How to Hire Employees in India

India enters 2026 as one of the world's most consequential hiring markets. Total employment reached 56.2 crore in Q2 FY26 (July–September 2025), adding 8.7 lakh jobs from the previous quarter. Labour force participation has hit a record 55.4%, the employment rate stands at 52.5%, and unemployment sits at 5.2% a market in active recovery and growth. Manufacturing alone added over 10 lakh jobs in FY24, up 6% year-on-year, while 76% of recruiters plan new hires in H1 2026. That translates to 12.8 million projected new jobs in 2026 with healthcare (88% recruiter intent), manufacturing (79%), IT (76%), and BFSI (70%) leading demand.

The competitive pressure is real. Tech vacancies rose 20% year-on-year, with a 51% talent gap in AI skills specifically. White-collar hiring surged 38% year-on-year in March 2025. Fresher hiring intent reached 73% for January–June 2026, with retailers (91%) and e-commerce companies (90%) explicitly prioritising skills over degrees. Salaries are rising 9% overall and 15–25% in IT specialities. This is a market where top candidates have leverage, and slow-moving hiring processes lose talent to faster competitors.

Hiring employees in India requires:

• Clarity on hiring models (entity vs. Employer of Record vs. contractor)
• Registration with EPFO, ESIC, and tax authorities before the first payroll cycle
• Contribution structures for EPF, ESI, and professional tax across relevant states
• Gratuity obligations (now triggered after 1 year for fixed-term employees under the new Labour Codes)
• Understanding the Industrial Disputes Act retrenchment framework, notice periods, and the 300-employee threshold for government approval
• Legal distinctions separating compliant employment from misclassification risk
• Employment Visa and FRRO registration processes for foreign national hires

This guide covers each of those dimensions: choosing the right hiring model, onboarding your first India employee, managing payroll across the new Codes framework, navigating termination rules, and avoiding compliance traps that are more common and more expensive than most employers expect

What Are Your Employment Options When Hiring in India?

Before you post a job or issue an offer letter, you need to decide how you'll employ talent. Foreign companies typically choose between establishing a local entity, partnering with an Employer of Record (EOR), or engaging independent contractors. Each choice creates a distinct legal, financial, and operational reality from day one.

• Entity setup → full legal presence in India, direct employer obligations, and complete compliance responsibility.
• EOR hiring → outsources employment compliance to a third-party legal employer while you retain operational control.
• Contractor engagement → treats individuals as independent service providers outside the labour law framework only when the real nature of the relationship genuinely reflects independence.

The consequences of choosing the wrong model are immediate and retroactive. Misclassifying an employee as a contractor triggers backdated EPF and ESI contributions, gratuity exposure, and potential claims under the Industrial Disputes Act from the date the relationship began. Choosing entity setup before you understand state-specific registration requirements adds months to your first hire timeline. Getting the model right at the start avoids both outcomes.

1. Hiring Through a Local Entity

Establishing an Indian Private Limited Company (or a Branch/Liaison/Project Office) gives you direct control over employment, payroll, and benefits administration. You become the legal employer with full responsibility for compliance under the new Labour Codes, EPF, ESI, the Income Tax Act, state Shops and Establishments Acts, and all other central and state labour regulations applicable to your workforce.

This model suits:

• Long-term operations with 10+ employees
• Companies building Global Capability Centres (GCCs), India's most common large-team expansion model for multinationals
• Situations requiring direct IP ownership, local bank accounts, and regulatory standing

 incorporation takes 2–4 months when accounting for company registration, PAN/TAN registration, bank accounts, EPFO/ESIC enrollment, state-level registration under applicable Shops and Establishments Acts, and professional tax registration (mandatory in applicable states). The new Labour Codes introduce a unified compliance portal, which simplifies multi-state filing, but state-level rule notifications are still pending, meaning employers need to track both central and state compliance windows simultaneously.

2. Hiring Through an Employer of Record (EOR)

An EOR becomes the legal employer in India while you direct the employee's day-to-day work. The EOR handles employment contracts, payroll in INR, EPF contributions, ESI enrollment (where applicable), professional tax, TDS under the Income Tax Act, gratuity accrual, and all filings with EPFO, ESIC, and the Income Tax Department.

You maintain operational control. They absorb legal liability.

