Payroll Setup for Startups in India: Registrations, Salary Structure, Process

Payroll setup for startups in India begins before the first salary is paid. Since the four Labour Codes came into force on 21/11/2025, the appointment letter, the salary structure and the statutory registrations all have to line up on the day an employee joins. A first hire needs only a few registrations, and the thresholds that trigger the rest depend on headcount and state. This guide sequences the work: what to register, how to build a salary structure that passes the new wage definition, and how to run each month without a payroll team.

How do you set up payroll for a startup in India?

Get a TAN, collect PAN, Aadhaar and bank details, and issue an appointment letter with a salary structure that meets the wage definition. Register for PF, ESIC and professional tax where headcount or state law requires. Then pay wages before the 7th, deposit salary TDS by the 7th, and deposit PF and ESI by the 15th (Section 17, Code on Wages, 2019; Section 392, Income-tax Act, 2025).

Payroll setup for startups in India: which registrations apply at what headcount?

Three obligations attach to a first hire at any headcount: a TAN once salary TDS falls due under Section 392 of the Income-tax Act, 2025, an appointment letter, and wage payment on time under Section 17 of the Code on Wages, 2019. Provident fund starts at 20 employees, ESIC at 10, and professional tax and shops and establishments registration depend on the state.

The four Labour Codes took effect on 21/11/2025. The Ministry of Labour and Employment notified the final Central Rules on 08/05/2026 and 09/05/2026, covering wages, social security, industrial relations and occupational safety. Those Central Rules bind only establishments where the Central Government is the appropriate government. Most private startups sit under their state government, and state rules are at different stages of notification. Apply the Code definitions from day one and check your state’s notified rules for forms and timelines. Our note on the new labour law in India covers the wider changes, and the annual calendar of startup compliances shows where payroll sits among them.

Registrations and the trigger for each

Does a startup with one employee need payroll registrations?

Yes, in part. A single employee needs an appointment letter, a wage slip and timely wage payment, and a TAN as soon as any salary TDS falls due. Salary TDS is due only where the employee’s estimated tax is above nil. Under the new regime a salary of up to ₹12,75,000 is tax-free after the standard deduction and rebate (Sections 19 and 156, Income-tax Act, 2025), so TDS may be nil while the other obligations still apply. PF and ESIC do not apply at one employee, but state registrations may.

Provident fund can be taken earlier. Section 1(5) of the Code on Social Security, 2020 lets Chapter III apply where the employer and a majority of employees agree. Section 1(8) makes coverage permanent: an establishment that is covered stays covered even if headcount falls below 20. Decide on early registration as a long-term cost decision, not a favour to the first hires.

ESIC is a wage-ceiling test as much as a headcount test. Once the 10-employee threshold is met, employees whose wages, on the Code definition, are up to ₹21,000 a month are covered. The employer pays 3.25% and the employee 0.75% of wages (Rule 19, Social Security (Central) Rules, 2026). No ceiling has been notified for Chapter IV under Section 2(89) of the Code on Social Security, 2020, so ₹21,000 continues to apply under the Ministry of Labour and Employment’s FAQs of 16/03/2026. The ESI ceiling was not touched by the 2026 PF revision, which covers Chapter III only.

Payroll setup for first employees: what to collect and issue before day one

Before an employee’s first day, collect PAN, Aadhaar, bank details, address proof, previous employer salary details and a tax regime declaration. Issue an appointment letter in the prescribed format with the salary structure annexed. The appointment letter is mandatory for every employee under the Occupational Safety, Health and Working Conditions Code, 2020, and the Central Rules, 2026 prescribe its format.

