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Guide · GST Rates

GST on Employment in India —
Taxed or Outside GST?

Salary is outside GST under Schedule III — but director fees, freelancers, notice pay and manpower supply are different. Know exactly when GST applies to employment-linked payments.

TaxClue Editorial Desk Updated 18 August 2026 6 min read 16 FAQs answered
Updated for FY 2025-26 GST Expert Reviewed Employer & Employee Guide
Quick Answer

Services by an employee to their employer are outside GST — Schedule III of the CGST Act places them beyond the definition of "supply," so there is no GST on salary, wages, bonus or gratuity. GST does apply to employment-linked payments to non-employees: independent/non-executive director fees at 18% under RCM, manpower-supply agencies at 18%, and freelancers/consultants at 18% once turnover crosses ₹20 lakh.

Employee salary Nil
Director fees 18% RCM
Manpower supply 18%
Freelancer >₹20L 18%
At a glance

GST on Employment Payments — Decision Table

Every common employment-linked payment, whether GST applies, the rate and who pays it.

Payment TypeGST?RateWho Pays
Employee salary, wages, overtimeNoNilSchedule III exclusion
Bonus, incentive, gratuityNoNilPart of employment contract
Whole-time / executive director (on payroll)NoNilTreated as employee · Sch. III
Non-executive / independent director feesYes · RCM18%Company pays under reverse charge
Manpower / staffing agency serviceYes18%Agency invoices · recipient claims ITC
Freelancer / consultant fees (>₹20L)Yes18%Freelancer charges on invoice
Notice pay recovery by employerNo*NilNot a supply · CBIC view
Employee secondment (related entity)Disputed18%Often taxable · deputing entity

* Notice pay recovery treated as non-taxable per CBIC Circular 178/10/2022-GST. Service rates were NOT changed by GST 2.0 (22 Sep 2025), which restructured goods slabs only. Confirm on the official GST portal before invoicing.

The core distinction

Employee vs Independent Contractor

The dividing line is the contract of service (employment) versus a contract for service (engagement). An employee's services fall under Schedule III and are outside GST; an independent contractor supplies a taxable service and must register and charge 18% GST once turnover exceeds ₹20 lakh.

Nil

Employee — outside GST

  • Contract of service (employment)
  • Employer controls how work is done
  • Cannot send a substitute
  • Uses employer's tools & workplace
  • TDS under Section 192 · taxed as Salary
vs
18%

Contractor / freelancer — taxed

  • Contract for service (engagement)
  • Controls own method & hours
  • Can sub-contract / hire assistants
  • Uses own tools · multiple clients
  • GST if turnover > ₹20L · TDS 194J
FactorEmployeeIndependent Contractor
Legal relationshipContract of serviceContract for service
Control & directionEmployer directs the workContractor controls method
SubstitutionCannot substituteCan sub-contract
GST on incomeNil · Sch. III18% if > ₹20L
TDS section192 (salary)194J (professional)
Income-tax headSalariesBusiness / Profession
Misclassification is a real risk

Labelling a worker an "employee" to avoid GST does not hold if the substance is a contract for service. Tax authorities apply the control, integration, substitution and economic-dependence tests. If any point to independence, the person is a contractor and their supply is taxable at 18%.

Engaging freelancers or consultants? Get their GST & TDS treatment reviewed.

Talk to a GST Expert →
High-intent

GST on Director Remuneration

A whole-time or executive director on payroll is in an employer-employee relationship, so their salary is outside GST (Schedule III). But fees paid to a non-executive or independent director are a taxable supply — the company pays 18% GST under the Reverse Charge Mechanism (RCM), in cash, and can then claim it as ITC if the fees are for business.

Non-exec directorProvides services / attends board
→
Company pays feesSitting fees / commission
→
Company self-pays GST18% under RCM · in cash
→
ITC claimCompany claims 18% as credit
  • RCM on director fees is fixed by Notification 13/2017-CT(R) — the company is liable, not the director.
  • A whole-time director drawing a salary with TDS under Section 192 is an employee — no GST.
  • RCM liability must be paid in cash; it cannot be set off against existing input tax credit.
Staffing & labour

GST on Manpower Supply & Staffing

Manpower supply, labour contracting, staffing and placement services attract 18% GST (SAC 9985). The agency charges 18% on its full invoice to the hiring company — including the salary cost it passes on plus its margin — and the hiring company can claim ITC if the staff are used for business.