EOR hiring is the right choice when:

• You need to be in market faster than entity setup allows
• You're testing India as a hiring location before committing to a full entity
• You're scaling quickly across multiple states without managing state-by-state compliance stacks
• You need to be compliant under both old and new Labour Code frameworks simultaneously, without building that expertise internally

Given India's multi-state compliance complexity different minimum wages per state, state-specific Shops and Establishments Acts, professional tax rates that vary across Karnataka, Maharashtra, Tamil Nadu, West Bengal, and others EOR partners with established India operations are meaningfully valuable beyond just speed.

3. Hiring Independent Contractors

Contractors in India operate under contract law, not labour law. They are not covered by EPF, ESI, gratuity, or retrenchment protections. Independent contractors manage their own PAN and tax filings, are not enrolled in social security schemes, and engage on clearly project-bound, multi-client terms.

This model is legitimate when the relationship is genuinely independent. It breaks down and creates serious liability when companies use contractor labels to avoid EPF/ESI contributions while exercising employee-level control: setting work hours, directing daily tasks, providing equipment, and maintaining an exclusive dependency.

India's new Labour Codes extended social security coverage to gig workers and platform workers for the first time, with aggregators required to contribute 1–2% of annual turnover (capped at 5% of worker payments) toward social security. This signals the regulatory direction: the government is actively closing classification loopholes in non-traditional work arrangements.

Local Entity vs EOR vs Independent Contractor: Side-by-Side Comparison

What Are The Legal Requirements for Hiring in India?

India's employment law framework is a dual-layer system. Central laws govern minimum wages, EPF, ESI, gratuity, retrenchment, and maternity benefits. State laws govern Shops and Establishments registration, professional tax, state-specific leave entitlements, and local minimum wages (which frequently exceed the central floor wage).

Since November 21, 2025, four Labour Codes have replaced 29 central laws:

• Code on Wages, 2019: Consolidates wage regulation, minimum wages, overtime, bonus, and equal remuneration across all workers regardless of employment type. Introduces a "floor wage" below which no state minimum may fall. Mandates that basic pay plus dearness allowance must be at least 50% of total CTC, a structural change to how salary packages are built.
• Industrial Relations Code, 2020: Governs trade unions, fixed-term employment, employment terms, retrenchment procedures, and dispute resolution. Raises the threshold for government approval before retrenchment or layoffs from 100 to 300 workers. Codifies fixed-term employment with full benefit parity.
• Code on Social Security, 2020: Consolidates EPF, ESI, gratuity, maternity benefits, and other social security provisions. Extends coverage to gig and platform workers for the first time. Reduces gratuity eligibility for fixed-term employees from 5 years to 1 year of continuous service.
• Occupational Safety, Health and Working Conditions Code, 2020: Covers workplace safety, working hours, health checkups, inter-state migrant worker protections, and contractor management rules.

Key employer registration obligations include:

• PAN (Permanent Account Number) and TAN (Tax Deduction and Collection Account Number) from the Income Tax Department before running payroll
• EPFO registration for establishments with 20 or more employees
• ESIC registration for establishments with 10 or more employees (or even one employee in hazardous work in manufacturing, construction, or chemicals)
• State-level Shops and Establishments Act registration (varies by state; required before commencing operations in most states)
• Professional tax registration in applicable states (Karnataka, Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh, and others but not Delhi or Haryana)
• Appointment letters (written) issued to every employee before work begins are mandatory under the new Labour Codes, regardless of establishment size or industry

What Are the Employment Contract Rules in India?

Written employment contracts or appointment letters are now mandatory for all employees under the Occupational Safety, Health and Working Conditions Code, 2020, effective November 21, 2025. The appointment letter must outline pay, work schedule, leave policies, and terms of employment before the employee starts work. This requirement applies universally across all industries and establishment sizes.

Types of Employment Contracts

• Permanent (open-ended) contracts are the default for ongoing employment relationships. Full statutory protections under the Industrial Disputes Act (now IR Code), Payment of Gratuity Act (now Social Security Code), and applicable state Shops and Establishments Acts apply from commencement. Gratuity vests after 5 years of continuous service.
• Fixed-term contracts are now formally recognised and codified under the Industrial Relations Code, 2020. Fixed-term employees are entitled to full benefit parity with permanent employees, including EPF, ESI, proportional bonus, and proportional annual leave for the contract period. Critically, fixed-term employees are now eligible for gratuity after just 1 year of continuous service (effective November 21, 2025), a significant change from the prior 5-year threshold. This substantially increases gratuity liability for employers using fixed-term arrangements.
• Probationary contracts cover the initial assessment period. Probation is not legislatively mandated but is standard practice, typically ranging from 3 to 6 months. Employees on probation retain statutory rights but termination during probation carries lower procedural complexity than post-confirmation dismissal.
• Contract/outsourced labour relationships require compliance with the new contractor management framework under the OSHWC Code, including principal employer obligations for welfare, safety, and social security coverage if the contractor fails to meet them.

