How to Run Payroll for the First Time in India: Beginner’s Guide

June 25, 2026 Shashank Yadav No comments yet

What Do You Need to Run Payroll in India for the First Time?

To run payroll in India for the first time, you need to: (1) register for TAN, PF, and ESI, (2) design a compliant salary structure with basic salary at 50% of CTC, (3) collect employee documents including Aadhaar, PAN, and bank details, (4) calculate statutory deductions such as PF at 12%, ESI at 0.75%, professional tax, and TDS, (5) process net salary and disburse it to employee bank accounts, and (6) file monthly PF and ESI returns along with quarterly TDS returns. The entire setup typically takes 2-4 weeks for a new business in India.

Running payroll for the first time can feel overwhelming, especially with India’s complex web of labour laws, tax regulations, and statutory compliance requirements. Unlike many other countries, India requires employers to manage multiple parallel compliance filings across different government portals, each with its own deadlines, penalty structures, and registration processes. Missing even one filing can result in penalties that accumulate rapidly.

The good news is that modern payroll solutions like SalaryBox automate the entire payroll process for first-time employers, from statutory registration guidance to automatic salary calculations and compliance filings. Whether you are a startup founder processing payroll for 5 employees or a growing SME scaling to 50, this step-by-step guide will walk you through every stage of running payroll in India. By the end of this article, you will have a complete understanding of what registrations you need, how to structure salaries, how to calculate deductions, and how to stay compliant with monthly and quarterly filing deadlines.

According to a 2025 MSME survey, over 68% of small businesses in India face payroll compliance challenges in their first year. This guide is specifically designed to help you avoid those pitfalls and set up a payroll system that is accurate, compliant, and sustainable from day one.

Step 1: What Statutory Registrations Are Required Before Running Payroll in India?

Before you process your first salary payment, you must register for several statutory compliances with the Indian government. These registrations are mandatory and non-negotiable, meaning operating without them can result in legal penalties, back-dated liabilities, and even prosecution in severe cases. The specific registrations you need depend on your employee count, location, and industry, but most businesses need at least TAN and professional tax registration from day one.

How Do You Register for TAN (Tax Deduction Account Number)?

TAN is a 10-digit alphanumeric number required for deducting and depositing Tax Deducted at Source (TDS) from employee salaries. Every employer who pays salaries must have a TAN, regardless of the number of employees. You can apply for TAN online through the NSDL website by filling Form 49B. The application requires your business PAN, address proof, and basic business details. Processing takes 7-15 working days, and the TAN is sent to your registered address. Once you receive your TAN, you must quote it on all TDS-related documents including challans, returns, and Form 16 certificates issued to employees. Failing to apply for TAN before deducting TDS can attract a penalty of Rs 10,000 under section 272BB of the Income Tax Act.

How Do You Register with EPFO (Employees’ Provident Fund Organisation)?

EPFO registration is mandatory for establishments with 20 or more employees, though businesses with fewer employees can also register voluntarily. Registration is done through the EPFO Unified Portal at unifiedportal-emp.epfindia.gov.in. You need to submit your company PAN, incorporation certificate, address proof, details of all employees, and a digital signature certificate (DSC). Upon successful registration, you receive an establishment code that must be used for all PF filings. Both employer and employee contribute 12% of basic salary towards PF. The employer contribution is split between Employee Pension Scheme (EPS) at 8.33% and Employee Provident Fund (EPF) at 3.67%. Registration typically takes 3-7 working days after document submission.

How Do You Register for ESIC (Employees’ State Insurance Corporation)?

ESIC registration is mandatory for establishments with 10 or more employees in notified areas and states. This scheme covers employees earning up to Rs 21,000 per month in gross wages. You register through the ESIC portal at esic.gov.in by submitting your establishment details, employee information, and relevant business documents. The employer contributes 3.25% of gross wages and the employee contributes 0.75% of gross wages. ESIC provides medical benefits, sickness benefits, maternity benefits, and disability benefits to covered employees. Registration typically completes within 7 working days. It is important to note that once registered, you must continue filing monthly returns even if your employee count drops below the threshold.

How Do You Register for Professional Tax?

