30 Questions About Hiring Employees in India

Why Hiring in India Demands Careful Planning

India's labour law framework is among the most complex in the world. Four new Labour Codes were notified with effect from 21 November 2025, consolidating 29 legacy laws into a modernised regulatory regime. However, central and state-specific rules under the Codes are still being finalised (draft rules were released in late 2025, with final rules expected by 1 April 2026); during the transition, many provisions of the legacy labour Acts continue to apply alongside the notified Codes. For foreign companies looking to hire in India, understanding these rules is not optional; non-compliance can result in penalties, prosecution, and reputational damage that far exceeds the cost of doing things correctly from the start.

This guide answers the 30 most common questions we receive from foreign companies, NRI entrepreneurs, and global HR teams about hiring employees in India. Every answer reflects the law as of March 2026, including the Labour Codes as notified on 21 November 2025, while recognising that several subordinate rules are still under finalisation.

Legal Entity and Hiring Models

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

No. Indian employment law requires a legal employer presence for full-time employees. A foreign company cannot directly run payroll, make statutory deductions (PF, ESI, Professional Tax), or issue employment contracts in India without a registered entity. You have three options: (1) Incorporate a Private Limited Company (takes 4-6 weeks, costs USD 3,000-5,000 for professional fees); (2) Use an Employer of Record (EOR) — the EOR is the legal employer, handling payroll and compliance while you manage day-to-day work (operational in 1-2 weeks, costs USD 200-500 per employee per month); (3) Engage independent contractors — but misclassification risk is high and India's tax authorities actively scrutinise these arrangements.

2. What is the difference between an employee and a contractor in India?

Indian law distinguishes based on the degree of control, exclusivity, and integration. An employee works under the employer's supervision and control, uses the employer's tools and equipment, has fixed working hours, and receives a regular salary with statutory benefits. A contractor works independently, uses own tools, can serve multiple clients, and is paid per deliverable. Key risk: if a contractor works exclusively for you, follows your schedule, uses your equipment, and reports to your managers, Indian authorities will likely reclassify them as an employee — triggering retrospective PF, ESI, gratuity, and bonus obligations. The new Labour Codes have broadened the definition of "worker" to include more categories, increasing reclassification risk.

3. What entity type should I set up for hiring in India?

A wholly owned subsidiary (Private Limited Company with 100% foreign shareholding) is the most common choice. It provides limited liability, allows you to hire unlimited employees, and qualifies for FDI under the automatic route in most sectors. Alternatives include a Branch Office (can hire for executing parent company work, but profits are taxed at 35% plus surcharge) or a Liaison Office (limited to communication and coordination, cannot engage in commercial activity or hire for revenue-generating roles). For a detailed comparison, see our guide on branch office vs subsidiary.

Employment Contracts and Onboarding

4. Is a written employment contract mandatory in India?

Yes. Under the Code on Wages, 2019 (notified with effect from 21 November 2025, subject to pending subordinate rules), every employer must issue a written appointment letter to every worker specifying: job designation, wages and wage components, period of employment, social security entitlements, notice period for termination, and other conditions of service. Failure to issue an appointment letter is a punishable offence with fines up to INR 50,000 for a first offence and up to INR 2 lakh for a repeat offence.

Beyond the statutory minimum, foreign companies should ensure the employment contract also covers: confidentiality and non-disclosure obligations, intellectual property assignment (critical for technology companies — without a written IP assignment clause, the employee may retain rights to work product under Indian copyright law), non-compete provisions (enforceable only during employment in India, not post-termination under Section 27 of the Indian Contract Act), non-solicitation clauses (enforceable post-termination if reasonably scoped), dispute resolution mechanism (arbitration is common in senior contracts), and governing law. For companies with global operations, include a cross-border data transfer consent clause to comply with India's Digital Personal Data Protection Act, 2023.