What to Include in an Employment Contract?

Mandatory and recommended contract elements:

• Full name, designation, and department
• Joining date and work location
• Basic salary and total CTC (basic + DA must be at least 50% of CTC under the new Labour Codes)
• Payment frequency (monthly is standard; salary must be paid by the 7th of the following month under new Codes)
• Working hours (standard: 8–9 hours per day, 48 hours per week for factories; the Codes permit flexibility in shift design with mutual consent)
• Overtime policy (minimum 2x regular rate for hours beyond statutory limits)
• Leave entitlements (earned/privilege leave, casual leave, sick leave per state Shops and Establishments Act)
• Probationary period and confirmation process
• EPF and ESI enrollment confirmation
• Gratuity entitlement reference
• Bonus eligibility (statutory bonus under the Payment of Bonus Act for eligible employees)
• Notice period for termination (standard 30–90 days depending on role level)
• Confidentiality, IP ownership, and non-compete provisions

The 50% basic salary rule is significant from a total cost perspective. Salary packages that previously allocated 20–30% to basic pay and the rest to various allowances to reduce EPF and gratuity exposure must now be restructured. This raises statutory contribution amounts for high-allowance packages.

NDAs and Restrictive Covenants

Confidentiality and non-disclosure agreements are enforceable under Indian contract law and are standard practice for IT, pharma, BFSI, and any role with access to proprietary information. IP created during employment belongs to the employer unless otherwise specified.

Post-employment non-compete clauses sit in a grey area. Indian courts have generally held that restraints of trade operative after employment ends are in restraint of trade and may be unenforceable under Section 27 of the Indian Contract Act, 1872. Enforceability depends on scope, duration, geographic limits, and whether the clause is tied to legitimate business protection. Non-solicitation of clients and employees is generally treated more favourably by courts than blanket non-compete restrictions. Both should be backed by consideration and reviewed by local legal counsel.

How Payroll Costs and Taxes Work in India?

India's employer cost burden is moderate but variable, driven by EPF/ESI contribution thresholds, state-specific professional tax rates, the new 50% basic wage rule, and gratuity accrual obligations that are now wider in scope than before. Total employer on-costs typically add 12–16% above basic salary for statutory contributions alone, before accounting for gratuity and group health insurance (which most competitive employers provide above the ESI threshold).

1. Payroll and Salary Structure in India

Salaries are paid in Indian Rupees (INR). Under the new Labour Codes, basic salary plus dearness allowance must be at least 50% of the total CTC. This is a structural change that reshapes how compensation packages are designed, increases EPF contribution amounts for previously low-basic packages, and raises gratuity liabilities proportionally.

The national floor wage established under the Code on Wages ensures a baseline no state minimum wage can fall below. State minimum wages are set by each state government and vary significantly. Mumbai, Bengaluru, Delhi, and Chennai all have different applicable rates by category of worker. The central floor wage must be tracked alongside the relevant state notification for your hiring location.

Salaries must be paid by the 7th of the following month (for establishments with 1,000+ workers) or the 10th (for others) under the new Code on Wages. TDS must be deposited with the Income Tax Department by the 7th of each month.

