India payroll and tax overview.

India is the seventh-largest country in the world and, with a population of over 1.2 billion, is also one of its most populous. Located at the heart of Asia, India has been an important international trade hub for centuries but following rapid industrialisation and free market reforms in the early 1990s it also became one of the world’s fastest growing economies. While India’s economy is built on the historically important agriculture and textile industries, the 21st century emergent industries such as pharmaceutical production, petroleum, biotechnology, and software have become significant contributors. With an estimated GDP of $12.63 trillion and annual growth of around 4.2%, India’s development trend is ongoing, with some observers suggesting it may continue into the 2050s. India plays a significant role on the international economic landscape, and is one of the world’s top exporting countries, trading with partners in Asia, Africa, Europe, and North America. India is a member of the UN, the WTO and the Commonwealth of Nations, and in 2019 it was ranked 63 on the World Bank’s Ease of Doing Business Survey.

Why Invest in India?

India’s growth as a major international economy has attracted investment interest from sources around the globe. So, why invest in India?

• Reforms to India’s economic system are ongoing and include pricing deregulation, tax streamlining, and and an increase in the limits on foreign investment in sectors like railways, pharmaceuticals and aviation. The momentum has seen the Bombay Stock Exchange’s Sensex index rise impressively over the past few years.
• India’s 2017 forecasted GDP growth rate (around 6.6%) rivals China’s as one of the fastest in the world. The economy is diversified over the agriculture, industry and service sectors and, given its population, hosts a vast market of consumers.
• The services sector is a huge part of India’s export profile and in 2015 represented 58% of its economy. Skill and knowledge-based services - including IT, pharmaceuticals and engineering - play a significant part in that trend, promising new opportunities for foreign investors.
• Not only one of the largest populations in the world, India is also one of the youngest, with two-thirds of its citizens under the age of 35. The figure represents an advantage for competitive labour costs, and offers businesses a large consumer market - in fact, spending is growing in India: by 2020, around 90% of Indians will be part of an international ‘middle class’.
• India offers businesses a stable and transparent environment in which to set up and operate. Businesses also benefit from robust segregation of power and an economically-minded government keen to push through further free market reforms.

Foreign Direct Investment in India

The Indian economy is the tenth largest in the world in terms of purchasing power. As predicted by Goldman Sachs, by 2035 India is expected to be the third largest economy of the world - just behind the US and China. Foreign direct investment plays a huge part in the Indian economy’s success and the government is taking steps to increase its role: in 2014, the limit for FDI in the insurance sector was raised to 49% (from 26%), and by 2015, India was the number one FDI-investment location in the world. FDI in India flows into a spectrum of industries, including infrastructure and services, automotives, pharmaceuticals, textiles and airlines.

Registering a Company & Establishing an Entity in India

For the registration of a company please refer to the below site of ROC (Registrar of Companies):

www.mca.gov.in

The necessary steps required for registering a company in India are as follows:

• Obtain Director Identification Number (DIN) online
• Filing the application Form DIN-1 online
• Obtain digital signature certificate online
• Reserve the company name with the Registrar of Companies (ROC) online
• Pay stamp duties online, file all incorporation forms and documents online and receive the certificate of incorporation
• Make a seal
• Visit an approved franchise or agent appointed by National Securities Depository Services Limited (NSDL) or Unit Trust of India (UTI) Investors Services Ltd to receive a Permanent Account Number (PAN)
• Obtain a tax account number for Income Taxes deducted at source from the Assessing Office
• Register with The Office of Inspector, Shops and Establishment Act
• Register for VAT online
• Register for profession tax
• Register with Employees’ Provident Fund Organization
• For any establishment who employs 20 or more Employees and engages in any of the 187 Industries and Classes of business establishments, throughout India (but excluding the State of Jammu and Kashmir), The Employees Provident Funds & Miscellaneous Provisions Act, 1952, is applicable.
• Register for medical insurance (ESIC) if employee strength is 10 or more

Once the legal entity has been established, in order to process payroll in India, the company needs to have:

• TAN (Tax Account Number) for Tax,
• PAN (Permanent Account Number) for Tax submission and TDS return filing
• PF Number for the Social Security Scheme, and
• ESI Number for Employee insurance

Registrations for Social securities like PF & ESI are taken care of by the company; it takes around 15-45 days for registrations to be complete. Other registrations such as PT and LWF are location specific.

Banking for Business in India

Employee payments can be made from out with India, however it is mandatory to make payments to authorities/Government Departments from an in-country bank account. In some states, Professional Tax and Labour and Welfare Fund payments may need to be deposited manually. Payments can be made to the authorities using; PF – bank transfer, ESI – bank transfer, Income tax – bank transfer.

Bank transfers generally take 2-3 working days depending on the nature of payment.

Generally, banks are open Monday to Friday from 9.00 am to 4.00 pm for public and 9:00 am to 1:00 pm on 1st and 4th Saturday. All banks are closed on Sunday.

The Indian numbering system is specific to India and is also used in Bangladesh, Nepal, Pakistan and Sri Lanka. The term Lakh and Crore are commonly used in India to express large amounts. For example: -

Rs1,50,000 is equal to 1.5 Lakhs

Rs10,000,000 is equal to 1 Crore Rupees

Working Days and Working Hours in India

In India, the normal working week is Monday to Saturday inclusive.

