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Tax Obligations Detailed

Discover employer and employee tax responsibilities in India

Employer tax responsibilities

In India, employers have a responsibility to contribute towards social security and health insurance schemes for their employees. These contributions are separate from the income tax deducted from an employee's salary.

Employees' Provident Fund (EPF)

The Employees' Provident Fund (EPF) is a retirement savings scheme in India. Both employers and employees contribute a fixed amount of 12% of the employee's gross monthly earnings to the EPF. This contribution goes into an interest-bearing account, and the accumulated amount is available to the employee upon retirement.

Employer Contribution

Employers are required to match the employee's contribution of 12%. Out of this 12%, 8.33% is allocated towards the Employees' Pension Scheme (EPS) for employees earning less than ₹15,000 per month. This contribution is capped at ₹1,250 monthly. The remaining employer contribution of 3.67% goes into the employee's EPF account.

Both the employer's and employee's contributions towards EPF are exempt from income tax.

Employees' Pension Scheme (EPS)

The Employees' Pension Scheme (EPS) is a social security scheme that provides pension benefits to employees upon retirement.

Employer Contribution

As mentioned earlier, 8.33% of the employer's contribution to EPF goes towards the EPS for eligible employees (earning less than ₹15,000 per month). This contribution is capped at ₹1,250 monthly. Unlike the EPF amount, the EPS contribution does not accrue interest, and the monthly pension payments are subject to tax.

Employees' State Insurance (ESI)

The Employees' State Insurance (ESI) scheme provides medical and financial benefits to employees and their dependents in case of illness, maternity, and work-related injuries.

Employer Contribution

The employer contribution to ESI depends on the number of employees in the company. Companies with more than 20 employees contribute 4.75% of the employee's wages. Companies with less than 20 employees are not mandated to contribute to ESI.

It is mandatory for employers to register their employees under the EPF and ESI schemes if they meet the eligibility criteria (number of employees). The employer is responsible for deducting the employee's contribution towards ESI and EPF from their salary and depositing the total amount (employer and employee contribution) to the respective authorities. The deadlines for depositing these contributions can vary, so it's important for employers to stay updated on the latest regulations.

Employee tax deductions

Employee tax deductions in India are the portion of an employee's salary that is withheld by the employer and deposited with the government. These deductions primarily contribute to income tax and various social security schemes.

Income Tax Deduction at Source (TDS)

The Income Tax Deduction at Source (TDS) is the most significant deduction from an employee's salary. The amount of TDS deducted depends on the employee's income slab, tax filing status, and any applicable deductions or exemptions claimed.

  • Calculation: Employers calculate TDS based on the employee's taxable income as per the latest income tax slabs and rates provided by the Income Tax Department.
  • Payment: The deducted TDS is deposited with the government by the employer within the specified timelines.
  • Tax Filing: Employees are responsible for filing their income tax returns and claiming any tax credits or deductions for which they are eligible.

Employees can submit a duly filled Form 16 to their employer, which details the total salary earned, TDS deducted, and other tax components throughout the financial year. This form is crucial for filing income tax returns.

Professional Tax

Professional tax is a state-levied tax deducted from an employee's salary. The rate and applicability of professional tax vary depending on the state of employment.

  • Eligibility: Professional tax is generally applicable to salaried employees earning above a certain threshold, which differs from state to state.
  • Payment: The employer deducts professional tax at source and deposits it with the state government.

It's advisable for employees to be familiar with their state's specific professional tax rules.

Other Deductions

There might be other deductions from an employee's salary depending on the company's policies and benefits offered. These could include:

  • Employee's Contribution to Provident Fund (EPF): A fixed percentage (usually 12%) of the employee's salary is contributed towards the Employees' Provident Fund (EPF) scheme, a retirement savings plan.
  • Employee's Contribution to Employees' State Insurance (ESI) (if applicable): Employees earning below a certain limit contribute 1.75% of their salary towards the Employees' State Insurance (ESI) scheme, which provides medical and financial benefits.


In India, the concept of Value Added Tax (VAT) has been replaced by the Goods and Services Tax (GST) since July 1st, 2017. GST is a comprehensive indirect tax levied on the supply of goods and services across the country. Understanding the past implications of VAT on services can provide a better understanding of the current GST framework for service providers.

Pre-GST VAT Scenario for Services:

  • Tax Liability: Service providers were liable to register under VAT if their annual turnover exceeded a specific threshold set by each state.
  • Tax Rates: Different states levied varying VAT rates on services, leading to a complex tax structure.
  • Input Tax Credit (ITC): Registered service providers could claim credit for VAT paid on business purchases to offset their tax liability.
  • Cascading Effect: VAT was levied at each stage of the supply chain, inflating the final price of services.

How GST Addresses VAT Shortcomings:

  • Unified Tax System: GST replaced multiple state-level VAT rates with a single tax structure across India, streamlining compliance for service providers.
  • Reduced Cascading Effect: The input tax credit mechanism under GST allows service providers to claim credit for GST paid on purchases, reducing the tax burden on final consumers.
  • Simplified Administration: GST implementation aimed to simplify tax administration and compliance for businesses dealing with services.

GST Implications for Service Providers:

  • Registration: Service providers with a turnover exceeding ₹20 lakh (₹10 lakh in some states) must register under GST.
  • Tax Rates: Services are categorized under different GST slabs (e.g., 0%, 5%, 18%) depending on the nature of the service.
  • Tax Payment: Registered service providers need to collect GST from their customers, file GST returns, and deposit the collected tax with the government.

Tax incentives

The Indian government provides a range of tax incentives to stimulate business expansion and investment within the country. These incentives can be generally divided into three categories.

Incentives for Startups

Eligible startups can benefit from a 100 percent tax rebate on their profits for a period of three years within a block of ten years from incorporation. To qualify, the startup must be incorporated before March 31, 2024, and its annual turnover must not exceed INR 1 billion. Startups are also exempt from long-term capital gains tax on the sale of investments held for more than two years. Furthermore, the government exempts tax on the investment made in a startup above the fair market value.

Corporate Tax Incentives

Domestic companies with a total turnover or gross receipts not exceeding Rs. 250 crore in the previous financial year are eligible for a reduced tax rate of 25% (plus applicable surcharge and cess). Companies can also opt for a lower tax rate of 22% under the concessional tax regime. However, this regime comes with certain conditions, such as a minimum investment in physical assets. New domestic manufacturing companies incorporated after October 1, 2019, can avail a special concessional tax rate of 15%.

Other Tax Benefits

Businesses operating in Special Economic Zones (SEZs) and undertaking infrastructure development projects in certain regions can avail tax holidays on their profits for a specified period. Export-oriented units can benefit from various tax exemptions and duty concessions. For instance, new undertakings in SEZs can enjoy a complete tax exemption on export profits for the initial five years, followed by partial tax benefits for subsequent years.

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