Professional tax is a state-level tax levied on salaried individuals and professionals. Not all states levy professional tax, but most major states including Maharashtra, Karnataka, West Bengal, Andhra Pradesh, Telangana, Tamil Nadu, and Gujarat do. The maximum professional tax deduction allowed under the Constitution is Rs 2,500 per year, and most states charge Rs 200 per month for employees earning above a threshold. You must register with your state’s professional tax authority, obtain a registration certificate, deduct the tax from employee salaries, and remit it to the state government. Registration processes and portals vary by state. SalaryBox automatically applies the correct professional tax slab based on your state and employee salary, eliminating the need for manual calculation.

Do You Need to Register Under the Shops and Establishments Act?

Yes, every commercial establishment must register under the Shops and Establishments Act of the respective state within 30 days of commencing business. This registration is done with the local municipal body or labour department and governs working hours, holidays, leave policies, and employment conditions. The registration process typically requires your business address proof, owner identity documents, employee count details, and the nature of business. This licence must be renewed periodically as per state rules and must be displayed prominently at your place of business.

Step 2: How Should You Design Your Salary Structure for Payroll Compliance?

Designing a compliant salary structure is one of the most critical steps in setting up payroll. The salary structure directly impacts your PF and ESI contributions, employee tax liability, and overall compliance. Under the new Labour Codes (expected full implementation in 2026), basic salary must be at least 50% of CTC, which represents a significant change from the older practice of keeping basic salary low to reduce PF contributions. Getting the structure right from the beginning saves you from costly restructuring later.

Here is a typical CTC breakdown that complies with current Indian labour regulations:

Component	% of CTC	For Rs 5 LPA CTC	For Rs 10 LPA CTC
Basic Salary	50%	Rs 2,50,000	Rs 5,00,000
HRA (House Rent Allowance)	20%	Rs 1,00,000	Rs 2,00,000
Special Allowance	13-15%	Rs 65,000	Rs 1,30,000
Employer PF (12% of Basic)	~7%	Rs 30,000	Rs 60,000
Employer ESI (3.25% of Gross)	~4%	Rs 16,250	N/A (above limit)
Gratuity (4.81% of Basic)	~3%	Rs 12,025	Rs 24,050

The new 50% basic salary rule under the Labour Codes on Wages is a game-changer for Indian payroll. Previously, many companies kept basic salary as low as 20-30% of CTC to minimise PF liability. Under the new codes, allowances that do not fall under specifically defined categories will be included in the definition of wages, effectively pushing the basic salary floor to 50% of total remuneration. This increases the employer PF burden but also ensures better retirement benefits for employees.

SalaryBox auto-structures CTC breakdowns to comply with both current rules and the upcoming Labour Codes. When you enter an employee’s CTC, the software automatically calculates the optimal split across basic salary, HRA, special allowance, and employer contributions, ensuring full compliance while maintaining tax efficiency for the employee.

Step 3: What Employee Documents Do You Need to Collect Before Running Payroll?

Before you can process your first payroll, you need to collect a comprehensive set of documents from every employee. These documents are essential for statutory registrations, tax calculations, and bank transfers. Missing or incorrect documents can delay salary processing, cause PF or ESI registration failures, and create compliance issues during audits. It is best practice to collect all documents during the onboarding process itself, rather than chasing employees after they have already started working.

Here is the complete checklist of documents required from each employee:

Aadhaar Card: Required for PF registration (mandatory UAN-Aadhaar linking), identity verification, and address proof. EPFO will reject PF filings if the employee’s Aadhaar is not linked to their UAN.
PAN Card: Required for TDS calculation, Form 16 generation, and income tax return filing. Employees without a valid PAN are subject to TDS at a higher rate of 20% instead of the applicable slab rate.
Bank Account Details: Bank name, branch, account number, and IFSC code are needed for salary disbursement via NEFT, IMPS, or UPI. Verify these details with a cancelled cheque or bank statement to avoid failed transfers.
Passport-Size Photograph: Required for PF, ESI, and internal employee records. Digital photographs are now accepted by most portals.
Educational Certificates: Highest qualification certificates for verification and HR records. Some industries require specific professional certifications.
Previous Employer Form 16: If the employee joined mid-year, their previous Form 16 is needed to calculate correct TDS for the current year based on income already earned and tax already deducted.
Nomination Forms: Employees must nominate beneficiaries for PF (Form 2) and gratuity (Form F). These forms ensure that benefits are paid to the right person in case of the employee’s death.