5. What must be included in the salary structure?

Under the new Labour Codes, basic salary must be at least 50% of total CTC (Cost to Company). This is a significant change from the previous regime where companies could structure basic as low as 20-30% of CTC. The mandatory wage structure affects all statutory calculations:

6. What is the minimum wage I must pay?

India does not have a single national minimum wage. Minimum wages are set by each state and vary by skill level, industry, and zone. As of early 2026: Delhi has the highest rates — INR 18,456/month for unskilled workers, INR 20,357 for semi-skilled, INR 22,411 for skilled, and INR 24,356 for clerical/graduate-level workers. Maharashtra ranges from approximately INR 10,000-15,000/month depending on zone and skill level. Karnataka ranges from approximately INR 9,000-14,000/month. Bengaluru and Hyderabad — popular for tech hiring — fall under Zone I of their respective states. The new Code on Wages mandates a national floor wage that no state can go below, though specific floor wage notifications are still being finalised.

7. What is the probation period in India?

There is no statutory maximum probation period prescribed by central law — it is governed by the employment contract and company policy. Industry standard is 3-6 months, though senior positions may have up to 12 months. During probation, the employer can terminate with shorter notice (typically 1-7 days as specified in the contract) compared to the notice period for confirmed employees (30-90 days). However, all statutory benefits — PF, ESI, gratuity accrual, bonus eligibility — apply from day one regardless of probation status. Under the new Industrial Relations Code, a fixed-term employee's probation period cannot exceed 50% of the contract duration.

Common pitfall: some companies attempt to extend probation indefinitely to avoid providing full benefits. This is not legally permissible — a pattern of repeated extensions can be challenged. If an employee's performance is unsatisfactory during probation, the company should terminate during the probation period itself rather than extending. The termination letter during probation should clearly state that the employee is being released during probation and cite the specific clause in the appointment letter that permits this. Always maintain documented evidence of performance reviews conducted during probation.

Statutory Contributions and Benefits

8. What is the EPF contribution rate and who pays?

Both employer and employee contribute 12% of basic wages (basic salary + dearness allowance) to the Employees' Provident Fund. The statutory wage ceiling for PF is INR 15,000/month — contributions above this threshold are voluntary. The employer's 12% is split: 8.33% goes to the Employees' Pension Scheme (EPS, capped at INR 15,000 basic) and 3.67% to the EPF account. Additionally, the employer pays 0.5% as EDLI (Employees' Deposit Linked Insurance) and an administrative charge of 0.5%. Total employer PF cost is approximately 13% of basic wages. PF registration is mandatory once you have 20 or more employees, but many companies register voluntarily from day one.

9. What is ESI and when does it apply?

Employee State Insurance (ESI) provides medical, disability, maternity, and death benefits. ESI is mandatory when you have 10 or more employees (or even one employee in hazardous work). The wage ceiling is INR 21,000/month gross — employees earning above this threshold are not covered. Employer contribution is 3.25% and employee contribution is 0.75% of gross wages. Under the new Labour Codes, ESI now applies pan-India, not just in notified areas. The current ESI rules shall be followed until 20 November 2026 while the new Code on Social Security rules are being notified. Total ESI cost for the employer is 3.25% of the employee's gross wages.

10. How does gratuity work in India?

Gratuity is a mandatory retirement benefit calculated as: (Last Drawn Wages x 15 x Number of Completed Years of Service) / 26. Permanent employees qualify after 5 years of continuous service. Under the new Labour Codes, fixed-term and contract employees now qualify after just 1 year of service — a major change. The maximum tax-exempt gratuity amount is capped at INR 20 lakh. Example: an employee with 10 years of service and last drawn basic + DA of INR 50,000/month would receive: (50,000 x 15 x 10) / 26 = INR 2,88,462. Employers must pay gratuity within 30 days of the employee becoming eligible; delays attract interest. For detailed calculations, see our guide on private limited company compliance.

