Hiring in India: What International Employers Need to Know

Statutory registrations in India are numerous and state-variable, which is the single biggest reason international employers seek local expertise rather than self-managing compliance.

Employer of Record in India

An EOR allows international employers to hire in India without registering for Provident Fund, Employee State Insurance, professional tax, or the various state-specific labour registrations that apply depending on where employees are based. It is well suited to companies scaling a distributed engineering or operations team quickly, testing the Indian market, or hiring before deciding on a state for entity registration. It becomes less cost-effective at meaningful scale, where the per-employee EOR fee outweighs the benefit relative to running payroll through an owned entity.

How payroll works in India

Indian payroll withholds income tax under the Tax Deducted at Source (TDS) regime based on the employee's declared tax regime and investment declarations, and separately manages statutory contributions to the Employees' Provident Fund (EPF) and, for employees below a wage threshold, Employees' State Insurance (ESI). Professional tax, a state-level levy, applies in many but not all states, adding a jurisdiction-specific compliance layer. Payroll is run monthly, and salary structuring — the split between basic pay, allowances, and other components — materially affects both the employee's take-home pay and statutory contribution calculations, making compensation design a real payroll consideration in India.

Payroll frequency and reporting obligations

Monthly payroll is standard, with TDS remittance and EPF/ESI contributions due by set monthly deadlines to the respective authorities. Employers must file quarterly TDS returns and issue annual Form 16 tax certificates to employees. EPF and ESI each have their own periodic filing and reconciliation obligations, and professional tax filing requirements vary by state, meaning a multi-state Indian payroll operation is effectively managing several overlapping compliance calendars simultaneously.

Key payroll nuances

Salary structuring is a genuine strategic decision in India — the proportion allocated to basic salary versus allowances like house rent allowance and special allowance affects EPF contribution amounts, tax efficiency, and employee take-home pay, and is typically optimised rather than left as a flat percentage. Statutory bonus obligations exist under the Payment of Bonus Act for eligible lower-wage employees, distinct from any discretionary performance bonus. Gratuity, a statutory lump-sum payment on separation after five years of continuous service, needs to be accrued as an ongoing liability.

Pay components and employer costs

Typical pay components include basic salary, house rent allowance, special allowance, and other structured allowances, plus statutory bonus where applicable. Employer costs beyond gross salary include the employer EPF contribution, ESI contribution where applicable, gratuity accrual, and, in some states, labour welfare fund contributions. All-in employer statutory cost typically adds a modest single-digit-to-low-teens percentage on top of salary, comparatively lower than many European employer on-cost structures, though administrative complexity remains high.

Benefits and leave entitlements

Statutory leave entitlements vary somewhat by state-level shops and establishments acts, but generally include earned/annual leave, casual leave, and sick leave, commonly totalling around 18 to 30 days combined depending on state and company policy. Maternity leave is a strong statutory entitlement of 26 weeks for eligible employees under the Maternity Benefit Act, among the more generous provisions in Asia. Public holidays combine national holidays with a state-specific list, and many employers allow employees to choose from a set of optional/restricted holidays.

Hiring and employment contracts

Written employment contracts or appointment letters are standard practice and effectively necessary for statutory registration and compliance purposes. Probation periods commonly run three to six months and are contract-defined. Fixed-term employment is permitted and has become more clearly recognised under recent labour code consolidation, though implementation varies by state. Contractor and consultant arrangements are common in India's IT and services sectors, but misclassification exposure exists where the relationship functions as employment, particularly around control and exclusivity.

Entity setup in India

A private limited company, registered with the Ministry of Corporate Affairs, is the most common structure for foreign employers, requiring digital signatures, director identification numbers, and registration through the online incorporation system. Post-incorporation, the entity must register for a Permanent Account Number (PAN) and Tax Deduction Account Number (TAN), register under EPF and ESI where thresholds apply, complete state-specific shops and establishments registration, and open a corporate bank account. End-to-end setup typically takes four to eight weeks.

EOR vs Payroll Management vs Entity Setup — India

Frequently asked questions