2. Employer Statutory Contributions

• EPF (employer portion): 12% of basic salary + DA, mandatory for establishments with 20 or more employees. Applicable to employees earning up to ₹15,000/month in basic + DA (though many employers contribute on actual salary for higher earners as a practice). Of the 12% employer contribution, 8.33% goes to the Employees' Pension Scheme (EPS) and 3.67% to the EPF account directly. The Supreme Court has directed the Central Government and EPFO to decide on increasing the wage ceiling from ₹15,000 to ₹21,000 or ₹25,000 within four months of January 9, 2026, meaning contribution amounts may rise by mid-2026. Employers should model this scenario now.
• ESI (employer portion): 3.25% of gross wages, applicable to employees earning ₹21,000/month or less. Mandatory for establishments with 10 or more employees. For employees above the ₹21,000 threshold, employers typically provide group health insurance as a replacement benefit.
• Employer's Deposit Linked Insurance (EDLI): 0.5% of basic salary (capped at ₹15,000), funded entirely by the employer
• EPF administrative charges: 0.5% of basic + DA (minimum ₹500/month per establishment)
• Professional tax: State-specific, deducted from employee salary and remitted to the state government; applicable in Karnataka, Maharashtra, Tamil Nadu, West Bengal, Andhra Pradesh, and several other states (not applicable in Delhi, Haryana, Rajasthan)
• Gratuity accrual: 15 days' wages (basic + DA) per year of service, payable on separation for employees with 5+ years (permanent) or 1+ year (fixed-term, under new Labour Codes). Capped at ₹20 lakhs

Total employer statutory on-cost: approximately 15–20% above basic salary (EPF 12% + ESI 3.25% + EDLI 0.5% + admin charges), before gratuity accrual and group health insurance.

3. Employee Tax Deductions

Employees have the following deducted from gross pay:

• EPF (employee portion): 12% of basic + DA
• ESI (employee portion): 0.75% of gross wages (only if gross monthly wages ≤ ₹21,000)
• TDS (Tax Deducted at Source): Progressive income tax rates withheld monthly by the employer and deposited by the 7th of the following month. Employees choose between the old tax regime (with deductions and exemptions) and the new tax regime (lower rates, minimal exemptions) at the beginning of each financial year. Employers calculate TDS based on the employee's declared regime choice and investment proofs.
• Professional tax: State-specific deduction, employer remits to the state government

4. Statutory Bonus

The Payment of Bonus Act (now consolidated under the Code on Wages) mandates a minimum statutory bonus for eligible employees earning up to a prescribed wage ceiling. The minimum bonus is 8.33% of annual wages (or ₹100, whichever is higher). The maximum bonus under the Act is 20% of annual wages. Eligibility requires 30 working days in the accounting year.

5. Statutory Leave Entitlements

Leave entitlements in India are governed by both the new Labour Codes and state-specific Shops and Establishments Acts:

• Earned/privilege leave: 1 day for every 20 days worked, approximately 15–18 days per year. Under the new Codes, eligibility starts after 180 days of work (reduced from 240 days). Earned leave carries forward and must be encashed on termination. In-service encashment is now permitted at year-end.
• Casual leave: Typically 8–12 days per year, depending on state. Non-carryforward.
• Sick leave: Generally 6–12 days per year, depending on the state Shops and Establishments Act provisions.
• Maternity leave: 26 weeks fully paid for the first two children; 12 weeks for the third child onwards. For women who have already had two or more surviving children, 12 weeks apply from the date of expected delivery. Applicable to establishments with 10 or more employees.
• Public holidays: Typically 10–14 public holidays per year, with central holidays plus state-specific additions.

How Do Employers Pay Employees in India?

1. Payment Methods

Salaries are paid via direct bank transfer (NEFT/RTGS/IMPS) to the employee's Indian bank account. Cash payments are rare and generally disfavored for compliance purposes. The Code on Wages promotes digital payment methods for all covered workers.

Payslips must itemise gross salary, all allowances, EPF deduction, ESI deduction (if applicable), professional tax, TDS, and net pay. Payslip records must be maintained and accessible for statutory audits and EPFO/ESIC inspections.

2. Salary Payment Deadlines

The new Code on Wages standardises payment deadlines:

• Establishments with 1,000+ workers: by the 7th of the following month
• All other establishments: by the 10th of the following month

TDS must be deposited with the Income Tax Department by the 7th. EPF and ESI contributions must be remitted by the 15th. Late EPF payments attract 12% annual interest plus damages of 5% to 100% depending on the duration of delay. Late ESI payments attract 12% annual interest plus damages of 5% to 25%.

Quarterly TDS returns must be filed in Form 24Q. Annual Form 16 must be issued to all employees by June 15 of the following financial year.

How To Onboard Employees in India?