11. What is the bonus requirement?

Under the Payment of Bonus Act 1965 (now subsumed under the Code on Wages), every establishment with 20 or more employees must pay bonus to employees whose monthly wages do not exceed INR 21,000. Minimum bonus is 8.33% of wages earned during the year (or INR 100, whichever is higher). Maximum bonus is 20% of wages. Bonus is calculated on a salary ceiling of INR 7,000/month or the minimum wage for the scheduled employment, whichever is higher. Bonus must be paid within 8 months of the close of the accounting year. New establishments are exempt for the first 5 years from the year of establishment.

12. What is Professional Tax?

Professional Tax is a state-level tax on employment, capped at INR 2,500 per year by the Constitution. Not all states levy it. Major states with PT include: Maharashtra (INR 200/month, INR 300 in February), Karnataka (INR 200/month), Telangana (INR 200/month), West Bengal (INR 150/month), and Madhya Pradesh (INR 208/month). The employer must register with the state PT authority, deduct PT from employee wages monthly, and deposit it with the state government. Employer PT registration is typically required within 30 days of hiring the first employee in that state.

Hiring Process and Documentation

13. What documents should I collect from a new hire?

Standard documentation includes: Aadhaar card (12-digit unique identity number — mandatory for PF and ESI registration), PAN card (Permanent Account Number — mandatory for TDS calculation and filing), educational certificates and transcripts (original verification is common practice), experience letters and relieving letter from the previous employer (critical — hiring an employee who has not been formally relieved can create legal complications with their prior employer), passport-size photographs (4-6 copies), bank account details for salary credit, Form 11 (for PF transfer from previous employer), Form 2 (PF nomination for death-in-service benefits), ESI nomination form, and a completed personal information form with emergency contact details.

For employees in regulated industries (banking, defence, financial services), police verification and comprehensive background checks are mandatory. For technology companies handling sensitive data, background verification through agencies like AuthBridge, HireRight, or First Advantage is strongly recommended. The verification process typically takes 7-14 days and covers: criminal record check, address verification, employment history verification, educational credential verification, and reference checks. Cost ranges from INR 1,500-5,000 per employee depending on the depth of verification. While not legally mandatory for all industries, background checks are industry standard for companies hiring in India's technology sector.

14. Do I need to register for PF and ESI before hiring?

Yes. Before your first payroll run, you must complete: (1) PF registration on the EPFO unified portal (typically takes 3-7 days online); (2) ESI registration on the ESIC portal (if you will have 10+ employees or any employee in hazardous work); (3) Professional Tax registration with the state authority; (4) Shops and Establishment Act registration with the local municipal body (required within 30 days of commencing business in most states); (5) Labour Welfare Fund registration (applicable in states like Maharashtra, Karnataka, Tamil Nadu). You cannot legally run payroll without PF registration if you have 20+ employees.

15. Can I hire foreign nationals to work in India?

Yes, but they need valid work authorisation. The primary visa types are: Employment Visa (for skilled foreign workers — minimum salary threshold of USD 25,000/year, except for ethnic cooks, language teachers, and certain other categories); Business Visa (for business-related activities, not regular employment); Project Visa (for government-related projects); and Intern Visa (for foreign interns at Indian companies). The employer must register the foreign employee with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival.

Foreign employees are subject to Indian labour laws and entitled to all statutory benefits. For PF contributions, India has Social Security Agreements (SSAs) with 20 countries including Belgium, Germany, France, South Korea, Japan, and the Netherlands. Employees from SSA countries can obtain a Certificate of Coverage from their home country to be exempt from Indian PF contributions, avoiding double social security payments. For employees from non-SSA countries (including the USA and UK), PF contributions are mandatory on both sides. The employer must also obtain a clearance from the Ministry of Home Affairs for hiring nationals from countries sharing a land border with India (China, Pakistan, Bangladesh, etc.).

Salary Structure and Payroll

16. What is the total employer cost above CTC?

The total employer cost above the employee's gross salary includes:

As a rule of thumb, budget 25-35% above the gross salary for total employer cost. For an employee with a CTC of INR 10 lakh/year, the actual employer cost including all statutory contributions typically ranges from INR 12.5-13.5 lakh.

