Payroll Processing India: Who Needs It and Who Does Not
Whether Payroll Processing India applies to a given business is the first thing worth settling, and it is where most of the early questions land. The questions below are the ones raised most often in practice; the full scope of the service is on the Payroll Processing India page. Section and form numbers below refer to the Income-tax Act 1961, which governs income up to FY 2025-26; from tax year 2026-27 the Income-tax Act 2025 applies with renumbered sections and forms, and the key equivalents are noted where relevant — confirm the equivalent for the period concerned.
My employee has not submitted PAN. What TDS rate applies to their salary?
If an employee fails to furnish their PAN, TDS on salary must be deducted at the higher of: the average rate under the applicable tax slab, or 20% under Section 206AA (for salary paid from 1 April 2026, the corresponding provision is Section 397 of the Income-tax Act 2025). CBDT's salary-TDS circulars have clarified that where the employee's estimated salary income is below the taxable limit, no tax is deducted; where it exceeds that limit, the 20% floor applies even if the employee's average rate is lower. Confirm the current CBDT position for the tax year concerned before applying it.
In practice: We collect PAN at onboarding and validate it against ITD before the first payroll run. Employees who change PAN or have PAN name mismatches create complications in TRACES — catching this early avoids corrections in 24Q.
When does EPF registration become mandatory for my company?
Provident fund coverage becomes mandatory when your establishment employs 20 or more persons — historically under the Employees' Provident Funds and Miscellaneous Provisions Act 1952, and since 21 November 2025 under the Code on Social Security 2020, which subsumed that Act and retains the 20-employee threshold. This threshold includes contract workers and workers engaged through a contractor — not just direct employees. Once the threshold is crossed, the employer must register within the time the Code and its rules prescribe — confirm the current timeline with EPFO. Voluntary registration is permitted even before 20 employees. Once covered, coverage continues even if headcount later falls below 20.
In practice: The 20-employee count includes contract workers — a point many employers miss. If contract workers are not counted, an EPFO inspection can find the employer non-compliant retrospectively. Count everyone who works on your premises.
What happens when an employee leaves — how is the full-and-final settlement handled for TDS?
At the time of full-and-final (FnF) settlement, the employer must compute TDS on all taxable components of the settlement: balance salary, bonus, the taxable portion of leave encashment (leave encashed during service is fully taxable, whereas encashment on retirement or resignation is exempt within the limits in Section 10(10AA), including a notified overall cap for non-government employees — only the excess is taxed), and any other taxable payments. Notice pay retained (where the employee does not serve notice) has a different tax treatment than notice pay received (where the employer waives notice). TDS must be deducted on the taxable amount before the FnF is credited, and reported in the next 24Q.
In practice: Incorrect FnF TDS computation can lead to 24Q corrections. The exit tax computation is not a standard payroll run — it involves specific exemptions, past TDS already deducted, and often multiple payment dates. We handle every exit computation separately.
Can we pay directors as employees — and if so, what are the TDS implications?
Yes, executive directors who are in whole-time employment with the company receive remuneration as salary, which is subject to TDS under Section 192 (Section 392 of the Income-tax Act 2025 for salary paid from 1 April 2026) in the same way as any other employee. Non-executive or independent directors receive sitting fees and/or commission — these are not salary; TDS applies at 10% under Section 194J, which has a specific clause for fees and commission paid to directors (Section 393 of the Income-tax Act 2025 from 1 April 2026). The distinction matters: salary remuneration goes into the quarterly salary TDS statement (Form 24Q, which is Form 138 from tax year 2026-27); director commission and sitting fees go into the non-salary statement (Form 26Q, now Form 140). Mixing them up creates a mismatch between the company's TDS returns and the director's ITR.
In practice: Director remuneration structuring is also an income tax planning opportunity — the split between salary and commission, the benefits-in-kind structure, and the company's tax deduction all interact. We review director compensation packages as part of our payroll and corporate advisory work together.
What is the difference between payroll processing by a CA firm versus a payroll software subscription?
A payroll software processes the inputs you give it and produces outputs based on configured rules. It does not know that your Section 192 computation is wrong because an employee changed their regime mid-year. It does not catch that a salary increment pushed an employee above the ESI threshold. It does not flag that a director's perquisite needs to be added to Form 12BA (Form 123 from tax year 2026-27). It does not respond to the EPFO notice. A CA firm does all of these things — the software is our tool, not the service. At PNPC, payroll is a CA-supervised compliance function, not a data-entry task.
In practice: We use payroll software internally. What distinguishes our service is the CA review layer on top: TDS recomputation at mid-year and year-end, regime advisory, FnF tax computation, notice responses, and the integration with the company's annual audit and ITR — all in one engagement.
Where this sits in the wider engagement
Payroll Processing India rarely arrives on its own. The statutory basis and the current requirements are set out on the Payroll Processing India service page, and the related services are grouped under Accounting Payroll.
What PNPC does
PNPC Global has practised since 1986 across India and the UAE. On Payroll Processing India we take the work end to end — reviewing the facts, preparing and filing what is required, and dealing with the authority through to closure.