1. New Hire Onboarding Checklist

Before Day 1:

• Issue a signed appointment letter covering all mandatory terms (legally required before work begins under the new Labour Codes)
• Collect PAN card mandatory for TDS compliance
• Collect Aadhaar required for EPF/ESI registration
• Confirm bank account details for payroll transfer
• Register the employee with EPFO (Universal Account Number / UAN). UAN is portable across employers for the employee's entire career
• Enrol in ESIC (if gross salary ≤ ₹21,000/month)
• Register with the state Shops and Establishments authority if this is your first employee in that state

First week:

• Salary structure documentation confirming 50% basic + DA rule compliance
• Investment declaration form for TDS calculation (employees declare under old or new tax regime)
• ESI e-Pehchan card issuance (if enrolled)
• Safety orientation and occupational health assessment (annual health checkups are now mandatory under the new OSHWC Code)

2. Required Employee Documentation

Documents to collect from new hires:

• PAN card (tax identification)
• Aadhaar card (social security + EPF/ESI registration)
• Passport/voter ID / other government photo ID
• Bank account details (account number + IFSC code)
• Previous employment EPF UAN (for UAN transfer/linking)
• Academic certificates and professional certifications (particularly for regulated roles in BFSI, healthcare, and IT with licensing requirements)
• Form 12BB (investment declaration for TDS calculation, or regime choice declaration under the new tax framework)

Maintain complete onboarding records for every employee. Labour inspections under the new unified compliance framework will focus on appointment letters, UAN registration, payslip maintenance, and ESI enrollment accuracy.

What Are The Best Practices For Interviewing and Hiring in India?

• India's Constitution prohibits discrimination on grounds of religion, race, caste, sex, place of birth, and descent. The new Labour Codes reinforce anti-discrimination requirements in recruitment, wages, and working conditions. Interview questions must be strictly job-relevant.
• Avoid questions about caste, religion, marital status, pregnancy plans, or political beliefs. Specific protections for women in the workplace include mandatory anti-sexual harassment compliance under the POSH Act (Prevention of Sexual Harassment at the Workplace, 2013) applicable to all establishments regardless of size. If you have more than 10 employees, you must constitute an Internal Complaints Committee (ICC).
• The Digital Personal Data Protection Act, 2023 (DPDPA), while still awaiting full rule notification, signals India's move toward formal data protection regulation. Treat candidate data with appropriate care: collect only what is necessary for the hiring decision, secure it properly, and don't retain it beyond need.
• In a market where tech vacancies are up 20% year-on-year and AI skills carry a 51% talent gap, speed and compensation structure are your primary competitive tools. Most white-collar roles require 30–90-day notice periods from current employers building this into your offer timeline prevents post-offer attrition from counter-offers. For senior IT specialties, salary growth of 15–25% is expected year-on-year. Matching or exceeding this without correct salary structuring (basic + DA ≥ 50% of CTC) creates EPF compliance exposure.
• Entry-to-mid level roles dominate active demand, with fresher hiring intent at 73% for H1 2026. The skills-first hiring shift (91% in retail, 90% in e-commerce) means structured skills assessments are increasingly replacing degree-based screening particularly relevant for IT and digital roles where certification in cloud platforms, cybersecurity, and data analytics directly correlates with productivity from day one.

Work Permits and Right to Work in India

1. Indian Citizens

Indian nationals require no work authorisation and are immediately eligible for formal employment. Enrol them in EPF (UAN), confirm PAN for TDS, and register per applicable state Shops and Establishments requirements.

2. Overseas Citizens of India (OCI)

OCI cardholders may live and work in India without an Employment Visa, but are generally not eligible for government or specific reserved posts. Onboarding an OCI cardholder follows the standard PAN/tax process; no Employment Visa is required. However, OCI cardholders must notify the FRRO/FRO of any change in residential address or occupation.

3. Foreign Nationals (Employment Visa)

India does not issue a standalone work permit. The primary authorisation route for foreign nationals is the Employment Visa (E Visa), applied for through the Indian Mission or Consulate in the applicant's home country. Foreign nationals must not travel to India on a tourist or business visa; intending to take up employment change of visa category after arrival is not permitted.