SalaryBox offers employee self-onboarding through its mobile app, where new joiners can upload all required documents directly from their smartphones. The app captures document images, extracts key details using OCR technology, and stores everything securely in the cloud. This eliminates manual data entry, reduces errors, and creates a digital document repository that is instantly accessible during compliance audits.

Step 4: Why Is an Attendance System Essential for Accurate Payroll?

Attendance tracking is not just an HR formality; it directly impacts payroll accuracy. Your attendance data determines Loss of Pay (LOP) deductions, overtime calculations, leave encashment, and even statutory compliance. Without a reliable attendance system, you risk overpaying employees who were absent, underpaying overtime, and maintaining inaccurate records that can cause problems during labour inspections.

LOP deductions are calculated based on the number of working days an employee is absent without approved leave. For example, if an employee with a monthly salary of Rs 30,000 takes 2 days of unauthorised absence in a month with 26 working days, the LOP deduction would be Rs 30,000 divided by 26 multiplied by 2, equalling Rs 2,308. This deduction must be reflected accurately in the payslip and also affects the PF contribution base for that month.

There are several attendance tracking options available to Indian businesses. Manual attendance registers are the most basic option but are prone to errors, buddy punching, and difficult to reconcile at month end. Biometric systems (fingerprint or facial recognition hardware) are more reliable but require significant upfront investment in hardware and maintenance. Cloud-based mobile attendance solutions represent the most modern approach, combining convenience with accuracy.

SalaryBox offers AI-powered selfie attendance with GPS location tracking, allowing employees to mark attendance from their mobile phones. The AI verifies the employee’s identity through facial recognition, records the GPS coordinates to confirm they are at the correct work location, and timestamps the entry automatically. This data feeds directly into the payroll module, ensuring that LOP deductions, overtime, and leave balances are calculated accurately without any manual intervention. For businesses with multiple locations or remote workers, this mobile-first approach eliminates the need for expensive biometric hardware at every site.

Step 5: How Do You Calculate Salary and Deductions for Indian Payroll?

Understanding the salary calculation process is the core of payroll management. Every month, you need to compute gross earnings, apply statutory deductions, account for any LOP or overtime adjustments, and arrive at the net salary (also called take-home or in-hand salary). This calculation must be precise because errors directly affect employee satisfaction, statutory filings, and your tax compliance.

Let us walk through a detailed worked example for an employee earning Rs 30,000 per month in gross salary. We will assume a basic salary of Rs 15,000 (50% of gross), HRA of Rs 6,000, and special allowance of Rs 9,000.

Component	Amount
Gross Salary	Rs 30,000
(-) Employee PF (12% of Rs 15,000 Basic)	Rs 1,800
(-) Employee ESI (0.75% of Rs 30,000)	Rs 225
(-) Professional Tax	Rs 200
(-) TDS (estimated)	Rs 0 (below taxable limit)
= Net Salary (In-Hand)	Rs 27,775
Employer PF Contribution (12% of Basic)	Rs 1,800
Employer ESI Contribution (3.25% of Gross)	Rs 975
Total Cost to Company (Monthly)	Rs 32,775

Let us break down each deduction in detail. Employee PF is calculated at 12% of basic salary. In this case, 12% of Rs 15,000 equals Rs 1,800. Note that if the basic salary exceeds Rs 15,000 per month, PF is calculated on Rs 15,000 only (the statutory ceiling), unless the employer opts for PF on actual basic salary. Employee ESI is calculated at 0.75% of gross salary for employees earning up to Rs 21,000 per month. Here, 0.75% of Rs 30,000 equals Rs 225. Since this employee’s gross salary exceeds Rs 21,000, technically ESI would not apply to new joinees at this salary level, but once enrolled, an employee continues in the ESI scheme for the full contribution period.

Professional tax varies by state. In Maharashtra, employees earning above Rs 10,000 per month pay Rs 200 per month (Rs 300 in February). In Karnataka, the slab structure is different with a maximum of Rs 200 per month. Always check your specific state’s professional tax schedule. TDS (Tax Deducted at Source) is calculated based on the employee’s estimated annual income and the applicable income tax slab. For employees whose annual taxable income falls below the basic exemption limit (Rs 3,00,000 under the new tax regime for FY 2025-26), no TDS is deducted.