17. How is TDS (Tax Deducted at Source) calculated on salaries?

The employer must estimate the employee's total annual income, apply the applicable tax slab (new regime is default from FY 2024-25), and deduct TDS proportionally each month. Under the new tax regime for FY 2026-27: no tax up to INR 4 lakh (after standard deduction of INR 75,000), 5% for INR 4-8 lakh, 10% for INR 8-12 lakh, 15% for INR 12-16 lakh, 20% for INR 16-20 lakh, 25% for INR 20-24 lakh, and 30% above INR 24 lakh. A rebate under Section 87A means no tax is payable if total income does not exceed INR 12 lakh (approximately INR 12.75 lakh after standard deduction). TDS must be deposited with the government by the 7th of the following month.

18. How often must payroll be processed?

Under the Code on Wages, wages must be paid before the 7th day of the following month for establishments with fewer than 1,000 workers, and before the 10th for establishments with 1,000+ workers. Monthly payroll is the standard practice. You must also process: EPF contributions by the 15th of the following month, ESI contributions by the 15th of the following month, TDS by the 7th of the following month, and Professional Tax by the state-specific due date (typically the last day of the month). Late deposits attract interest — PF at 12% per annum on delayed amount, and ESI at 12% simple interest.

19. What payroll software or systems are commonly used?

Popular payroll platforms in India include: greytHR (cloud-based, popular with SMEs, from INR 3,495/month), Zoho Payroll (integrated with Zoho suite, from INR 40/employee/month), Keka (HR + payroll, popular with tech companies), RazorpayX Payroll (automated compliance, from INR 100/employee/month), and ADP/SAP SuccessFactors (for larger enterprises). All platforms handle PF/ESI/PT calculations, generate payslips, and produce TDS returns. For companies with fewer than 20 employees, a qualified payroll accountant (INR 5,000-15,000/month) can handle payroll manually using Excel and government portal filings.

Leave, Working Hours, and Benefits

20. What are the mandatory leave entitlements?

Under the new Labour Codes, mandatory leave entitlements include: Earned Leave/Privilege Leave — 1 day for every 20 days worked (approximately 15 days/year for a full-year employee), which can be accumulated and encashed. Sick Leave — typically 7-12 days/year depending on state rules. Casual Leave — typically 7-12 days/year depending on state. National and festival holidays — 3 national holidays are mandatory (Republic Day, Independence Day, Gandhi Jayanti) plus state-specific festival holidays (typically 7-10 additional days). Maternity Leave — 26 weeks for first two children, 12 weeks for third child onwards (Maternity Benefit Act). Paternity Leave — no statutory provision yet under central law, but many companies offer 5-15 days. Leave policies must be clearly documented in the employment contract and displayed at the workplace.

21. What are the maximum working hours?

Under the Occupational Safety, Health and Working Conditions Code, 2020, the daily working limit is 8 hours, and the weekly limit is 48 hours. Overtime is permitted but capped at 125 hours per quarter. Overtime must be compensated at twice the normal wage rate. Spread-over time (the span between starting and finishing work, including breaks) cannot exceed 12 hours in a day. Night shifts for women are now permitted in all establishments with adequate safeguards including transportation and security. The employer must maintain attendance registers and overtime records — digital records are now accepted.

For technology companies and knowledge workers, the practical reality is that most employees work beyond 8 hours regularly. However, the legal obligation remains — overtime wages must be calculated and paid at double the ordinary rate for hours worked beyond 8 per day or 48 per week. Many IT companies have obtained exemptions under their state's Shops and Establishment Act, which may allow up to 9 hours per day and 48 hours per week without overtime. The Karnataka Shops and Commercial Establishments Act (which covers Bengaluru) permits 10-hour working days including breaks for IT/ITES establishments. Always check your state-specific rules as they can be more favourable than central law for certain industries.