Key Employment Visa requirements:

• The foreign national must be a skilled professional in a role where adequate local expertise is not available
• Annual gross remuneration must meet or exceed USD 25,000 (exceptions apply for language instructors, certain NGO roles, and volunteers)
• A sponsoring employer registered in India is required to issue a sponsorship letter confirming the role, duration, and salary
• BOI-registered companies, private sector companies, banks, NGOs, and diplomatic mission employers all have specific employer documentation requirements

The Employment Visa process:

1. The Indian employer prepares the sponsorship documentation (company registration, employment contract, justification for the foreign hire)
2. The foreign national applies for the Employment Visa at the nearest Indian Mission/Consulate abroad
3. After visa issuance, if the visa is valid for more than 180 days, the employee must register with the Foreigners Regional Registration Office (FRRO) via the e-FRRO online portal within 14 days of arrival to obtain a Residential Permit
4. The employee must obtain a PAN from the Income Tax Department for TDS compliance
5. If the employer has 20+ employees and the establishment is EPF-covered, the foreign national is treated as an "International Worker" under EPFO. EPF contributions apply unless exempted under a bilateral Social Security Agreement (SSA) between India and the employee's home country

Employment Visa validity and renewal:

• Initial validity: up to 1 year or the contract term, whichever is shorter
• Extensions: available year-to-year at the FRRO up to a maximum of 5 years from initial issue, contingent on continued employment
• Processing time: approximately 1 week when documentation is complete (varies by Mission and nationality)

India does not currently offer a Digital Nomad Visa. Remote freelancers remaining in India must operate within other lawful visa categories but cannot earn from Indian sources without proper work authorisation.

How Does Employment Termination Work in India?

1. Lawful Grounds for Termination

India does not permit at-will termination. Every exit requires a documented cause, proper procedural steps, an applicable notice period, and full final settlement paid within 2 working days. The framework differs based on whether the employee qualifies as a "workman" under the Industrial Disputes Act / Industrial Relations Code.

• Workmen (non-managerial employees): entitled to full retrenchment protections under the IR Code. Any termination other than for disciplinary misconduct (following a fair inquiry process) is retrenchment and attracts mandatory compensation.
• Managerial and supervisory employees: primarily governed by their employment contracts and the state Shops and Establishments Acts. The Industrial Disputes Act retrenchment provisions apply more narrowly to this category, though Labour Courts may still exercise jurisdiction in disputes.
• Termination for cause (misconduct): requires a documented fair inquiry; the employee must be given notice of the allegation and a genuine opportunity to respond before any dismissal decision. Without this process, even a justified dismissal is vulnerable to challenge as procedurally defective.
• Termination without cause (retrenchment): for workmen with 1+ year of continuous service, retrenchment compensation is mandatory. For establishments with 300 or more workers (up from 100 under the old law), prior government approval is required before retrenchment or layoff. The "last in, first out" rule applies, so the most recently hired employee must be the first retrenched in a collective redundancy.

2. Notice Periods

• Non-managerial workmen with 1+ year of service: minimum 1 month's notice or pay in lieu
• Managerial/supervisory roles: 30–90 days depending on contract and seniority (most white-collar roles in 2025 specify 30–90 days)
• Payment instead of notice is legal across India and must equal full wages (not just basic salary) for the notice period

3. Retrenchment Compensation

Mandatory for workmen with 1+ year of continuous service who are involuntarily terminated for non-disciplinary reasons:

Formula: 15 days' average wages × number of completed years of service (or part thereof exceeding 6 months)

This is separate from gratuity and does not apply to resignations or terminations for proven misconduct.

4. Gratuity

Payable under the Social Security Code, 2020 (effective November 21, 2025):

• Permanent employees: 5 years of continuous service required
• Fixed-term employees: 1 year of continuous service required (new rule under Labour Codes)

Formula: (Last drawn basic + DA / 26) × 15 × years of completed service

Capped at ₹20 lakhs. Payable on resignation, retirement, dismissal (except for misconduct with damage to employer property), disability, or death. For fixed-term employees whose contracts terminate on or after November 21, 2025, with 1+ year of service, this obligation is now active, representing a 25–50% increase in gratuity liabilities for employers with significant fixed-term workforces.

5. Worker Re-Skilling Fund

Under the new Industrial Relations Code, employers must deposit an amount equal to 15 days of the retrenched worker's last drawn wages into the government-administered Worker Re-Skilling Fund within 45 days of retrenchment. This is a new obligation in addition to statutory retrenchment compensation.

6. Final Settlement

All terminal benefits, including outstanding salary, leave encashment, gratuity, retrenchment compensation, and any other contractual dues, must be paid within 2 working days of the termination date. Delays attract penalties under the Code on Wages.

