Payroll for Small Business in India: First Payroll Guide

Your first hire is a milestone, and your first payroll is where many small businesses and startups slip. Payroll in India comes with registrations, deductions and deadlines that apply even to a business with one employee. Get the basics right from the start and payroll becomes a routine half-day each month; get them wrong and interest, penalties and unhappy employees follow. This guide walks you through running payroll for a small business or startup, from registrations to the first salary run, with a worked example for three employees. For choosing a tool, see our payroll software for small business guide.

Step 1: Get the registrations in place

Companies incorporated through SPICe+ on the MCA portal already have PAN, TAN, and PF and ESI registration codes, and in some states professional tax or shops and establishments registration. Check what you have before applying again. Our guides to ESIC registration and the PF guide cover the details; registration for PF is on the EPFO portal.

Step 2: Set up each employee

• ☐ Appointment letter with designation, salary, date of joining and terms
• ☐ PAN and Aadhaar, and the employee's bank account details
• ☐ UAN from any earlier PF account, and ESIC number if any
• ☐ Tax regime choice (new regime is the default) and investment declarations if old regime
• ☐ Previous employer's salary and TDS for the year, for mid-year joiners
• ☐ Emergency contact and nominee details

Our new employee payroll setup guide has the full joining checklist.

Step 3: Design a simple, compliant salary structure

Keep it simple: basic, HRA and a special allowance usually work for a small team. Under the Labour Codes, wages (basic, DA and retaining allowance, plus any excess of excluded allowances over 50% of total pay) decide PF, gratuity and bonus, so do not keep basic artificially low. Check that pay meets the minimum wage for your state and the employee's skill level. Our guide to salary structure under the Labour Codes and the Labour Code salary calculator help you set it up.

Step 4: Fix your payroll calendar

See our payroll calendar and compliance calendar guides.

Step 5: Run payroll each month

1. Collect inputs: attendance, leave, joiners, exits, salary changes, reimbursements and advances, by the cut-off.
2. Calculate gross pay: salary for days paid, plus overtime or arrears.
3. Calculate deductions: PF and ESI if registered, professional tax by state slab, TDS on the estimated annual tax.
4. Check: compare with last month, check new joiners and exits, and check net pay for each employee.
5. Pay salaries: by bank transfer, before the 7th.
6. Deposit dues: TDS by the 7th, PF and ESI by the 15th, professional tax by the state date.
7. Issue payslips: wage slips are required under the Code on Wages.
8. Record: keep the payroll register, challans and payslips, and post the salary journal entry.

Our payroll process guide explains each step in more detail, and the monthly payroll checklist keeps you on track.

Worked example: a startup with three employees

A startup in a state that levies professional tax has three employees, all in the new tax regime. It has fewer than 10 employees and has not registered for PF or ESI voluntarily.

Employee C's tax: on ₹13.65 lakh, 5% on ₹4–8 lakh (₹20,000) plus 10% on ₹8–12 lakh (₹40,000) plus 15% on ₹1.65 lakh (₹24,750) is ₹84,750; with 4% cess, ₹88,140 a year, or about ₹7,345 a month. The startup pays ₹1,77,055 in salaries by the 7th, deposits ₹7,345 TDS by the 7th, and pays ₹600 professional tax by the state's due date. Professional tax slabs and amounts vary by state; use our professional tax calculator, and the TDS calculator for tax. Once the startup registers for PF and ESI, use the PF calculator and ESI calculator.

Leave, attendance and holidays

Even a three-person team needs written rules, because they decide pay. Fix the working week and hours, how attendance is recorded, how many days of earned, casual and sick leave employees get, which public holidays are paid, and whether unused leave can be carried forward or encashed. State shops and establishments laws set minimum leave and holidays, and the Labour Codes set annual leave and overtime rules for covered workers. Decide too whether you pay for a month on calendar days or a fixed 30 or 26 days, and apply it consistently; our guide on salary for 26 or 30 days explains the choice.

Paying salaries the right way

Pay salaries by bank transfer to the employee's own account, not in cash, so there is a clear record. Use your bank's bulk payment upload or the salary file from your payroll tool, check the total against the payroll register before releasing it, and keep the bank confirmation. Pay on a fixed date each month, before the 7th, and tell employees the date in their appointment letters. If a payment fails, re-pay it quickly and record the reason.

When you cross 10 or 20 employees

Check headcount every month. Once you reach 10 employees, register with ESIC and deduct ESI for employees earning up to ₹21,000 a month: 0.75% from the employee and 3.25% from you. At 20 employees, register with EPFO and deduct PF at 12% from the employee, with a matching 12% employer share, on wages up to the ₹25,000 ceiling for employees who must join. Statutory bonus also starts at 20 employees. Coverage generally continues even if headcount later falls, so plan budgets and salary structures before you cross a threshold. Our payroll compliance guide lists each obligation.

Step 6: Quarterly and annual work

• Quarterly: file the TDS return (Form 138) with salary and TDS details for each employee. See our Form 138 guide.
• Annually: issue Form 130 (the TDS certificate that replaced Form 16) to each employee by 15 June; file any annual state returns for professional tax and labour welfare fund.
• Year-end: collect investment proofs from old-regime employees by January or February and correct TDS before March.
• Bonus: once statutory bonus applies (20 or more employees), pay it within eight months of the end of the accounting year.

