ESI) of 4.75%. Consequently, employers in India pay 16.75% of employment tax, split into the pension and mandatory state insurance.

Both EPF and EPS are two social security schemes and it is the employer’s duty to register under them. Essentially, the 12% paid for these schemes is broken down into 8.33% for EPS and 3.67% for the EPF. The employee also contributes 12% to the EPF, as mentioned in the next section below.

The EPF is compulsory for all organizations with more than 20 employees and is compulsory for employees earning up to 15,000 INR. Above this threshold, employees can contribute voluntarily. These contributions can be withdrawn by the employee after two months of unemployment or after 58 years of age, but special events qualify as well (children’s education, weddings, loan repayment, and others).

The EPS receives most of the employer’s contribution (8.33%) out of a salary of up to 15,000 INR. EPS is the pension to be received after 58 years of age only and is paid for the rest of the contributor’s life.

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Finally, the last component of the employer’s mandatory payroll contributions is the ESI, or the Employee’s State Insurance. Essentially, this scheme ensures medical and financial assistance in case of inability to work, such as injury, sickness, or maternity leave. The scheme was established in the Employees’ State Insurance Act, 1948.

ESI is applicable to employers with ten or more employees, and it is not applicable in specific industries, such as manufacturing, education or medical institutions, transport, and others. Employees with a salary of up to 21,000 INR are entitled to this scheme.

Overall, employers’ costs include the pension (the two schemes detailed above), state insurance, and health insurance.

The employee’s payroll costs include 12% EPF and EPS, 1.75% for ESI, and 4% for Health and Education Cess, for a total of 17.75%.

India Payroll Taxes 2022 Update

Employee Income Tax

Based on their income, the employee must also cover the income tax. The tax brackets are as follows:

  • 00% – from 0 INR to 2,50,000.00 INR
  • 00% – from 2,50,001.00 INR to 5,00,000.00 INR
  • 00% – from 5,00,001.00 INR to 7,50,000.00 INR
  • 00% – from 7,50,001.00 INR to 10,00,000 INR
  • 00% – from 10,00,001 INR to 12,50,000 INR
  • 00% – from 12,50,001 INR to 15,00,000 INR
  • 00% – over 15,00,001 INR

ITR: Updated Income Tax Return

Recently, the income tax (IT) department in India has introduced an updated income tax return, known as ITR-U. This new form aims to reduce the occurrence of improper tax filing and reduce the time required to complete the form.

In the new ITR, the taxpayer must specify the reason for filing the updated form and the total taxable income. The taxpayer does not need to break down the total figure.

The ITR-U is to be completed in case of incorrect income reporting, the reduction of carried forward loss, wrong rate of tax when completing the original ITR, and several other reasons. The ITR-U can be filed within the following two years after the assessment year, but only one updated return per assessment year can be submitted.

The updated tax return comes with 25% more on due tax and interest if the form is filed within one year, and 50% more tax if filed after 1 year. If the additional taxes are not paid, the return becomes invalid.

Summary

Overall, employers in India must be aware of the multiple mandatory schemes that must be covered when accessing the Indian workforce. The components of employment cost are the EPF and EPS, which are two pension schemes, and the ESI, which is health insurance. The employee must also cover EPF and EPS, ESI, and an additional Health and Education Cess. Finally, the income tax rate varies from 0% for up to 2,50,000 INR to 30% for income above 15,00,001 INR.

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