Payroll Tax - Definition, Types, Example, How to Calculate?

Payroll Tax - Definition, Types, Example, How to Calculate?

The tax that is deducted, assessed, or imposed on an employer's paycheck is known as payroll tax. This comprises pay to employees in the form of wages, gross salary, benefits, and other forms of compensation. 

No matter the employee's residence, family situation, or other personal details, this tax is imposed. 

Payroll taxes are levied for employees by employers and must be paid and withheld on their behalf. India is one of the economies in the world with the quickest growth. 

Any economy expanding at this rate will undoubtedly have a number of emerging industries, technological and industrial developments, and different trends. 

Due to this growth, businesses must develop, hire new workers, and manage a sizable workforce. Payroll taxes in India may quickly turn into an issue in the process. 

Therefore, it's important to keep track of them. Here is detailed information and procedure for calculating payroll tax by ESPECIA.

What is a payroll tax? 

The tax that is assessed, deducted, or imposed on the employer's paycheck is known as payroll tax. 

This will include gross salary, pay,  benefits, and any other compensation given to the workers. The tax bill, withheld or imposed on an employee's paycheck, is known as payroll tax. 

This covers all total salaries, wages, benefits, and other types of payments given to his or her staff. 

This tax is calculated without considering the employee's residence, family situation, or other unique circumstances. In a nutshell, payroll taxes must be paid or postponed by a company on behalf of its employees.

Although both an income tax and a payroll tax are withheld from employees' paychecks, there is a difference between the two. Specific programs are funded with the help of payroll taxes. 

Up to a yearly maximum, everyone pays a fixed payroll tax rate. However, income taxes are graduated. Depending on an individual's income, rates change. 

All taxes on a person's income, wage, bonus, fee, and tips are included in their payroll. 

These fees are used to fund municipal infrastructure, Medicare, Social Security, unemployment insurance, and other government initiatives.

The main objectives of payroll tax are given below: 

  • To support the expansion and improvement of the company sector
  • To make it easier to provide the refund that the employer pays for its employees
  • To aid in preparing businesses throughout their early stages of operation
  • The assistance for companies intending to relocate their headquarters To assist companies looking to hire more employees and take on the responsibility of paying payroll taxes

However, if a firm or a group of enterprises were responsible for paying payroll taxes the previous year, they are not eligible for the payroll taxes bonus program.

Why is Payroll tax important in India? 

A few reasons why payroll taxes are important in India are:

  • Accountability 

You must comprehend your taxes as an accountable citizen and ensure they are submitted on time. The employer payroll tax does, however, become partially your obligation if you work for an employer. Based on your declarations and investments, the organisation's accounting team and human resources division will eliminate payroll taxes in India. However, to prevent fines and inconvenience to yourself, you must timely pay your professional taxation on your income as a responsible citizen.

  • Avoid penalties 

Employees consider paying taxes to be their first obligation because penalties are the most severe penalty for not reporting taxes in India. Various professional taxes that apply to employees may or may not be paid under TDS at their place of employment. Every person with an income source must pay professional taxes in India. The tax bracket you are in, or your tax responsibilities will determine this. Tax evasion carries potentially serious consequences. Your future job, credit score, and reputation with employers and other institutions are all impacted further by this. You would be required to pay the penalty if you don't pay the tax in full according to the rules as well as regulations. Fines for failing to pay taxes can run into the thousands. This affects your potential employment, credit rating, and reputation with employers or other organisations.

  • Responsibility of the citizen

If you carefully think about it, the employees are ultimately responsible for paying taxes. You must comprehend your taxes as a responsible citizen of the nation and ensure they are paid on time. However, employer payroll tax partially falls under their purview when you work for an employer. Payroll taxes are withheld by the company's accounting department or human resources department based on your declarations as well as investments. Therefore, in order to avoid fines and bother yourself, you must pay your income taxes on time and in full as a responsible citizen.


  • Economy of India 


Payroll taxes are essential for the development of the country's economy. Every country prospers and grows thanks to this tax revenue. With the help of this money, certain industries will expand, and public areas will improve and become more livable. Taxpayers who contribute to the government according to their income ranges are essential to the health of any nation. This money supports other aspects of the nation's development as well as technological breakthroughs. Overall, India's payroll taxes support economic growth and national development.

