Payroll tax is defined as the tax that is withheld, charged, or levied on the employer’s payroll. This includes wages, gross salaries, perks, and any other form of remuneration paid to employees.
This tax is levied regardless of the employee’s domicile, family status, or any other personal circumstances. Payroll taxes are taxes that an employer is required to pay or withhold on behalf of his or her employees.
India is one of the world’s fastest growing economies. Certainly, there are several emerging sectors, technical and industrial advancements, and multiple trends in any economy growing at this rate. This growth demands companies’ expansion, hiring new employees, and managing a large workforce. However, in an attempt to do so, payroll taxes in India can quickly become a bottleneck and it’s critical to keep track of these taxes.
Importance of Payroll Taxes in India
As a responsible citizen, you must understand your personal taxes and ensure that they are paid on time. However, if you work for an employer, the employer payroll tax becomes partially your responsibility. The accounting team or human resources department of the company deducts payroll taxes in India based on your declarations and investments. Nonetheless, as a responsible citizen, you must pay professional taxes on your income on time to avoid penalties and inconvenience to yourself.
- Stay away from Penalties
In India, the most severe consequence of not filing your taxes is penalties and to avoid the same, employees take this as their first responsibility to pay taxes. Employees are subject to a variety of professional taxes, which may or may not be deducted under TDS at the source. Every individual with a source of income in India is required to pay professional taxes. This is determined by your tax bracket or tax liabilities. The penalties for failing to pay taxes can be severe. This has an additional impact on your future employment, credit score, and credibility with employers or other institutions.
- Impact on the Economy
Last but not the least, payroll taxes are imperative for the nation’s economical growth. With this tax money, every country thrives and flourishes. This money assists sectors in growing and public spaces in becoming more livable and better. The well-being of any country is dependent on taxpayers who contribute to the nation according to their income brackets. This money aids in technological advancements as well as other areas of the country’s development. Overall, payroll taxes in India promote national development and boosts the economy.
The Basic Payroll Tax Categories
Payroll tax is broadly classified as under:
- Withholding Tax: A certain percentage that an employer is required to withhold from their employees is referred to as withholding tax. This sum is paid to the government, which is in charge of levying and collecting taxes in accordance with the Income Tax Act’s various slabs. It is also known as a retention tax. Withholding taxes are used to generate revenue for the government, which is then used to fund various programs such as disability and employment.
- Employer-Paid Taxes in Lieu of Employee Wages: These charges are generally paid by the employer to cover the employer’s contribution to social security, insurance plans, and so on. This is paid by the employee out of his own pocket. This tax is directly related to the employment of a person and can consist of fixed charges or be proportionally linked to a worker’s salary.
- Personal Income Tax: In India, every individual with an income, including Hindu Undivided Family, individual, organization with an income, and so on, is required to pay payroll taxes. Furthermore, any salaried employee in India is required to pay professional taxes on capital gains, business gains, income from sources such as gambling, dividends, and so on. The tax slab for each individual may differ depending on the new and old tax regimes. TDS is typically deducted at the point of sale based on the tax slab. Employees can claim a portion of the payroll tax back by filing an ITR return based on their deductions and exemptions.
- Social Security Benefits
- Payroll in India includes a variety of schemes such as health insurance, pension plans, gratuity, and so on. This is equivalent to social security. In India, the Employees’ Provident Fund Scheme is a type of payroll pension contribution. The employee and the employer both contribute to the EPF based on their income.
- National Health Services are included in India’s payroll. These services, however, do not provide free care to employees. It provides funds to cover maternity, illness, and other expenses.
- Females should be given 12 weeks of maternity leave, both before and after the birth of their child, according to compliance rules.
- In India, gratuity is deducted from payroll taxes when an employee has worked for the same company for more than 5 years.
- Minimum Wages
A minimum wage is determined for each job role based on the employment and other categories. Employers must follow the rule for each of the 400 job categories. In India, there is a minimum wages act that is governed by the rules and regulations of state governments.
- Contributions from Employers and Employees
Under Payroll in India, both the employee and the employer make numerous contributions. Employers with 20 or more employees are required to contribute to the Employee Pension Scheme and the Employee Provident Fund. Employers with ten or more employees must contribute to Employee State insurance. The above deductions or contributions are made at different rates by both the employee and the employer.
- Working Hours and Employee Leaves
An employee in India normally works for 9 hours per day or 48 hours per week. Anything beyond this is considered overtime, and overtime is calculated at twice the employee’s regular pay. In a single year, an employee can take up to 15 paid days off. There are numerous additional leaves available due to national holidays. The leaves may be paid leaves over this.
Calculation of Payroll Taxes under Old Tax Regime and New Tax Regime
|Tax Slab (INR)||Old Tax Regime||New Tax Regime|
|0 – 2,50,000||0%||0%|
|2,50,000 – 5,00,000||5%||5%|
|5,00,000 – 7,50,000||20%||10%|
|7,50,000 – 10,00,000||20%||15%|
|10,00,000 – 12,50,000||30%||20%|
|12,50,000 – 15,00,000||30%||25%|
|15,00,000 & above||30%||30%|
Implementing a payroll system can help you increase productivity, efficiency, and cut costs in your HR operations. An online payroll software is a digital, cloud-based tool which allows to store and manage a range of data including employee’s personal data, their attendance and leave records, salary computation, and most importantly tax computation. Zoho Payroll, GreytHR, RazorPay are some of the best Payroll Applications to be used by the organizations.
Payroll taxes are used to help the business sector. They are used to support the industry’s growth and development. Payroll (employee) taxes assist businesses in their early years of operation by allowing them to function efficiently. If a company wants to relocate its headquarters from one location to another, these taxes can help. Payroll Taxes assist businesses that are looking to expand their payroll and are preparing to take on the liability of payroll tax payments.
They also help with the provision of rebates, which are paid to employees by the employer. Employees must pay TDS, which is typically deducted at the time of hire. This includes many other deductions that are only made at the source. Employees can choose a suitable tax regime to reduce their tax liability based on their tax slab