Standard working hours are 9.30 AM to 6.00 PM.

Basic Facts About India

India is situated at the heart of sub continental Asia, with the Indian Ocean to the south, the Arabian Sea to the west, and the Bay of Bengal to the east. Its northern land border is shared with Pakistan, China, Nepal, Bhutan, Myanmar, and Bangladesh and, as home to over 1.2 billion people, it is the second most populous country on Earth. While traditional industries like textiles and agriculture remain important to the economy, modern India has been characterised by rapid industrialisation, urbanisation and technological progress. India comprises a wide variety of environments, from the snow-capped peaks of the Himalayas, to tropical coastal regions and arid central deserts. Warm, wet summer monsoon seasons contrast with periods of dry, sweltering heat, and the country has become extremely popular with tourists from all over the world.

General Population: 1.339 billion (World Bank, 2017)

Capital: Delhi

Language: Hindi, English

Monetary Unit: Rupee

Main Exports: Software, Petrochemicals, Pharmaceuticals, Precious Stones, Textiles, Machinery, Iron Ore, Chemicals, Automobiles

Internet Domain: .In

International Dialling Code: +91

The financial year in India runs from the 1st April to the 31st March. Income tax is payable by every employee at the rates fixed by the Finance Act on an annual basis.

Income Tax in India

Income tax in India must be paid by any individual, Hindu Undivided Family (HUF), company or organisation that generates income - it may be deducted at source, or returned to the Income Tax Department. Tax is due on any form of salaried income from an employer, any income from property, any business gains, capital gains, or income from other sources including dividends, gambling, and welfare schemes. Tax rates may vary for different levels of earnings, ranging from 10% at the lowest bracket (or ‘tax slab’), to 30% at the highest. India’s tax free allowance varies depending on age: the over-60s only pay tax on income over 3,00,000 rupees, while the over-80s only pay on income over 5,00,000 rupees. Various tax deductions are permissible, including contributions to pension funds, and life and health insurance schemes.

Social Security in India

India’s social security system is built around a number of schemes, which broadly include pension plans, medical and health insurance, maternity leave, gratuity, and disability insurance.

• Pension: The Employees’ Provident Fund Scheme is a statutory pension scheme for Indian workers. EPF contributions are mandatory for employers and employees on earnings over 15,000 rupees, but voluntary thereafter.
• Health/Disability Insurance: While India has a National Health Service, it does not offer free healthcare to everyone. The Employees State Insurance Corporation provides a medical care fund for employees and their families - it covers periods of sickness and maternity leave, or delivers monthly payments in cases of disablement or death.
• Maternity: Employers must provide all female employees with 12 weeks of maternity leave - six weeks prior to birth, and six weeks following. The leave should be paid at the average daily rate.
• Gratuity: The Payment of Gratuity Act creates a fund which provides employees with over 5 years’ service, an additional 15 days wages per year, for every year of service.

Reporting Tax in India

India’s tax year runs from the 1st of April to the 31st of March. A taxpayer’s ‘Residential’ or ‘Non-residential’ status is important, since it affects their income tax rates:

• Individuals who spend more than 6 months in India, or who have spent 60 days in India in the assessment year (and have lived in India for 365 days over the past 4 years) are considered tax residents.
• Individuals who spend less than 6 months in India in the assessment year are considered non-residents. Residents of India are taxed on income received from anywhere in the world. Non-residents, on the other hand, are taxed only on income earned in India.

The tax reporting process involves the following obligations:

• Taxpayers in India require a Personal Account Number - a unique ten digit number issued by the tax authorities. The PAN should be used on all tax correspondence.
• Since 2013, incomes exceeding 5,00,000 now have a mandatory e-filing requirement.
• Tax relief claims under sections 90, 90A or 91 of the Indian Income Tax Act also have an e-filing requirement.
• Income from salaries should be taxed at source - along with professional fees, rent, dividends, and interest. If source withholding falls short of an individual’s entire liability, a further self-assessment return, or advance payment of tax is necessary.
• If estimated tax exceeds 10,000 rupees, advance tax must be paid. Payment should be made in four installments - on the 15th of June, December, and March.

New Employees in India

All new employees are required to have a PAN card in order to pay tax which takes approximately 1 month to obtain.

The new employee should be registered with the authorities within 15 days of the second month of employment.

For an expat employee, passport & salary details will be required.

Leavers in India

There are no legislative specifications of time scale for the final payment. However, if the employee has completed 5 years of service, gratuity payment needs to be made within 30 days of departure.

It is usually preferable to make the F&F payment (final employee payments) within 30 days of departure.

Provident Fund and ESI authorities are require to be informed of leaving employees.

Employers in India have withholding obligations towards employees’ salaries, which include tax and social security and, in some cases, benefit plans like health insurance. Certain tax-free allowances are permitted, including rent, transport, medical, meals, travel for leave, education, and any other special costs like uniforms, books or research.

Payslips must be issued to employees in India - and are done so in English. It is legally acceptable to issue online payslips in India. Given the complexities of India’s tax system, employers with global employee populations may choose to outsource the process to gain the benefit of third-party expertise. Explore your options when choosing a global payroll provider by exploring the regulatory landscape.