Running payroll in India is more complex than in most countries. You're not just calculating salaries and transferring money. You're managing PF contributions, ESI deductions, TDS calculations, Professional Tax rates that vary by state, and an annual Form 16 exercise that every employee expects to be accurate. Get any one of those wrong and you're looking at penalties, employee complaints, and potentially a visit from the relevant authority.
Payroll management software is meant to handle most of this automatically. But not all platforms are built with India's compliance requirements in mind, and the feature list on a vendor's website won't tell you which ones actually work under real conditions. This guide walks through how Indian payroll works, what software should and shouldn't be expected to do, and how to evaluate options practically.
How Payroll Works in India
Indian payroll involves several components that all feed into each other:
Salary structure
Most Indian companies break salary into components: Basic, HRA, Special Allowance, LTA, and sometimes custom components like Food Allowance or Medical Allowance. Each component has different tax treatment — HRA, for example, has an exemption calculation based on rent paid and city of residence. The salary structure is the foundation of payroll; if your software can't handle the structure you use, everything downstream is wrong.
Statutory deductions
Every payroll cycle requires calculating and deducting:
- Provident Fund (PF): 12% of basic salary from the employee, 12% from the employer (split between EPF and EPS). Contribution above a certain wage ceiling is optional.
- ESI (Employee State Insurance): 0.75% employee + 3.25% employer for employees earning up to ₹21,000/month. ESI is managed by the ESIC.
- TDS (Tax Deducted at Source): Income tax deducted from salary based on the employee's projected annual income and declared investments. Rates depend on the tax regime (old or new).
- Professional Tax: State-specific, ranging from ₹0 to ₹2,500/year depending on the state. Not all states levy PT.
Monthly filings
After running payroll, the compliance doesn't end. PF ECR (Electronic Challan cum Return) files need to be submitted to the EPFO portal. ESI contributions are paid monthly by the 15th and reported semi-annually via ESI returns (April–September due by 11 November; October–March due by 11 May). Salary TDS must be deposited using challan ITNS 281 and reported quarterly via Form 24Q. Each has a deadline, and missing them triggers penalties.
Annual requirements
At year end, every employee needs a Form 16 — a certificate of TDS deducted and deposited during the financial year. This is generated from the payroll data and needs to match what's been filed with TRACES. Any mismatch creates problems for employees filing their tax returns.
What Payroll Management Software Should Handle
A good payroll software for India should reduce the manual work involved in each of the above — but it's worth being specific about what "handle" means:
- Salary calculation: The software should calculate gross salary, all statutory deductions, and net pay based on your configured salary structure. Including LOP (Loss of Pay) adjustments, arrears, and one-time payments.
- Compliance deduction accuracy: PF, ESI, and TDS should be calculated correctly for each employee based on their salary, regime choice, and declared investments. This is the core requirement.
- ECR and return file generation: The platform should generate the files you need to upload to government portals — ECR for PF, return files for ESI, challans for TDS — not just give you a report you then have to manually process.
- Form 16 generation: Part A (TDS certificate from TRACES) and Part B (income details) should be generated accurately and be ready for download.
- Payslip generation: Formatted payslips that employees can access digitally, ideally through a self-service portal.
- Audit trail: Every payroll run, salary change, and deduction modification should be logged with timestamps and user information.
What Software Can't Do (That Some Vendors Imply It Can)
A few things worth being clear about:
Payroll software doesn't file on your behalf in India. Unlike some countries where payroll providers handle government filings directly, Indian law requires the employer to file. Software generates the files and calculates the amounts, but submitting to EPFO, ESIC, and TRACES is still your responsibility.
Software can't replace professional judgment on edge cases. Arrears for a mid-year salary revision, gratuity calculations for long-service employees, ESOP taxation — these involve judgment calls. Software handles the standard path well; edge cases still need review.
Compliance accuracy depends on your data quality. The software calculates from what you enter. If employee declarations, salary components, or regime choices are entered incorrectly, the compliance outputs will be wrong regardless of how good the software is.
Key Features to Look for When Evaluating
Custom salary components
Your salary structure probably doesn't match the default template in any software. Check whether you can add custom allowance components, set their taxability, and configure how they appear on payslips — without contacting support.
Tax regime support
Since the Finance Act 2023, employees can choose between the old and new tax regimes each year. The payroll software needs to support both, ideally allowing employees to declare their regime choice themselves through the self-service portal.
LOP and attendance integration
Loss of Pay adjustments — salary deductions for unauthorised absences — need to flow automatically from attendance data into payroll. If the two are separate systems with no integration, someone is manually reconciling them every month.
Multi-state PT handling
Professional Tax rates differ by state and, in some states, by salary slab. If you have employees in multiple states, the software needs to handle each state's PT schedule automatically.
Payroll reversal and correction
Payroll mistakes happen. The software should let you correct and re-run payroll for a specific employee, or process arrears in the following cycle, without affecting the rest of the team's finalised data.
How to Evaluate Before You Commit
The best evaluation method is to run a test payroll with your actual salary structure. Set up a few test employees with your typical components — Basic, HRA, Special Allowance, plus any custom components you use — and run a full payroll cycle. Then verify:
- Are the PF and ESI deductions calculating correctly?
- Is TDS calculated correctly for both old and new regime employees?
- Does the ECR file generate in the format EPFO expects?
- Does the payslip show all components clearly?
- Can you adjust for a mid-month joiner correctly?
If any of those five fail, you've found a problem before it becomes a live payroll error.
MedleyHR handles all of the above natively — PF, ESI, TDS, PT, Form 16, and payslip generation — with a free plan for up to 10 employees. Run a test payroll on your actual salary structure before committing to anything. Start free →
Pricing Models: What to Watch For
Indian payroll software pricing works in a few different ways, and the model affects total cost significantly:
- Per employee per month: Common among larger platforms. Starts low but scales with headcount. A 40-person team at ₹200/employee is ₹8,000/month. Watch for minimum employee counts and features locked behind higher tiers.
- Flat base with included headcount: A fixed monthly cost covers a set number of employees, with a per-employee charge for headcount above that. More predictable for teams within the included count — ₹1,999/month covers up to 25 employees; beyond that, an overage rate applies per additional employee.
- Custom enterprise pricing: Large platforms that won't publish pricing until a sales call. Expect higher costs, annual commitments, and implementation fees on top.
The Bottom Line
The right payroll management software for an Indian business handles PF, ESI, TDS, and Form 16 natively, can be configured for your salary structure without a consultant, and generates the compliance files you actually need to submit — not just reports you then have to process manually. Test with your real data before committing, verify the compliance outputs specifically, and don't assume that "India payroll" means the same thing across all platforms.