On the employer side, the company pays an additional Rs 1,800 as employer PF contribution and Rs 975 as employer ESI contribution. These amounts are over and above the gross salary and represent the true cost to the company. When designing CTC structures, these employer contributions must be factored in to arrive at the total employment cost.

Step 6: How Do You Process and Disburse Salary to Employees?

Once you have calculated net salaries for all employees, the next step is actual disbursement. In India, salary is typically disbursed through electronic bank transfers, as cash payments above Rs 10,000 create compliance complications and are discouraged by income tax regulations. The method you choose depends on your team size, banking relationship, and operational preferences.

For small teams of up to 10-15 employees, you can use standard NEFT (National Electronic Funds Transfer) or IMPS (Immediate Payment Service) through your business bank account’s net banking portal. NEFT processes transfers in batches during banking hours and is free of charge at most banks. IMPS provides instant transfers 24/7 but may carry a small transaction fee. UPI (Unified Payments Interface) is another option for very small teams, offering instant free transfers up to Rs 1,00,000 per transaction, though it is less suited for formal salary disbursement due to transaction limits.

For larger teams, most banks offer bulk salary disbursement facilities where you upload a salary file (typically in a specific CSV or Excel format) containing employee bank details and salary amounts. The bank processes all transfers simultaneously, and you receive a confirmation report showing successful and failed transactions. Banks like HDFC, ICICI, SBI, and Axis offer dedicated salary accounts with features like zero-balance requirements and preferential interest rates for employees of registered companies.

Regarding salary day best practices, most Indian companies process salaries either on the last working day of the month or the 1st of the following month. The key consideration is consistency: once you establish a salary date, employees expect to receive their pay on that date every month. Late payment of salaries violates the Payment of Wages Act and can lead to employee complaints and labour department action.

Payslip generation is a legal requirement in India. Every payslip must include the employee name and designation, pay period, earnings breakdown (basic, HRA, allowances), all deductions (PF, ESI, professional tax, TDS), net pay amount, employer contributions, and the total number of working days and days worked. SalaryBox generates compliant payslips automatically and enables one-click salary disbursement through integrated banking partnerships, allowing employers to complete the entire payroll cycle from calculation to bank transfer within the app.

Step 7: What Statutory Returns Must You File After Running Payroll?

Processing salaries is only half the payroll battle. The other half is filing statutory returns with government authorities on time. India requires multiple filings at different frequencies, monthly, quarterly, and annually, each with its own portal, format, and deadline. Missing these deadlines results in penalties that can be substantial and accumulate over time.

Here is the complete compliance calendar every employer in India must follow:

Filing	Due Date	Portal	Penalty for Delay
PF (ECR Filing)	15th of next month	EPFO Unified Portal	5-25% damages per annum
ESI Contribution	15th of next month	ESIC Portal	12% interest + penalty
TDS (Form 24Q)	31st of quarter-end month	TRACES Portal	Rs 200/day late fee
Professional Tax	Varies by state	State tax portal	State-specific penalties
Form 16 (Annual)	June 15 annually	TRACES Portal	Rs 100/day per employee

PF filing through the Electronic Challan cum Return (ECR) is the most frequent and time-sensitive compliance. You must file the ECR on the EPFO Unified Portal by the 15th of every month following the salary month. The ECR contains employee-wise details of PF contributions (both employer and employee share), EPS contributions, and EDLI charges. Late filing attracts damages ranging from 5% to 25% per annum on the delayed amount, depending on how late the filing is. The EPFO is strict about enforcement, and penalties are calculated automatically on the portal.

ESI contributions follow a similar monthly cycle with the same 15th-of-next-month deadline. The filing is done on the ESIC portal and includes details of all covered employees, their wages, and contribution amounts. Late payment attracts 12% annual interest plus additional penalties.