18% Manpower agency invoice

Salary cost passed on₹1,00,000
Agency margin / fee₹15,000
GST @ 18% on ₹1,15,000₹20,700
Company pays₹1,35,700

Nil Direct employee on payroll

Salary₹1,00,000
GST₹0
Company pays₹1,00,000

The wages the agency pays its own workers are outside GST — only the agency's service supply to the hiring company is taxed at 18%. A registered recipient recovers that 18% as ITC, so the net cost is usually the margin, not the full tax.

Using a staffing agency or paying director fees? Get your RCM & ITC position sorted.

Get Expert Advice →
Perks & welfare

GST on Employee Benefits

Perks provided as part of the employment contract (in the employer-employee relationship) are generally outside GST. GST arises only on the underlying third-party supply, and ITC on many such supplies is blocked.

BenefitGST on supplyEmployer ITC
Salary, allowances, gratuityOutside GST—
Group health insurance premiumInsurer charges GST*Often blocked · 17(5)
Canteen via third-party caterer5%Blocked · food
Company car — personal use18%Blocked · 17(5)
Reimbursements at actual costNil—

* Retail health & life insurance for individuals is GST-exempt from 22 Sep 2025; employer group policies follow their own contract terms — check the insurer's invoice.

TaxClue Insight

The GST question on a perk is rarely "does the employee pay GST" — they never do on salary. It is "can the employer claim ITC on the third-party supply behind the perk." For food, health insurance and personal-use vehicles, Section 17(5) usually blocks that credit, so plan CTC structuring with the blocked-credit rules in mind.

Frequently disputed

Notice Pay & Secondment

Notice pay recovery (employee pays the employer for un-served notice) is not a taxable supply — it is compensation for tolerating an act, and CBIC Circular 178/10/2022-GST confirms no GST applies. Employee secondment to a related entity is a contested area where the deputing entity may be treated as supplying manpower at 18% — get it reviewed if amounts are significant.

Clearly outside GST

  • Salary, wages, overtime, bonus, gratuity
  • Whole-time director on payroll (TDS 192)
  • Notice pay recovery (CBIC 178/2022)
  • Reimbursement of actual expenses with bills

GST applies / review needed

  • Non-executive director fees (18% RCM)
  • Manpower & staffing agency (18%)
  • Freelancer / consultant > ₹20L (18%)
  • Employee secondment to related entity

Unsure whether a payment attracts GST or RCM? Get a quick expert opinion.

Talk to a GST Expert →
Government sourcesEmployee→employer exclusion: Schedule III, CGST Act 2017 · Director RCM: Notification 13/2017-CT(R), Section 9(3) · Notice pay: CBIC Circular 178/10/2022-GST · Rates & SAC: gst.gov.in · cbic-gst.gov.in
People also ask