Employee vs Contractor Classification in India

India's labour laws apply to employees, not independent contractors. Contractors operate under contract law and are not entitled to EPF, ESI, gratuity, retrenchment compensation, or statutory leave. However, the Labour Codes now extend social security coverage to gig and platform workers through aggregator contributions a signal that the government is actively narrowing the universe of genuinely contractor-relationship work.

Misclassification consequences:

• Retroactive EPF contributions from day one (employer 12% + employee 12%) plus 12% annual interest and up to 100% damages on delayed contributions
• Retroactive ESI contributions (3.25% employer, 0.75% employee) where applicable
• Backdated gratuity exposure (1 year for fixed-term equivalent; 5 years for permanent equivalent)
• Retrenchment compensation liability for the full tenure
• Industrial dispute exposure under Section 2A of the Industrial Disputes Act a single employee can raise an industrial dispute without requiring union backing or collective action

Labour enforcement in India's formal sector, particularly IT, BFSI, and manufacturing, actively monitors contractor arrangements where the practical reality of the relationship resembles employment.

What Compliance Risks Should Employers Know When Hiring in India?

1. 50% basic salary rule non-compliance

 Salary structures that don't meet the new basic + DA ≥ 50% of the CTC requirement create retroactive EPF calculation errors, understated gratuity liability, and potential Code on Wages violations. Every existing salary structure needs review against this rule, effective November 21, 2025.

2. EPF contribution calculation errors

EPF is calculated on basic + DA, not total CTC. Common error: calculating on a restricted "basic" that is artificially low relative to CTC, understating contributions. Post-Labour Code implementation, this exposure is larger because the 50% rule increases the qualifying wage base.

3. ESIC registration oversight

 ESI applies to establishments with 10+ employees where at least one employee earns ₹21,000/month or less. Employers in IT and services sometimes assume no employee crosses the coverage threshold; one hire at or below ₹21,000 gross triggers the obligation for the entire establishment.

4. Fixed-term gratuity underestimation

 The single biggest new liability from the November 2025 Labour Codes is the 1-year gratuity threshold for fixed-term employees. Companies relying heavily on fixed-term contracts for flexibility did not budget for gratuity on short-tenure engagements. This must be modelled into cost projections for all active and future fixed-term contracts.

5. Termination without documentation

 India's Labour Tribunals place heavy emphasis on procedural fairness and documentary evidence. Terminations, even for genuine cause without documented performance warnings, inquiry records, or notice letters are regularly overturned. "At-will" dismissal practices imported from other markets create significant reinstatement and back-wages exposure in India.

6. Professional tax non-registration

 Professional tax is a state-level obligation that many employers with multi-state workforces miss for states where they have employees but not physical offices. Under India's GST and tax framework, registering for professional tax in each applicable state is mandatory regardless of office footprint.

7. POSH Act non-compliance

 Every establishment, regardless of size must comply with the Prevention of Sexual Harassment at the Workplace Act, 2013. Establishments with 10+ employees must constitute an Internal Complaints Committee (ICC) with an external member. Failure to constitute an ICC or to follow the prescribed complaint process attracts fines up to ₹50,000 and cancellation of business licenses.

8. TDS filing delays

 Missing the 7th of the month TDS deposit deadline triggers a ₹200 per day late filing fee plus interest. Missing quarterly Form 24Q filings creates further compounding penalties. Payroll systems that haven't been updated for the new tax regime choices available under the Income Tax Act may generate incorrect withholding.

How an Employer of Record (EOR) Helps You Hire in India?

An EOR eliminates entity formation delays, absorbs multi-layer compliance risk across central and state frameworks, and handles payroll, EPF/ESI contributions, TDS, professional tax, gratuity accrual, and all statutory filings end-to-end.

What you gain with an EOR in India:

• Speed: Live hires in 48 hours in some cases versus 2–4 months for entity setup critical in a market where tech roles are moving in days and AI-skilled talent has multiple competing offers
• Labour Code transition certainty: The dual-track compliance obligation (new Codes + pending state rules) requires active regulatory monitoring. An established EOR handles this continuously, protecting you from gaps created by delayed state rule notifications
• Multi-state compliance: Professional tax, state minimum wages, and Shops and Establishments Act requirements vary across Karnataka, Maharashtra, Tamil Nadu, Delhi, West Bengal, and every other state. An EOR with existing multi-state registrations removes this burden entirely
• Fixed-term gratuity management: The new 1-year threshold requires proactive accrual tracking from day one of every fixed-term contract. An EOR models and manages this liability automatically
• Control: The employee reports to you, works under your direction, and operates within your processes. The EOR holds legal employment risk.