Types of payroll tax categories 

Here are some basic types of payroll tax categories: 

  • Withholding tax

Withholding tax is the name for the portion of employee wages that a company is required to deduct. The government, which is responsible for collecting and levying taxes in compliance with the various slabs of the Income Tax Act, receives this payment. Another name for it is a retention tax. The government raises money through withholding taxes, which are subsequently used to pay for various programs, including employment and disability assistance.

  • Personal income tax

Payroll taxes must be paid by every individual and entity having an income in India, including Hindu Undivided Families and other similar entities. In addition, professional taxes on investment gains, commercial gains, and income through sources like gambling, dividends, etc. so forth must be paid by any paid employee in India. The new and old tax systems may result in a different tax bracket for each individual. TDS is normally taken off according to the tax slab at the point of sale. Based on their reductions and exemptions, employees can file an ITR return to receive some of the payroll tax back.

  • Benefits of social security

In India, payroll comprises a range of programs like insurance for health, pension plans, gratuities, and so on. Similar to social security, this. Employees' Provident Fund Scheme, a sort of payroll pension contribution, is used in India. Depending on their income, the employer and the employee contribute to the EPF. Payroll in India includes National Health Services. However, these services do not offer employees free medical attention. It offers money to pay for maternity, medical, and other costs. According to compliance regulations, women should be granted 12 weeks of parental leave before and after their kid's arrival. In India, when an employee has been with the same employer for more than five years, gratuity is subtracted from payroll taxes.

  • Employees' and employers' contribution 

Both the workers and the business make a number of contributions to payroll in India. Employers are required to contribute to the Employee Pension Scheme and the Employee Provident Fund if they have 20 or more employees. Employers are required to pay into Employee State insurance if they have ten or more workers. Both the worker and the company make the aforementioned deductions or payments at varying rates.

  • Minimum wage

Each job role's minimum pay is established depending on the place of work and various other categories. For each of the 400 employment categories, employers are required to abide by the law. State government laws and policies manage an entry-level wage statute in India.


  • Working hours 


In India, an employee typically puts in 9 hours each day, or a total of 48 hours per week. Anything over this is considered extra hours, and the employee is paid for overtime at double the regular rate of pay. An employee is permitted to take up to 15 days of compensation off in a calendar year. As a result of national holidays, there are a lot more extra days off available. Over this, the branches may be paid. 

Calculation of payroll tax

After the release of the Union Budget, you can estimate the taxes you pay based on your income using the simple-to-use payroll tax calculator. 

Our tool has been updated to reflect the proposed income tax adjustments in the Union Budget for 2023–2024. 

The steps to calculate payroll tax are as follows:

  • Choose the fiscal year to calculate payroll tax.
  • Select age and tax liability.
  • Go to the next step and select tax liability and other required details.
  • Click on the Calculate option. 

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Payroll taxes are a tool used to support the commercial sector. They serve to aid in the expansion and development of the sector. 

Payroll (employee) taxes enable enterprises to operate effectively in their initial stages of operation. 

These taxes may be beneficial for businesses looking to move their headquarters. Payroll taxes support companies that want to increase their payroll and are getting ready to assume the responsibility of making payroll tax payments. 

They also support the administration of refunds that employers give their workers. The employee must pay TDS; it is normally taken out at hire. 

This covers a wide range of additional deductions that are made exclusively at the source. 

Based on the tax bracket, employees can select a suitable system of taxation to lower their tax obligation.


1. What are payroll taxes in India?

Employers are liable for a number of different payroll taxes in India, including Income tax: Employers must withhold income tax from their workers' paychecks and submit it to the taxing authority on their behalf. The employee's salary, as well as tax bracket, determines how much income tax is withheld.

2. How can I calculate payroll tax in India?

Before tax and other deductions, the gross salary is calculated by adding the employee's basic salary, allowances, and basic salary. It includes things like holiday pay, bonuses, and overtime compensation. Basic Salary + HRA + Additional Allowances = Gross Salary.

3. What is the rule of payroll?

Payment of Wages Act 1936 mandates that the company make timely wage payments to employees at least once a month. According to the employer's convenience, salaries can be paid on a monthly, weekly, or daily schedule.

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