How Payroll Works in India: CTC, Gross Salary, Deductions, and Take-Home Pay Explained

Why Indian Payroll Is Different

If you’ve only run payroll in the US, UK, or Europe, Indian payroll will feel unfamiliar. The fundamental structure is different: India uses a CTC (Cost to Company) model where the total compensation figure includes employer contributions to statutory benefits. This means the number you agree on during hiring is not what the employee takes home — and the gap can be significant.

Understanding this structure is essential for making competitive offers, budgeting correctly, and keeping employees happy.

The Indian Salary Structure: From CTC to Take-Home

CTC (Cost to Company)

CTC is the total annual cost the employer incurs for an employee. It includes:

• Gross salary (what appears on the payslip before deductions)
• Employer’s PF contribution (12% of basic salary)
• Employer’s ESI contribution (3.25% of gross wages, if applicable)
• Gratuity provisioning (4.81% of basic salary)
• Other employer-borne costs like group insurance premiums or food coupons

CTC is not the employee’s salary. It’s the employer’s total cost. This distinction trips up foreign companies constantly.

Gross Salary

Gross salary is the sum of all salary components before employee-side deductions. A typical gross salary breakdown:

Component	Typical % of Gross	Purpose
Basic salary	40–50%	Base for PF, gratuity, leave encashment calculations
House Rent Allowance (HRA)	40–50% of basic	Tax exemption for rent-paying employees
Special allowance	Remainder	Fully taxable, flexible component
Other allowances	Varies	LTA, medical, conveyance (less common now under new tax regime)

Deductions from Gross (Employee Side)

Deduction	Amount	Notes
Employee PF	12% of basic salary	Mandatory, accumulates in PF account
Professional Tax	₹0–₹200/month	State-specific, see below
TDS (Income Tax)	Varies	Based on annual taxable income and tax regime
ESI Employee	0.75% of gross	Only if gross ≤ ₹21,000/month

Take-Home (Net Salary)

Take-home = Gross salary − Employee PF − Professional Tax − TDS − ESI (if applicable)

Worked Example: ₹15 Lakh CTC

Let’s walk through a real example for an employee in Bangalore with an annual CTC of ₹15,00,000.

CTC Breakdown

Component	Annual (₹)	Monthly (₹)
Basic salary (42% of CTC)	6,30,000	52,500
HRA (50% of basic)	3,15,000	26,250
Special allowance	3,48,660	29,055
Gross salary	12,93,660	1,07,805
Employer PF (12% of basic)	75,600	6,300
Employer ESI	0	0
Gratuity (4.81% of basic)	30,303	2,525
Group insurance	437	36
Total CTC	15,00,000	1,25,000

Monthly Deductions

Deduction	Monthly (₹)
Employee PF (12% of basic)	6,300
Professional Tax (Karnataka)	200
TDS (estimated, new regime)	6,500
Total deductions	13,000

Monthly Take-Home

₹1,07,805 − ₹13,000 = ₹94,805

So from a ₹15 lakh CTC, the employee takes home approximately ₹94,800 per month, or about ₹11.4 lakh annually. That’s a 24% gap between CTC and take-home.

How Basic Salary Percentage Affects Everything

The basic salary percentage is the single most impactful structuring decision. Here’s why:

Higher Basic (50%+)

• Higher PF contribution from both employer and employee (more retirement savings)
• Higher gratuity liability for the employer
• Higher HRA benefit (HRA is typically 40–50% of basic)
• Lower take-home pay (due to higher PF deduction)
• Better for employees who want to maximize PF corpus and HRA exemption

Lower Basic (35–40%)

• Lower PF contribution (less retirement savings, but higher take-home)
• Lower gratuity liability for the employer
• Higher take-home pay (more in special allowance, which has no statutory deductions)
• Less beneficial for HRA exemption calculation

Industry standard: Most Indian companies set basic at 40–50% of CTC. Going below 35% raises red flags with the EPFO and may not comply with upcoming labour code requirements that mandate basic salary be at least 50% of gross pay.

State-by-State Professional Tax Variations

Professional Tax is a state-level tax deducted from employee salaries. Not all states levy it, and rates vary significantly.