India's scale creates both opportunity and compliance exposure unlike most other markets. 12.8 million projected new jobs in 2026. 76% recruiter hiring intent. A 51% AI skills gap. Against that backdrop, companies that get India hiring right early with clean contract structures, accurate EPF/ESI enrollment, and gratuity accrual built in from the start build a talent acquisition engine that compounds. Companies that cut corners on compliance build a retroactive liability that also compounds.

An EOR is how you get the first version right.

How Gloroots Simplifies Hiring in India?

When hiring in India through Gloroots, the entire process is managed end-to-end. You don't coordinate state-by-state registrations, navigate the dual-track compliance requirements of India's new Labour Codes, or manage EPF/ESI filing schedules yourself.

Gloroots runs the complete India hiring workflow:

• Candidate sourcing, shortlisting, and background verification
• Initial screening to assess skills, experience, and role fit
• Interview coordination for final selection
• Offer issuance and compliant employment setup
• EPF (EPFO registration, UAN generation) and ESIC enrollment where applicable
• Salary structure review for 50% basic + DA compliance under new Labour Codes
• TDS setup per employee's declared tax regime
• Professional tax registration and deduction in applicable states
• Fixed-term gratuity accrual tracking from day one
• Appointment letter issuance per the new OSHWC Code mandate

Gloroots provides end-to-end EOR services in India, handling employment contracts aligned with new Labour Code requirements, payroll processing in INR with correct statutory deductions, monthly EPF/ESI/TDS filings, annual Form 16 issuance, leave administration, POSH compliance support, and all filings with EPFO, ESIC, and the Income Tax Department.

With Gloroots, you get:

• Audit-ready compliance records across all statutory authorities
• Transparent cost breakdowns, including statutory contributions and gratuity accrual
• Finance-team-friendly invoicing with country-level GL mapping
• Multi-state coverage without building state-by-state compliance infrastructure

Gloroots scales with you: from your first India hire to a distributed team across Bengaluru, Mumbai, Hyderabad, Chennai, and Pune and across 140+ countries as your global footprint grows.

Book a Free Demo to learn more

FAQs About Hiring Employees in India

1. Can a foreign company hire employees in India without setting up a local entity? 

Yes. Foreign companies can hire through an Employer of Record (EOR) without incorporating an Indian entity. The EOR becomes the legal employer, handling EPF/UAN registration, ESI enrollment, TDS, professional tax, gratuity accrual, appointment letter issuance, and all Labour Code compliance while you direct the employee's work and maintain full operational control.

2. What are the total employer costs for hiring in India? 

Beyond gross salary, budget for EPF (12% of basic + DA), ESI where applicable (3.25% of gross wages for employees earning ≤ ₹21,000/month), EDLI (0.5%), EPF admin charges (0.5%), professional tax (state-specific), and gratuity accrual. Total statutory on-cost typically runs 15–20% above basic salary, with an additional 5–10% for group health insurance above the ESI threshold. Fixed-term employees now trigger gratuity after 1 year a cost that must be modelled from day one of any fixed-term contract.

3. What changed for Indian employers with the November 2025 Labour Codes?

Four major shifts affect hiring budgets and processes immediately. Basic + DA must be at least 50% of CTC restructuring most high-allowance salary packages and increasing EPF and gratuity contribution bases. Fixed-term employees are now eligible for gratuity after 1 year (previously 5 years). The retrenchment approval threshold rose from 100 to 300 workers. And a Worker Re-Skilling Fund contribution (15 days' wages per retrenched employee) is now a mandatory new termination cost. Central and state implementation rules are still being finalised, creating a dual-compliance obligation that requires active monitoring throughout 2026.

4. What is the fastest way to hire compliantly in India?

 Partnering with an EOR is the fastest, lowest-risk path for hires to go live in 48 hours versus 2–4 months for entity setup. For companies entering India's booming AI, cloud, and healthcare hiring markets where talent moves fast, and competitor hiring timelines are compressing, EOR removes the entity formation bottleneck while ensuring full Labour Code compliance, correct EPF/ESI enrollment, proper salary structuring, and fixed-term gratuity management from day one.