When an employee leaves

On resignation or termination, pay all final dues (the full and final settlement) within two working days of the last working day, as the Code on Wages requires for wages on separation. Include salary up to the last day, leave encashment as per your policy, any bonus due, and gratuity once the employee has the qualifying service, less permitted recoveries. Update the exit date on the PF and ESI portals if registered, issue a relieving letter and Form 130 at year-end. Our guide to the full and final settlement process has a format.

Your first 90 days of payroll

• ☐ Week 1: TAN, professional tax and shops and establishments registrations; appointment letters issued
• ☐ Week 2: salary structures fixed; employee data, bank details and tax regime choices collected
• ☐ Week 3: payroll sheet or tool set up; leave and attendance rules written
• ☐ Month 1 close: first payroll run, salaries paid by the 7th, TDS and PT deposited, payslips issued
• ☐ Month 2: review month 1 for errors; set up a monthly checklist and a calendar reminder for every due date
• ☐ End of quarter: first Form 138 TDS return filed; headcount checked against PF and ESI thresholds

Records to keep

Keep appointment letters, salary structures, attendance records, the monthly payroll register, payslips, bank payment confirmations, every challan and return, and employees' tax declarations and proofs. Registers under the Labour Codes must be kept, on paper or electronically, for five years from the last entry under the central rules (check your state's rules), and tax records for as long as assessments can be reopened. Store them digitally, with access limited to the people who need them.

Founders, contractors and interns

Founders who work in the company as whole-time or managing directors, or as employees are usually paid salary through payroll, with TDS on salary; non-employee directors may receive fees, with TDS under the non-salary rules. Partners in an LLP are paid partner remuneration, not salary, and TDS applies to it. Get advice on the right mix, and record approvals in board minutes. Contractors and freelancers are not on payroll: they invoice you, and you deduct TDS under the provisions for professional fees or contracts where the thresholds apply. Treating a full-time worker as a contractor to avoid PF and ESI is risky. Interns may be paid a stipend; see our stipend vs salary guide.

Remote and multi-state teams

Startups often hire remote employees in several states from the start. Professional tax generally follows the state where the employee works, so you may need a PT registration in each such state. Labour welfare fund and shops and establishments laws are tied to an establishment, so check whether a home-based employee triggers them. Before hiring in a new state, check whether it levies professional tax and labour welfare fund and whether you need a registration there, and set the right state against each employee in your payroll. Minimum wages also differ by state, so check the rate for each employee's location and skill level.

Global payroll for startups

Indian startups that hire people abroad cannot run those employees through Indian payroll; they need a local entity in that country, or an employer of record there. Foreign startups hiring in India face the same question in reverse. Our guide to the employer of record in India explains how an EOR lets a company employ staff without its own local entity, and what it costs.

Excel, software or a provider?

For one to a few employees in one state, a well-built Excel sheet is usually enough; see our payroll in Excel guide. As you grow, move to payroll software, or outsource payroll to a provider. Our guides to payroll software for small business and payroll outsourcing compare the options. Whatever you choose, keep the registrations and portal logins in the company's name and keep one person responsible for checking payroll every month.

Common first-payroll mistakes

• No TAN before the first salary with TDS.
• Missing professional tax registration in a state that levies it.
• Paying late or in cash without records.
• Ignoring the tax regime choice, so TDS is wrong all year.
• Not tracking headcount, so PF or ESI registration is missed when you cross 20 or 10.
• No payslips or registers.
• Mixing contractors and employees without clear agreements.

See our common payroll errors and penalties guides for what late or wrong compliance can cost. The Income Tax Department publishes the TDS rules on salary.

Frequently asked questions

What is the easiest way to do payroll for a small business?

For a few employees in one state, the easiest way is a simple monthly routine: fix a salary date, collect attendance by a cut-off, calculate pay in a well-built Excel sheet or a free payroll plan, pay salaries by bank transfer, deposit TDS and professional tax on time, and issue payslips. Add PF and ESI when you cross 20 and 10 employees, or earlier if you register voluntarily.

Is there a free payroll service for small businesses?

There are free tools rather than free full services. You can use Excel templates, free online calculators and payslip generators, or a vendor's free plan for a small number of employees. A payroll provider that runs payroll for you usually charges a fee, though some offer low rates for very small teams.

How do I run payroll for one employee?

Issue an appointment letter, collect PAN, bank details and the employee's tax regime choice, and register for TAN and professional tax if needed. Each month, calculate salary for days worked, deduct professional tax and any TDS, pay by the 7th of the next month, deposit TDS and professional tax by their due dates, and issue a payslip. A simple Excel sheet is enough for one employee.

Do startups have to pay PF and ESI?

PF applies once an establishment has 20 or more employees, and ESI once it has 10 or more, under the Code on Social Security. Many startups register for PF earlier voluntarily, because employees value it. Once registered, contributions are mandatory for eligible employees every month.

How should startup founders be paid?

It depends on their role. A founder employed by the company as a whole-time or managing director, or as an employee, is paid salary through payroll with TDS on salary. A director who is not an employee may be paid director's fees, on which TDS applies under the non-salary provisions. Founders should take advice on the mix of salary and other income, and record it in board approvals.

What does SME mean in payroll?

SME stands for small and medium enterprises. In payroll it simply refers to payroll for smaller businesses, which follow the same laws as large employers but usually with fewer employees, one or two states and simpler pay structures.

Position as of 15 November 2026, under the Labour Codes, the PF wage ceiling of ₹25,000 from 17 September 2026 and the Income-tax Act, 2025 (new regime rates for tax year 2026-27). Professional tax, labour welfare fund and shops and establishments rules vary by state. General information, not legal or tax advice.