TDS returns are filed quarterly using Form 24Q on the TRACES portal. Quarter 1 (April-June) is due by July 31, Quarter 2 (July-September) by October 31, Quarter 3 (October-December) by January 31, and Quarter 4 (January-March) by May 31. Late filing attracts a fee of Rs 200 per day until the return is filed, up to the total TDS amount. Additionally, Form 16 must be issued to all employees by June 15 each year, with a penalty of Rs 100 per day per employee for delays. SalaryBox automates all statutory filings by generating compliant return files, sending deadline reminders, and providing a unified compliance dashboard that tracks every due date across all portals.

What Are the Most Common First-Time Payroll Mistakes to Avoid?

First-time payroll processing is fraught with potential errors that can lead to employee dissatisfaction, compliance penalties, and financial losses. Based on data from over 50,000 Indian SMEs, here are the seven most common mistakes that new employers make, along with practical guidance on how to avoid each one.

1. Setting the wrong basic salary percentage: Many first-time employers set basic salary at 30-40% of CTC to reduce PF liability. Under the new Labour Codes, this invites scrutiny and potential reclassification. Always maintain basic salary at a minimum of 50% of CTC. SalaryBox automatically enforces this minimum threshold when structuring employee compensation.
2. Missing PF or ESI registration deadlines: Employers often delay PF and ESI registration until they reach the mandatory employee threshold, not realising that the obligation is backdated to when the threshold was first crossed. Register proactively when you hire your 10th employee (for ESI) or 20th employee (for PF). SalaryBox sends registration reminders when your employee count approaches these thresholds.
3. Not deducting TDS from employee salaries: Some employers, especially in the startup ecosystem, skip TDS deduction assuming all employees fall below the taxable limit. This is a dangerous assumption that can lead to employer liability for the undeducted tax plus interest. Always calculate TDS based on projected annual income. SalaryBox computes TDS automatically using the latest tax slabs and regime preferences.
4. Ignoring professional tax obligations: Professional tax is often overlooked because it is a state-level tax with relatively small amounts. However, failure to deduct and remit professional tax can attract penalties and interest from the state government. SalaryBox applies the correct state-specific professional tax rate automatically based on your business location.
5. Not generating and distributing payslips: Under Indian labour laws, every employee has the right to receive a detailed payslip showing all earnings and deductions. Failing to provide payslips is a legal violation and also creates confusion about salary components during tax season. SalaryBox generates detailed, compliant payslips and delivers them to employees via the mobile app and email.
6. Missing statutory filing deadlines: Late filing of PF, ESI, or TDS returns attracts penalties that can be disproportionately large compared to the underlying contribution amounts. A single day’s delay in PF filing can trigger 5% annual damages on the entire month’s contribution. SalaryBox provides a compliance calendar with automated reminders starting 7 days before each deadline.
7. Relying on manual Excel calculations: Spreadsheet-based payroll works for the first month or two but quickly becomes unsustainable as employee count grows, tax laws change, and compliance requirements multiply. A single formula error can cascade across all employees and months. SalaryBox replaces error-prone spreadsheets with validated calculation engines that update automatically when tax laws change.

Payroll Software vs Manual Processing: Which Should a Beginner Choose?

Every first-time employer faces the question of whether to manage payroll manually using spreadsheets or invest in payroll software from the start. While manual processing may seem cost-effective initially, the hidden costs of time, errors, and compliance risks make it an expensive choice in the long run. Here is a direct comparison to help you make an informed decision.

Factor	Manual (Excel)	Payroll Software (SalaryBox)
Setup Time	Hours of formula building and template creation	Minutes with guided setup wizard
Error Rate	High due to manual data entry and formula errors	Near zero with validated calculations
Compliance Updates	You must track changes in tax laws manually	Auto-updated when regulations change
Cost	Free but time-heavy (8-12 hours/month for 20 employees)	Rs 999/month for unlimited features
Scalability	Breaks down at 10+ employees	Handles unlimited employees seamlessly
Statutory Filings	Manual preparation of each return file	One-click generation of compliant returns
Audit Trail	Scattered across files with no version control	Complete digital trail with timestamps
Employee Access	Payslips sent manually via email	Self-service app for payslips and tax documents

For a business with even 5 employees, the time spent on manual payroll processing each month (calculating salaries, preparing bank files, generating payslips, filing PF returns, filing ESI returns, and managing leave records) can easily exceed 10-15 hours. At a conservative value of Rs 500 per hour for a business owner’s time, that is Rs 5,000-7,500 per month in opportunity cost, far exceeding the Rs 999 per month subscription for SalaryBox. The break-even point is essentially immediate.