The onboarding file for each hire:

1. PAN and Aadhaar, with the PAN operative so that salary TDS is deducted at normal rates (see the TDS and TCS guide on higher rates for inoperative PANs).
2. A bank account in the employee’s own name. Bank transfer is a permitted mode of wage payment under Section 15 of the Code on Wages, 2019.
3. The existing UAN, if the employee has worked before, with Aadhaar KYC seeded and a PF nomination on file. A new UAN is generated only after PF registration.
4. Previous employer salary and TDS details for anyone joining mid-year (earlier Form 12B), so that your TDS estimate covers the full tax year.
5. A tax regime declaration. The new regime is the default under Section 202 of the Income-tax Act, 2025, and the employee may opt for the old regime. An employee who opts for the old regime also gives Form 124 (earlier Form 12BB), the statement of deduction claims under Section 392(5)(b) and Rule 205, with rent details and the landlord’s PAN for an HRA claim.
6. A signed appointment letter with the salary structure annexed, probation, notice period, leave policy and the day-count basis used to prorate a part month.
7. A signed employment agreement with confidentiality and IP assignment clauses.

Should founders be on payroll from the first month?

A founder who draws a regular salary should be on payroll, with a board resolution recording the remuneration. Salary TDS under Section 392 applies to directors in the same way as to other employees. Where a director is appointed as managing or whole-time director, Sections 196 and 197 of the Companies Act, 2013 apply where relevant. Founders who draw nothing need no payroll entry.

Interns and consultants are a separate question. A stipend paid under an employer-employee relationship belongs on payroll, and an independent consultant who invoices does not. The misclassification risk is covered in our payroll outsourcing guide, so it is not repeated here.

How should the first salary structure be built under the Labour Codes?

Build the structure so that basic pay, dearness allowance, retaining allowance and any allowance that is not an excluded head add up to at least 50% of total remuneration. Under Section 2(y) of the Code on Wages, 2019 and Section 2(88) of the Code on Social Security, 2020, excluded components above half of remuneration are added back into wages. The definition has applied since 21/11/2025.

Wages is now the base for gratuity, overtime and, within the ceiling, provident fund. Excluded heads include house rent allowance, conveyance allowance, the employer’s PF contribution, allowances for special expenses tied to the nature of the job, overtime, commission and statutory bonus that is not part of the terms of employment. A general special allowance with no expense condition is not an excluded head and counts as wages.

Does the 50% rule mean basic pay must be 50% of CTC?

No. The rule limits the excluded components to 50% of total remuneration, and anything above that is added back. A basic of 50% of CTC is still the cleanest template for a first hire, because it removes the add-back calculation and keeps the payslip easy to explain. The illustration below shows what happens to a template that keeps basic at 25%.

Illustration: wage base for a monthly CTC of ₹1,00,000 on an allowance-heavy template

The gratuity effect is direct. Gratuity for each completed year of service is 15 days of wages, calculated as wages divided by 26 and multiplied by 15 (Section 53, Code on Social Security, 2020). On the old basic of ₹25,000 that is ₹14,423 for each year of service. On wages of ₹50,000 it is ₹28,846. For eight employees on this template, the monthly gratuity provision rises from ₹9,615 to ₹19,231.

A template with basic at 50% of CTC reaches the same wage base without the add-back. Take basic of ₹50,000, house rent allowance of ₹25,000, conveyance allowance of ₹10,000, special expense allowances of ₹12,000 and employer PF of ₹3,000. The excluded components total ₹50,000, which is exactly 50% of CTC, so wages equal basic at ₹50,000 and gratuity for each year of service is again ₹28,846. The payslip is easier to explain because the wage base is one visible line, and an employee can check the gratuity arithmetic without a spreadsheet.

The provident fund effect depends on the ceiling. From 17/09/2026 the wage ceiling for Chapter III is ₹25,000 a month (S.O. 5109(E), 17/09/2026), up from ₹15,000. Employer PF on both structures above is ₹3,000 a month, which is 12% of ₹25,000 (rate under S.O. 3582(E), 01/07/2026). For an employer that restricts PF to the ceiling, the revision adds up to ₹1,200 a month for each employee whose wages are at or above ₹25,000, with an equal amount on the employee side. The PF compliance guide carries the contribution mechanics and registration steps.