Frequently Asked Questions

Salary & Employment
Is GST applicable on salary?
No. Services by an employee to their employer in the course of or in relation to employment are listed in Schedule III of the CGST Act 2017 as activities that are neither a supply of goods nor a supply of services. They are entirely outside the scope of GST. There is no GST on salary, wages, overtime, allowances, bonus or gratuity, and the employee need not register for GST because of employment income.
Are employment services subject to GST?
No. Employment services — an employee working for an employer under a contract of service — are excluded from GST by Schedule III of the CGST Act. The employer does not charge GST on top of salary and the employee does not register for GST. Only income tax (TDS under Section 192) and professional tax apply to employment remuneration, not GST.
Does an employee need GST registration?
No. An individual earning only salary income does not supply any taxable service under GST, so no GST registration is required regardless of the salary amount. Registration is triggered by making taxable supplies (for example, freelancing or business income) above the ₹20 lakh threshold — not by employment.
Employee vs Contractor
What is the GST difference between an employee and a contractor?
An employee works under a contract of service — under the employer's control, using the employer's tools, cannot substitute themselves — and their services are outside GST under Schedule III. An independent contractor works under a contract for service, controls their own method, can take multiple clients, and must charge 18% GST if turnover exceeds ₹20 lakh. TDS is under Section 192 for employees and Section 194J for contractors.
Do freelancers have to pay GST?
Yes, once turnover crosses the threshold. A freelancer or consultant supplies a taxable service, so GST registration is mandatory when aggregate turnover exceeds ₹20 lakh a year (₹10 lakh in special-category states) and they then charge 18% GST on invoices. Below the threshold they can remain unregistered, though registration is required regardless if they make inter-state supplies of goods.
What GST rate applies to consultants and professional fees?
18%. Professional, technical and consultancy services attract 18% GST. A registered consultant charges 18% on the invoice; the client, if registered and using the service for business, can claim it as Input Tax Credit. TDS under Section 194J applies separately on the fees.
Directors
Is GST applicable on director remuneration?
It depends on the type of director. A whole-time or executive director on payroll is treated as an employee, so their salary is outside GST (Schedule III). Fees paid to a non-executive or independent director are a taxable supply, and the company pays 18% GST under the Reverse Charge Mechanism — the director does not charge it.
Who pays GST on non-executive director fees?
The company. Director fees, sitting fees and commission paid to a non-executive or independent director fall under RCM (Notification 13/2017-CT(R)), so the company self-assesses and pays 18% GST directly to the government in cash — it cannot be paid using existing input tax credit. The company can then claim that 18% as ITC if the fees are for business.
Is GST charged on a whole-time director's salary?
No. A whole-time or managing director who is on the company payroll and whose remuneration is taxed as salary with TDS under Section 192 is in an employer-employee relationship. That remuneration is outside GST under Schedule III. Only fees to independent or non-executive directors attract 18% GST under RCM.
Manpower & Agencies
Does manpower supply attract GST?
Yes. Manpower supply, staffing, labour contracting and placement services are taxed at 18% GST (SAC 9985). The agency is the supplier and charges 18% on its full invoice to the hiring company — including the salary cost passed on and its margin. The hiring company can claim ITC if the staff are used for business. This rate was not changed by the GST 2.0 reform of 22 September 2025.
Is GST charged on the salary paid by a staffing agency to its workers?
No. The wages a manpower agency pays to its own workers are outside GST — that is an employment relationship. GST at 18% applies only to the agency's service supply to the hiring company. Because the recipient can usually claim that 18% as ITC, the effective cost is generally the agency's margin rather than the full tax.
Benefits & Notice Pay
Is GST applicable on employee benefits like insurance, food and transport?
The employee never pays GST on a perk. GST can arise on the underlying third-party supply: a caterer providing canteen food charges 5%, an insurer charges GST on a group premium, and a car for personal use carries 18%. However, ITC on food, personal-use vehicles and (usually) health insurance is blocked under Section 17(5), so the employer often cannot recover it. Note that retail health and life insurance for individuals became GST-exempt from 22 September 2025.
Is notice pay or salary in lieu of notice subject to GST?
No. Notice pay recovered by an employer when an employee leaves without serving notice is treated as compensation for tolerating an act, not a supply of service. CBIC Circular 178/10/2022-GST clarified that such amounts are not liable to GST. Salary paid by an employer in lieu of notice is also within the employment relationship and outside GST.
Can an employer claim ITC on employee health insurance?
Generally no. ITC on health insurance is blocked under Section 17(5) of the CGST Act when it is for personal consumption of employees, though it is allowed where providing the insurance is obligatory under a law. Some tribunals have allowed ITC in specific employee-welfare situations, so the position should be confirmed for your facts before claiming.
Is GST applicable on employee secondment to a group company?
This is a disputed area. Following the Supreme Court's Northern Operating Systems ruling, deputing an employee to a related entity can be treated as a supply of manpower service taxable at 18%, depending on the exact arrangement and who bears the employment relationship. Where secondment amounts are significant, obtain a specific opinion rather than assuming Schedule III applies.
GST 2.0
Did GST 2.0 change GST on employment?
No. The GST 2.0 rationalisation effective 22 September 2025 restructured goods and some service rates into a two-slab system (5% and 18%, plus a 40% demerit rate) but did not touch the employment position. Employee-to-employer services remain outside GST under Schedule III, director fees stay at 18% under RCM, and manpower supply and consultant fees remain at 18%.
If you would rather not do it yourself

Related TaxClue services

GST RegistrationRegister a freelancer, consultant or business and get your GSTIN online.See the service →GST Return FilingMonthly GSTR-1 & 3B, including self-assessed RCM on director fees.See the service →ITC ReconciliationClaim eligible credit and avoid blocked-credit errors on employee benefits.See the service →TDS Return FilingSection 192 salary TDS and 194J professional-fee TDS, filed correctly.See the service →
TaxClue for employers & professionals

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