22. Is health insurance mandatory for employees?

ESI coverage is the statutory health insurance for employees earning up to INR 21,000/month gross. For employees above the ESI wage ceiling, there is no statutory requirement for private health insurance. However, virtually all reputable employers in India provide Group Medical Insurance (GMI) as a standard benefit — typically covering the employee, spouse, and two children with sum insured ranging from INR 3-5 lakh. GMI costs range from INR 5,000-15,000 per employee per year depending on coverage, age profile, and insurer. Group term life insurance (1-3x annual CTC) is also common. These benefits are essential for talent attraction — candidates evaluate them alongside salary.

A competitive benefits package for mid-level employees in India's technology hubs typically includes: Group Medical Insurance (INR 5-10 lakh cover for family), Group Term Life Insurance (2x annual CTC), Group Personal Accident Insurance (2x annual CTC), meal vouchers or subsidised cafeteria (INR 2,200/month is tax-exempt under the old tax regime), mobile phone and internet reimbursement (INR 1,000-3,000/month), professional development budget (INR 25,000-50,000/year for courses and certifications), and flexible working arrangements. While not mandatory, these benefits significantly reduce attrition — India's tech sector experiences annual attrition rates of 15-25%, and comprehensive benefits packages can reduce this by 5-8 percentage points.

Termination, Severance, and Disputes

23. Can I terminate an employee at will in India?

No. India does not have at-will employment. Every termination must follow due process: (1) Document the reason — poor performance (with prior warnings and Performance Improvement Plans), misconduct (with domestic inquiry), redundancy, or mutual separation; (2) Provide written notice — 30-90 days as per the employment contract or pay salary in lieu of notice; (3) For workers under the Industrial Relations Code, companies with up to 300 employees can terminate without government permission (this threshold was raised from 100 under the old law); companies with 300+ workers need government approval for retrenchment; (4) Process full and final settlement within 2 working days of the last working day. India's labour courts generally rule in favour of employees in ambiguous cases.

24. What severance pay is required?

Severance pay (retrenchment compensation) is mandatory for employees who have worked for at least one year and are terminated for redundancy or business-related reasons. The compensation is 15 days' average wages for every completed year of continuous service. This is in addition to: (1) Notice pay — salary for the notice period or payment in lieu; (2) Gratuity — if the employee has completed 5 years (or 1 year for fixed-term workers under the new Labour Codes); (3) Encashment of unused earned leave; (4) Any pending bonus. Example: an employee with 5 years of service and monthly wages of INR 50,000 would receive approximately: Retrenchment compensation = (50,000/26 x 15 x 5) = INR 1,44,231 + Gratuity = (50,000 x 15 x 5)/26 = INR 1,44,231 + Leave encashment + Notice pay.

25. How do I handle employee misconduct?

For misconduct cases, the employer must conduct a domestic inquiry following the principles of natural justice: (1) Issue a written charge sheet to the employee specifying the allegations with sufficient detail — vague charges will be struck down; (2) Give the employee a reasonable opportunity to respond in writing (typically 7-15 days); (3) Appoint an inquiry officer (can be internal but must be impartial — ideally someone who was not involved in the incident or the decision to initiate proceedings); (4) Conduct the inquiry — both sides present evidence, and the employee has the right to cross-examine witnesses; (5) The inquiry officer submits findings with recommendations; (6) The management reviews the findings and passes a final order — this must be proportionate to the misconduct.

If misconduct is proven, proportionate punishments include: verbal or written warning, withholding of increments, suspension without wages (maximum period varies by state), demotion, or dismissal. Bypassing the domestic inquiry process is the most common reason terminations are challenged and overturned by labour courts. The Supreme Court has repeatedly held that even in cases of proven misconduct, the punishment must be proportionate — dismissal for a first-time minor offence may be overturned. Keep detailed written records of every step, including signed acknowledgments from the employee where possible.