The ceiling also decides membership. Under paragraph 2(f) of the Employees’ Provident Funds Scheme, 2026 (G.S.R. 525(E), 29/06/2026), an employee whose wages exceed the ceiling on the date of joining is an excluded employee and is not a mandatory PF member. A hire whose wages are at or below ₹25,000 must be enrolled from the joining date. S.O. 5109(E) superseded S.O. 2702(E) dated 29/05/2026, which had fixed the ceiling at ₹15,000.

Three further checks belong in the template. Test each role against the minimum wage notified by your state. Mark the gratuity basis in the CTC annexure. For fixed-term hires, remember that gratuity accrues after one year, not five. The hiring and payroll projection model shows how these lines flow into the budget.

What else does a first hire start besides salary?

A first hire also starts a gratuity accrual, a maternity benefit exposure and a records duty, none of which needs a payment in month one, and the team’s growth to 20 persons adds statutory bonus. All belong in the plan. Gratuity sits in Chapter V (Sections 53 to 58) and maternity benefit in Chapter VI (Sections 59 to 72) of the Code on Social Security, 2020.

• Gratuity accrues at 15 days of wages for each completed year of service, which is about 4.81% of monthly wages (15 divided by 26, divided by 12). Book it monthly from the first salary, not at the five-year mark.
• Maternity benefit under Section 60 is 26 weeks of paid leave for a woman with fewer than two surviving children and 12 weeks for two or more. Section 67 requires every woman to be told of her benefits in writing and electronically at the time of appointment.
• Statutory bonus starts once the establishment has 20 or more persons. Employees with wages up to ₹21,000 a month get at least 8.33% of bonus wages, or ₹100 if higher, and up to 20%, with bonus calculated on ₹7,000 or the applicable minimum wage if that is higher. It is paid within eight months of the accounting year end, which is 30 November for a March year-end (Sections 26 and 39, Code on Wages, 2019; S.O. 4711(E) and S.O. 4710(E) dated 25/08/2026, effective from 21/11/2025, for the central sphere).
• Payroll records, wage slips, attendance and leave records must be kept for inspection. The retention period is set by the rules of the state where the establishment is registered.

How should a payroll setup for startups run month to month?

A monthly cycle has five stages: lock attendance, joiners and exits; compute gross to net; approve and release wages; deposit TDS, PF and ESI; and file the quarterly TDS statement. Wages for a monthly period must be paid before the expiry of the 7th day of the next month (Section 17, Code on Wages, 2019).

Monthly payroll cycle for a first-year startup

When must salaries be paid each month?

Monthly wages must be paid before the expiry of the 7th day of the following month. On removal, dismissal, retrenchment or resignation, wages must be paid within two working days (Section 17(1) and (2), Code on Wages, 2019). Paying on the last working day of the month removes most of the risk.

The register that comes out of the cycle should tie to the books every month. The controls that make that reconciliation hold are set out in our note on virtual CFO payroll and TDS controls, and the accounting side of the close is in the month end close checklist. The point at which a spreadsheet should give way to software or a provider is covered in the payroll outsourcing guide. Dates for the current month sit in the compliance calendar for November 2026.

How should a part month be prorated?

The day-count basis for a part month is a policy choice, so it has to be written into the appointment letter and applied the same way to every joiner and leaver. Take monthly gross pay of ₹80,000 and a joining date of the 11th in a 30-day month. On calendar days the employee is paid for 20 days, which is ₹53,333. On a 26-day working basis, with 15 working days falling on or after the 11th, the figure is ₹46,154. The gap of ₹7,179 is the source of most first-payslip queries. Pick one basis, state it in the letter, and use it for exits as well, because final settlement within two working days under Section 17(2) of the Code on Wages, 2019 leaves no time to debate the method.

What does a first payslip look like?

A first payslip shows earnings, employee deductions and net pay, with employer contributions listed separately. Take the ₹1,00,000 CTC in the illustration above, with employer PF of ₹3,000 inside it. Gross salary is ₹97,000. Where PF is provided, employee PF at 12% of the ₹25,000 ceiling is ₹3,000. Taxable salary for the year is ₹10,89,000 after the ₹75,000 standard deduction, and tax of ₹48,900 on the new regime slabs is cancelled by the rebate under Section 156, so salary TDS is nil. Net pay is ₹94,000 before professional tax, which depends on the state. The payslip should still carry the TDS line at nil, so the monthly estimate is on record if the employee’s income changes during the year.

