What are the different employee taxes in India?
In our earlier blog posts we have already elaborated on how hiring the right talent is one of the most critical aspects that foreign SMBs eying international market expansion need to consider while entering a new geography. However, it is also equally important to understand the taxes applicable to employees in the destination country so that necessary resources could be put in place to ensure 100% compliance.
In India, employees are liable to pay income tax & profession tax and the onus lies on their employers to collect the applicable tax amounts at the time of salary disbursement and pay the same to the respective tax authorities as per the due dates.
Let’s look at the different employee taxes in more detail:
This is a tax that is charged by the central government on the income earned by an individual or a business entity during a financial year. It is a crucial source of revenue for the government which is utilized for infrastructure development, providing healthcare services, education, agricultural subsidies and other welfare schemes. Since this tax is directly levied on the income earned, it is categorized as a ‘direct tax’ and the tax calculation is based on the income slab rates applicable during the financial year in question.
In terms of eligibility, individuals are broadly classified into residents and non-residents. Resident individuals are required to pay tax on their global income in India i.e. income earned in India as well as abroad. Non-residents, on the other hand, need to pay taxes only on the income earned or accrued in India. The residential status of an individual is determined for every financial year on the basis of the individual’s tenure of stay in the country. Resident Individuals are further bifurcated into different age brackets for tax calculation purposes.
Income is grouped into blocks called tax brackets or tax slabs, each having a different tax rate which increases with higher income slabs.
This is a tax charged by the state government and contrary to what the name suggests, it is not just levied on professionals. Professional Tax applies to all kinds of professions, trades and employment and is levied based on the income earned. It is applicable to employees, businessmen, freelancers, professionals, etc. – basically every single earning individual residing in the state. Since it is levied by the state government, the tax rate may vary from one state to another depending on the tax slabs of the respective states. In fact, there are some states and UTs that do not charge professional tax at all. The taxpayer is allowed to deduct professional tax from the salary income while filing income tax return.
Concept of TDS (Tax Deducted at Source)
As per the Income Tax Act, any company or person making a payment is required to deduct tax at source according to the rates prescribed by the tax department if the payment exceeds certain threshold limits. In case of employees, freelancers or consultants (or the deductees), the employer (or the deductor) bears the responsibility to deduct TDS before disbursing the payment and deposit the tax with the government. TDS is required to be deducted irrespective of the mode of payment (cash, cheque or credit) and is linked to the PAN numbers of the deductor and deductee. It is applicable on payments made in the form of salaries, commission, consultation fees, professional fees and is required to be deposited with the government periodically by the deductor as per the due dates. TDS can be claimed in the form of a tax refund by the deductee at the time of filing Income Tax Returns.
In India, employers are liable to deduct Income Tax & Professional Tax from the employees’ monthly salaries and deposit the same to the government. In case of Professional Tax, separate registration may be required for each office depending on the respective state’s laws. Failing to collect and pay these taxes on time attracts penalties as levied by the respective governments authorities.
Foreign SMBs looking to establish a business set up in India can either incorporate a subsidiary in India and bear direct responsibility of ensuring compliance with tax and payroll regulations or look at employing an Indian PEO (Professional Employer Organization) to do so on their behalf.
A PEO essentially offers cost-effective solutions relating to HR, payroll, benefits and risk management. In this context, it would completely take over end to end employee taxation & payroll related activities and ensure 100% compliance to Indian laws so that the foreign company can focus its energies on expanding the core business instead of worrying about managing these processes and compliances.
Going the PEO route is also a quick and cost effective way by which foreign SMBs can expand to India without forming a local entity and Remunance, regarded as one of the best PEO companies in the country, has just the right solutions and domain expertise to help them do so!