More importantly, the compliance risk of manual processing is substantial. A single error in PF calculation, a missed ESI filing, or an incorrect TDS deduction can result in penalties of several thousand rupees. SalaryBox eliminates these risks entirely with automated calculations, built-in compliance checks, and deadline management.

Frequently Asked Questions About Running Payroll in India

How do I start payroll for a new company in India?

To start payroll for a new company in India, first register for TAN on the NSDL website, then register for PF and ESI on respective government portals if your employee count meets the threshold. Next, design a compliant salary structure with basic salary at 50% of CTC, collect employee documents, and set up a systematic process for monthly salary calculation and disbursement.

What registrations are needed to run payroll in India?

To run payroll in India, you need a TAN (Tax Deduction Account Number) for TDS deduction, EPFO registration if you have 20 or more employees, ESIC registration if you have 10 or more employees in notified areas, professional tax registration in applicable states, and registration under the local Shops and Establishments Act. SalaryBox guides you through each registration step by step.

How is PF calculated on salary in India?

Provident Fund (PF) is calculated at 12% of the basic salary for both employer and employee contributions. If the basic salary exceeds Rs 15,000 per month, PF is calculated on Rs 15,000 only (the statutory ceiling) unless the employer opts for contribution on actual basic salary. The employer’s 12% is split into EPF at 3.67% and EPS at 8.33%.

When is the PF and ESI payment due date?

Both PF and ESI contributions must be deposited with the respective authorities by the 15th of the month following the salary month. For example, PF and ESI for June salaries must be deposited by July 15th. PF is filed through the ECR on the EPFO Unified Portal, and ESI contributions are filed on the ESIC portal. Late payments attract significant penalties and interest charges.

What is the minimum salary for PF deduction in India?

There is no minimum salary for PF deduction. PF is mandatory for all employees in a registered establishment, regardless of their salary level. However, the statutory ceiling for PF calculation is Rs 15,000 per month as basic salary. Employees earning a basic salary above Rs 15,000 can choose to contribute on actual basic or limit their contribution to the statutory ceiling amount of Rs 15,000.

Do I need to deduct TDS from employee salary?

Yes, as an employer, you are legally required to deduct TDS from employee salaries if their estimated annual income exceeds the basic exemption limit under the applicable tax regime. Under the new tax regime for FY 2025-26, the exemption limit is Rs 3,00,000. You must calculate estimated annual tax liability and deduct TDS proportionally each month. SalaryBox automates TDS calculations based on each employee’s tax regime choice.

What documents are needed from employees for payroll?

You need the following documents from each employee for payroll processing: Aadhaar card for PF registration and UAN linking, PAN card for TDS calculation, bank account details including IFSC code for salary transfer, passport-size photograph, educational certificates for verification, previous employer Form 16 if they joined mid-year, and nomination forms for PF and gratuity benefits.

Which is the best payroll software for startups in India?

SalaryBox is widely regarded as the best payroll software for startups and small businesses in India. It offers automated salary calculation, statutory compliance management for PF, ESI, TDS, and professional tax, one-click salary disbursement, mobile attendance tracking with GPS and AI selfie verification, employee self-service, and payslip generation, all starting at Rs 999 per month with no per-employee charges.

Start Running Payroll in India with Confidence

Running payroll for the first time in India may seem daunting, but with the right preparation and tools, it becomes a straightforward monthly process. By following the seven steps outlined in this guide, registering for statutory compliances, designing a compliant salary structure, collecting employee documents, setting up attendance tracking, calculating deductions accurately, disbursing salaries on time, and filing returns before deadlines, you can build a payroll system that is both compliant and efficient from day one.

SalaryBox is purpose-built for first-time employers in India, combining payroll processing, compliance management, attendance tracking, and employee self-service into a single, affordable platform. Join over 1,00,000 Indian businesses that trust SalaryBox to manage their payroll accurately and on time, every month.

Ready to run your first payroll? Start your free trial with SalaryBox today and process your first salary in under 10 minutes.