How is TDS on salary calculated and reported under the Income-tax Act, 2025?

Employers deduct tax on salary monthly under Section 392 of the Income-tax Act, 2025, by estimating the employee’s annual tax and spreading it across the months. The new regime is the default, with a standard deduction of ₹75,000 and a rebate under Section 156 that makes taxable income up to ₹12 lakh tax-free. The deduction is reported quarterly in Form 138 and certified annually in Form 130.

Which forms replace Form 24Q and Form 16?

Form 138 replaces Form 24Q and Form 130 replaces Form 16 for salary paid from 01/04/2026, which is tax year 2026-27. Form 16 continued for FY 2025-26. Payroll software that still shows the old section and form numbers is out of date.

Terms in older guides and their current position

An illustration shows the monthly deduction for a first hire. On a CTC of ₹18,00,000 that includes employer PF of ₹36,000, a resident employee on the new regime with no other income or perquisites has taxable salary of ₹16,89,000 after the ₹75,000 standard deduction. Tax on the new regime slabs is ₹1,37,800 and cess at 4% adds ₹5,512, so the deduction is about ₹11,943 a month.

Form 138 is filed on 31/07, 31/10, 31/01 and 31/05, and Form 130 is generated from TRACES only after the Form 138 filings are in. The mechanics of deposits, corrections and defaults sit in the TDS and TCS guide. How NPS, HRA and regime choice change the number is in the salary structuring guide, so this section stays on the setup.

How is TDS set for an employee who joins mid-year?

TDS on a joiner is based on income for the whole tax year: salary from the previous employer, which the joiner must declare, plus salary from you for the remaining months. The standard deduction of ₹75,000 is allowed once for the year and is not prorated. If the previous employer’s salary is not declared, the estimate understates annual tax and the joiner sees a heavy deduction in the last months of the year. Collect the previous employer’s salary and TDS details before the first pay run, not at year end.

Payroll milestones across the first year and as headcount grows

Payroll obligations arrive in stages. The first hire starts the wage, TDS and gratuity duties, the tenth employee brings ESIC, the twentieth brings provident fund and statutory bonus, and each year adds a Form 130 and a bonus date. Planning the stages in advance avoids registering in a hurry.

What triggers a new payroll duty

A startup that expects to reach 20 persons within the year should budget for PF and statutory bonus before the nineteenth hire, because Section 1(8) of the Code on Social Security, 2020 makes PF coverage permanent once it applies. Bonus relates to the whole accounting year, so the provision should accrue monthly and not arrive as a lump sum in November.

Common mistakes that cost founders time and money

Five mistakes account for most first-year payroll problems. Each is avoidable with a template and a calendar.

1. Copying a pre-Code CTC template. Offer letters carried over from earlier jobs keep basic at 25 to 40% of CTC, so the gratuity provision is understated once wages is the base. The correct approach is to test every CTC against Section 2(y) before the offer goes out. In the illustration above, the gap is ₹14,423 for each employee for each year of service.
2. Running PF on the old ₹15,000 ceiling. Software defaults and older guides still show it. The ceiling is ₹25,000 from 17/09/2026 under S.O. 5109(E). For an employer restricting PF to the ceiling, the shortfall is up to ₹1,200 a month on the employer side and the same on the employee side for each employee at or above ₹25,000.
3. Deducting PF and not depositing it. It happens in lean months when cash is tight. It is the costliest default in the table below, because it carries imprisonment as well as interest. Deposit PF before any discretionary spend.
4. Using legacy forms and section codes for tax year 2026-27. Form 24Q, Form 16, Form 12BB and Section 192 are the old labels. Returns built on them fail validation at upload and have to be redone. Move master data to Section 392, Form 138, Form 130 and Form 124.
5. Paying late or skipping paperwork. Salary after the 7th breaches Section 17 of the Code on Wages, 2019 and attracts penalty under Section 54. A missing appointment letter breaches the OSH Code. Pay on the last working day and issue the letter before the start date.