26. What are the risks of employee misclassification?

If a contractor or consultant is reclassified as an employee by tax authorities or labour inspectors, the consequences include: retrospective PF contributions for the entire engagement period with 12% interest on delayed payments; retrospective ESI contributions with interest; gratuity liability if the engagement exceeded 5 years; bonus liability; penalties under the relevant social security legislation; and potential prosecution. The new Labour Codes have expanded the definition of "employee" and "worker," increasing the risk of reclassification. Common triggers for investigation: a single-client contractor, fixed working hours, use of company email/equipment, and integration into the company's organisational structure.

Compliance and Record-Keeping

27. What registers and records must an employer maintain?

Under the new Labour Codes, employers must maintain: Register of employees (Form A); Wage register (Form B); Attendance/muster roll; Leave register with carry-forward records; Overtime register; Register of fines and deductions; Annual return (Form C — to be filed with the labour department); PF and ESI contribution records; TDS computation worksheets; and Equal remuneration register (showing no gender-based wage discrimination). The new Labour Codes consolidate multiple registers into simplified formats, and digital record-keeping is now explicitly permitted. Records must be preserved for a minimum of 3 years (some states require 5 years). The annual compliance calendar is critical — missing deadlines triggers automatic penalties.

28. What labour law returns must be filed annually?

Key annual filings include: Annual PF return (consolidated statement by April 30); ESI contribution returns (half-yearly — by May 11 and November 11); Labour department annual return (Form C — under the new Codes, a single combined return replaces multiple returns under old laws, typically due by February 1); TDS returns (quarterly — Q1 by July 31, Q2 by October 31, Q3 by January 31, Q4 by May 31); Professional Tax returns (frequency varies by state); and Shops and Establishment renewal (annual in most states). Under the Shram Suvidha Portal, many filings are now unified, allowing a single online return covering multiple labour laws.

29. What are the penalties for labour law non-compliance?

The new Labour Codes have rationalised penalties but they remain significant:

The new Codes also introduce a compounding mechanism — first-time offenders can compound the offence by paying 50% of the maximum fine, avoiding prosecution. This is a significant improvement over the old regime where even minor violations could trigger criminal proceedings.

30. Should I hire an in-house HR team or outsource payroll and compliance?

The decision depends on your team size and growth trajectory. For 1-20 employees, outsourcing payroll and compliance to a professional employer organisation (PEO) or a CA firm is cost-effective — typical costs range from INR 1,000-3,000 per employee per month. For 20-50 employees, a dedicated HR generalist plus an outsourced payroll provider works well. For 50+ employees, build an in-house HR team with at least one labour law specialist, supplemented by external compliance auditors. Regardless of size, we strongly recommend annual labour law compliance audits to identify and fix gaps before they become enforcement actions. Read our complete guide on hiring employees in India as a foreign company for additional operational guidance.

Key Takeaways for Foreign Companies Hiring in India

Hiring in India offers access to one of the world's largest and most cost-effective talent pools, but it requires careful navigation of a complex regulatory framework. Here are the essential principles to follow: (1) Never hire without a legal entity or EOR arrangement — the penalties for non-compliance far exceed the setup costs; (2) Structure salaries with basic at 50% or more of CTC from day one — restructuring later is operationally disruptive and may trigger employee disputes; (3) Register for PF and ESI proactively, even before you reach the mandatory threshold — voluntary registration demonstrates good faith and avoids retrospective liability; (4) Budget 25-35% above gross salary for total employer cost — this accounts for EPF, ESI, gratuity, bonus, and administrative overheads; (5) Issue written employment contracts to every employee with comprehensive IP assignment and confidentiality clauses; (6) Document every termination meticulously — India's labour courts strongly favour employees, and procedural errors are the primary reason employers lose disputes; (7) Invest in a reliable payroll platform or outsource to a competent CA firm from the start — payroll errors create compounding compliance problems that are expensive to unwind.

For specialised assistance with setting up your India hiring infrastructure, explore our company registration services and GST compliance support. We help foreign companies across 40+ countries navigate the full lifecycle from entity setup to first hire to ongoing compliance.