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The Indian taxation system is complex which can make it difficult to navigate for foreign companies that are looking to set up an entity in India to hire Indian employees. Employers must comply with a range of tax laws and payroll contributions including Individual income tax (IIT), social security contributions, VAT, withholding tax, and business tax. Nonetheless, employers do not have to withhold any income taxes for their employees.
Employees are obligated to declare their own income tax each year. There are 2 tax regimes in India, the traditional tax regime and the new tax regime.
The traditional tax regime is broken up into four progressive tax thresholds. These thresholds are as follows:
| Taxable Income (INR) | Tax rate 2023 |
|---|---|
| 0 – 250,000 INR | 0% |
| 2,50,001 INR – 5,00,000 | 5% |
| 5,00,001 INR – 10,00,000 | 20% |
| above 10,00,000 INR (USD ~12,000) | 30% |
The new tax regime is broken up into seven income thresholds. These thresholds are as follows:
| Taxable Income (INR) | Tax rate 2024 |
|---|---|
| 0.00 INR – 3,00,000.00 INR | 0% |
| 3,00,001.00 INR – 6, 00,000 INR | 5% |
| 6,00,001.00 INR – 9,00,000 INR | 10% |
| 9,00,001.00 INR – 12,00,000 INR | 15% |
| 12,00,001 INR – 15,00,000 INR | 20% |
| Over 15,00,001 INR | 30% |
Employees can choose which regime they want to declare their taxes with. If they choose the traditional regime, they can reduce their overall taxes through claiming various exemptions and deductions ranging from Leave travel allowances to House rent allowances.
Employers are expected to pay social security contributions which equate to 13% of an employee’s salary package. Depending on the company size, they may have to contribute an extra 4.75% to the Employees State Insurance Cooperation (“ESIC”) scheme.
Employees are expected to contribute 12% of their overall salary package to cover social insurances.
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The national tax bureau in India is called The Income Tax Department or the ITD for short. This department is a government agency that collects taxes from individuals, companies and other organisations in India. It is part Department of Revenue of the Ministry of Finance and headed by the Central Board of Direct Taxes (CBDT).
There is no payroll tax contributions in India.
Employees are in charge of declaring their income taxes to The Income Tax Department each. Employers are only mandated to make employer-based contributions for social security and health insurance.
India – Individual Income Tax