What late payment and non-payment cost

What to do in the first 30 days of payroll setup

Payroll setup for startups in India is a one-time sequencing job followed by a monthly routine, and the first month is the only one that needs this much planning. In order:

1. Apply for the TAN and set up the TDS login on the income tax portal.
2. Enrol for professional tax and register under the shops and establishments Act in each state where employees will work.
3. Decide on PF: register at 20 employees, or earlier by agreement under Section 1(5), knowing that Section 1(8) makes coverage permanent.
4. Build the CTC template and test it against Section 2(y) of the Code on Wages, 2019.
5. Issue appointment letters with the salary structure annexed.
6. Run a dry cycle around the 20th, pay on the last working day, and diarise the 7th and the 15th.

FAQs on Payroll Setup for Startups in India

Q: What is the tax-free salary limit under the new regime for tax year 2026-27? 
A: It is ₹12,75,000 for a salaried resident whose only income is salary, being the ₹12 lakh rebate threshold plus the ₹75,000 standard deduction (Sections 19 and 156, Income-tax Act, 2025). Marginal relief applies just above that. Budget 2026 did not change slabs or the rebate.

Q: How much does payroll setup cost? 
A: The cost is the employer’s statutory contributions plus software or advisory fees. Employer PF is 12% of wages up to the ceiling, which is ₹3,000 a month at ₹25,000, and ESI is 3.25% of wages where it applies. Advisory fees are typically structured per employee per month with a one-time setup fee. Treelife scopes both on headcount and state mix.

Q: How long does payroll setup take? 
A: The statutory dates set the timeline. Registrations and the CTC template come before the offer letter, the payroll register before the first pay run, and the first salary must be paid before the 7th of the following month. TDS is due on the 7th and PF and ESI on the 15th. A dry cycle around the 20th of month one catches most errors.

Q: What documents are needed to start payroll? 
A: PAN, Aadhaar, bank details, address proof, previous employer salary details for mid-year joiners, a tax regime declaration, a signed appointment letter with the salary structure annexed, and an employment agreement. The company needs its TAN, and PF, ESIC and state registrations where they apply.

Q: How does payroll work when a foreign parent funds the Indian team? 
A: The Indian entity runs payroll under the same rules, deducting TDS under Section 392 and paying PF and ESI where thresholds are met. The parent reimburses or funds the cost, which raises Foreign Exchange Management Act, 1999 and transfer pricing questions. The India entry compliance checklist covers the entity side.

Q: Can co-founders draw salary through payroll? A: Yes, with a board resolution recording the remuneration. Salary TDS applies in full, and Sections 196 and 197 of the Companies Act, 2013 apply where a managing or whole-time director is appointed. Payments to relatives of founders must reflect real work, because unreasonable payments to related persons can be disallowed as a business expense.

Q: Does DPIIT recognition exempt a startup from payroll compliance? 
A: No. DPIIT recognition does not remove salary TDS, wage payment or the PF and ESIC thresholds. The DPIIT benefits connected to PF are set out in the PF compliance guide.

Q: Can salary be paid from the founder’s personal bank account? 
A: Bank transfer is a permitted mode of wage payment under Section 15 of the Code on Wages, 2019, but the Code does not name the account. Salary paid from a personal account leaves no company record for the expense deduction, TDS and PF evidence, and it fails investor checks. Pay from the company account from the first month.

Q: Can a startup run payroll on a spreadsheet? 
A: Nothing in the Code on Wages, 2019 bans a spreadsheet, and wage slips may be paper or electronic under the Central Rules, 2026. The limit is control: Form 138 must be filed electronically, and a spreadsheet cannot apply a split-period rule such as the September 2026 PF ceiling change without manual work. Move to software when headcount or states grow.

