No — employee salary is not subject to GST. Schedule III of the CGST Act treats services by an employee to the employer in the course of employment as neither a supply of goods nor of services, so salary, wages and bonus are outside GST entirely. TDS under income tax and professional tax still apply. GST does arise on related payments: non-executive director fees (18% under RCM), manpower supply (18%) and freelancer/contractor fees (18% above the threshold).
Salary-Related Payments — GST Decision Table
Every common employment and payroll-adjacent payment, whether GST applies, at what rate and who is liable. Rates reflect the position after the GST 2.0 rationalisation.
| Payment | GST? | Rate | Who Pays |
|---|---|---|---|
| Employee salary / wages | No | Nil | Schedule III exclusion |
| Bonus / incentive to employee | No | Nil | Part of employment |
| Whole-time / executive director (on payroll) | No | Nil | Treated as employee |
| Non-executive / independent director fees | Yes · RCM | 18% | Company (reverse charge) |
| Manpower / staffing agency charges | Yes | 18% | Agency (forward charge) |
| Freelancer / contractor fees (above threshold) | Yes | 18% | Contractor |
| Employee secondment to related entity | Often | 18% | Recipient (usually RCM) |
| Notice pay recovery by employer | No | Nil | Not a supply (Circ 178/2022) |
Employment rates were not changed by GST 2.0 (eff 22 Sep 2025); the 18% service rate on director fees and manpower supply continues. Confirm on the official GST portal.
GST on Director Remuneration
CBIC Circular 140/2020 draws a clean line: a whole-time / executive director on payroll is an employee, so remuneration booked as salary (TDS under Section 192) is outside GST. A non-executive or independent director is not an employee, so sitting fees, commission and professional fees (TDS under Section 194J) attract 18% GST.
Executive director — outside GST
- On the company payroll as an employee
- Remuneration booked as salary
- TDS deducted under Section 192
- Schedule III exclusion applies
- No GST, no invoice
Non-executive director — 18% RCM
- Not an employee of the company
- Sitting fees, commission, professional fees
- TDS deducted under Section 194J
- Company self-pays 18% under RCM
- Company can claim ITC on that RCM tax
For non-executive director fees, the company self-assesses and deposits the 18% GST under RCM — the director does not raise a GST invoice or collect the tax. The company can then claim ITC on that RCM payment if the service is used for its business.
Paying independent or non-executive directors? Get your RCM position confirmed.
Talk to a GST Expert →Salary vs Professional Fees — Why It Matters
The GST outcome turns on the nature of the relationship. An employee works under a contract of service (salary, outside GST). A freelancer or consultant works under a contract for service — their income is professional income, and GST can apply.
- A freelancer / independent contractor must register for GST once aggregate turnover crosses ₹20 lakh (₹10 lakh in special-category states) and then charge 18% on professional fees.
- Once registered, they issue GST invoices and file GSTR-1 and GSTR-3B like any other service provider.
- The tests for employee vs contractor: control and direction, use of the employer's tools, fixed hours, and whether the person can substitute someone else.
Mislabelling a full-time consultant as a "contractor" to save on payroll can backfire: if the arrangement is really employment, GST charged on the invoices may be disputed, and PF/ESI and TDS-192 exposure can follow. Get the classification right before you sign.
Freelancer crossing the GST threshold? Get registered the right way.
Get Freelancer GST Help →Manpower Supply & Employee Secondment
When a staffing agency supplies workers to a company, it is providing a service under SAC 9985 — 18% GST on the placement / service charge. The salary the agency pays its own workers stays outside GST; only the agency's service fee is taxed. The hiring company can claim ITC if the service is used for its business.
Outside GST
- Salary the agency pays its own workers
- Reimbursement of exact cost as a pure agent
- A genuine employer-employee relationship
GST at 18% applies
- The staffing agency's placement / service fee
- Secondment with a mark-up or control shift
- Deputation treated as a supply of manpower
Following the Supreme Court Northern Operating Systems ruling, deputing employees to a related entity for consideration can be treated as a taxable supply of manpower at 18% — even without a mark-up, if the recipient controls the seconded staff. Document cross-charges carefully and take advice before you structure a secondment.
Using contract staff or seconding employees? Get the GST treatment reviewed.
Get GST Advice →Notice Pay, Bond & Other Recoveries
For years, notice pay recovery was disputed. CBIC Circular 178/10/2022-GST (3 Aug 2022) settled it: notice pay recovery, employment-bond forfeiture and similar compensatory recoveries are not a supply and carry no GST — they are compensation for breach of the employment contract, not consideration for tolerating an act.
- Employee salary & wages
- Bonus & incentives
- Notice pay recovery
- Employment-bond forfeiture
- Reimbursement at actual cost
- Executive director on payroll
These sit outside GST. What remains taxable is the genuinely distinct service — director professional fees, manpower supply and contractor invoices — each at 18%.
Frequently Asked Questions
Related TaxClue services
Salary Outside GST, Director Fees Under RCM — Sorted
Whether you run payroll, pay non-executive directors, use contract staff or invoice as a freelancer, TaxClue's CA-led team handles GST classification, RCM and return filing — 100% online, across India.