State	Monthly Deduction	Notes
Maharashtra	Up to ₹200/month	Slab-based on gross salary
Karnataka	₹200/month	Flat rate for salary above ₹15,000/month
West Bengal	Up to ₹200/month	Slab-based
Andhra Pradesh	Up to ₹200/month	Slab-based
Telangana	Up to ₹200/month	Slab-based
Tamil Nadu	Up to ₹208/month	Half-yearly payment option
Gujarat	Up to ₹200/month	Slab-based
Kerala	Up to ₹208/month	Half-yearly
Delhi	Nil	No Professional Tax
Haryana	Nil	No Professional Tax
Rajasthan	Nil	No Professional Tax
Uttar Pradesh	Nil	No Professional Tax

Maximum Professional Tax: Capped at ₹2,500/year by the Constitution of India (Article 276).

The employer is responsible for deducting Professional Tax from the employee’s salary, registering with the state’s Professional Tax authority, and filing returns (monthly or half-yearly depending on the state).

The Monthly Payroll Process

Here’s what happens every month in a well-run Indian payroll:

1. Attendance and Leave Reconciliation

• Calculate working days, leave taken, and loss-of-pay (LOP) days
• LOP days reduce gross salary proportionally

2. Salary Calculation

• Calculate each component: basic, HRA, special allowance, etc.
• Apply pro-rata for mid-month joinings or separations
• Add any one-time components: bonuses, arrears, overtime

3. Statutory Deductions

• Employee PF: 12% of basic salary
• Professional Tax: Based on state and salary slab
• TDS: Based on projected annual income and tax regime
• ESI employee share: 0.75% of gross (if applicable)

4. Employer Contributions

• Employer PF: 12% of basic (3.67% to EPF + 8.33% to EPS)
• Employer ESI: 3.25% of gross (if applicable)
• EDLI and admin charges: As per EPFO rates

5. Net Pay Calculation and Disbursement

• Gross salary minus all deductions equals net pay
• Transfer to employee’s bank account
• In India, salary is typically credited on the last working day of the month or the 1st of the following month

6. Statutory Deposits

• PF and ESI contributions deposited by the 15th of the following month
• TDS deposited by the 7th of the following month
• Professional Tax deposited per state-specific schedule

7. Payslip Generation

• Detailed payslip showing all components, deductions, and employer contributions
• Must include: basic salary, HRA, special allowance, PF employee/employer, Professional Tax, TDS, ESI (if applicable), net pay

Payroll for Employees in Multiple States

When you have employees across Indian states, payroll complexity increases because:

• Professional Tax rates and filing schedules differ by state
• Shops & Establishments Act requirements vary (leave entitlements, working hours, overtime rules)
• Labour Welfare Fund contributions are applicable in some states (Maharashtra, Karnataka, Tamil Nadu) but not others
• Minimum wage thresholds vary by state and skill category

A good EOR or payroll provider tracks each employee’s state of work and applies the correct state-specific rules automatically.

Common Payroll Mistakes Foreign Companies Make

1. Confusing CTC with Gross Salary

Quoting “₹15 lakh salary” and meaning gross vs. CTC creates a ₹1.5–2 lakh gap. Always clarify whether you’re discussing CTC or gross.

2. Not Accounting for Employer PF in Budget

Employer PF is 12% of basic salary and is part of CTC, not an additional cost on top. But if you budgeted only for gross salary, employer PF is an unexpected 5–6% additional cost.

3. Running Payroll Late

Indian employees expect salary on a predictable date. Late payroll is a legal violation under payment of wages regulations and damages employee trust disproportionately.

4. Ignoring State-Level Requirements

Applying Maharashtra Professional Tax rates to a Karnataka employee (or vice versa) results in incorrect deductions. Each state must be handled individually.

5. Not Issuing Payslips

Payslips are legally required under the Code on Wages. They’re also needed by employees for loan applications, visa applications, and tax filing.

Key Takeaways

• CTC includes employer contributions — it’s always higher than gross salary and significantly higher than take-home
• Basic salary percentage is the most important structuring decision. It affects PF, gratuity, HRA, and take-home
• Professional Tax varies by state — some states don’t levy it at all
• Monthly payroll has strict deadlines — PF by 15th, TDS by 7th, salary by month-end
• Budget 20–25% above take-home when estimating CTC for Indian employees
• When in doubt, work with an EOR that handles all of this automatically