Q: What happens if PF is deducted from salary but not deposited? 
A: It is an offence under Section 133 of the Code on Social Security, 2020. Failure to deposit an employee contribution already deducted carries imprisonment of at least one year and a fine of ₹1,00,000, and the maximum imprisonment for contribution defaults is three years. Deposit by the 15th of the next month.

Q: What if a salary is paid after the 7th of the next month? 
A: It breaches Section 17 of the Code on Wages, 2019 and attracts penalty under Section 54. Pay on the last working day of the month, and if a delay is unavoidable, pay the affected employees first and document the cause.

Q: What do investors check on payroll during due diligence? 
A: Proof of deposit of TDS, PF and ESI, Form 138 filings, appointment letters, and the match between the payroll register and the books. Gaps in any of these show up in the compliance section of a legal due diligence checklist and can move into a closing condition.

Q: How are ESOP holders handled in payroll? 
A: The ESOP perquisite on exercise is taxed as salary, and TDS under Section 392 applies on the perquisite value. Payroll needs the exercise date, fair market value and exercise price from the ESOP records. The tax treatment is set out in our note on ESOP taxation in India.

Q: Do interns and consultants need to be on payroll? 
A: Interns paid a stipend under an employer-employee relationship do. Independent consultants who invoice do not, and payments to them attract TDS under Section 393 of the Income-tax Act, 2025, not Section 392. The deciding factor is control and integration, not the label on the contract.

Q: What changes when employees work in more than one state? 
A: Professional tax, labour welfare fund and shops and establishments registrations follow the state where the employee works. A startup with remote hires in three states may need three sets of state registrations, even where PF and TDS remain single.

Regulatory references

• Code on Wages, 2019: Section 2(y), Section 15, Section 17, Sections 26 and 39, Section 54
• Notifications S.O. 4711(E) and S.O. 4710(E), 25/08/2026 (bonus eligibility and calculation ceilings)
• Code on Wages (Central) Rules, 2026, notified 08/05/2026
• Code on Social Security, 2020: Section 1(4), 1(5), 1(8), Section 2(88), Section 2(89), Chapter III (Sections 14 to 23), Section 16, Chapter IV, Chapter V (Sections 53 to 58), Chapter VI (Sections 59 to 72, including Sections 60 and 67), Sections 127, 128 and 133
• Social Security (Central) Rules, 2026, notified 08/05/2026, Rule 19
• Occupational Safety, Health and Working Conditions Code, 2020 and Central Rules, 2026, notified 09/05/2026
• Employees’ Provident Funds Scheme, 2026: G.S.R. 525(E), 29/06/2026, paragraphs 2(f) and 20
• Notification S.O. 3582(E), 01/07/2026 (PF contribution rate of 12%)
• Notification S.O. 5109(E), 17/09/2026 (PF wage ceiling of ₹25,000, superseding S.O. 2702(E), 29/05/2026)
• Income-tax Act, 2025: Section 19, Section 29(1)(e), Section 156, Section 202, Section 392 (including 392(5)(b)), Section 393, Section 395(4)(b), Section 397(3)(b)
• Income-tax Rules, 2026: Rule 205, Rule 215(1), Rule 218, Rule 219 (including 219(4))
• Constitution of India: Article 276(2)
• Companies Act, 2013: Section 196, Section 197
• Foreign Exchange Management Act, 1999

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Treelife

Treelife Team | support@treelife.in

We are a legal and finance firm with a deep focus on the startup ecosystem. We offer a wide range of services, including Virtual CFO, Legal Support, Tax & Regulatory, and Global Expansion assistance.

Our goal at Treelife is to provide you with peace of mind and ease in business.

Reviewed By

Jitesh Agarwal

Founder

Leads VCFO, finance, tax, and regulatory functions at Treelife. Advises on GIFT City structuring and strategic financial decisions for startups and scale-ups.

Priya Kapasi Shah

Associate Partner | Tax & Regulatory

Heads Financial Advisory at Treelife, specialising in investment structuring, cross-border transactions, AIF setups, and tax and regulatory advisory.