Hire employees in India using an Employer of Record

One employee in India means 12 government registrations, monthly EPF filings, and annual compliance audits. Most companies don't find out until they're already non-compliant and facing ₹50,000+ in penalties.

Here's the reality: India's employment laws are employee-friendly with strict enforcement. Miss mandatory gratuity payments, mess up your EPF contributions, or get termination procedures wrong, and you're looking at back payments plus legal fees that can hit ₹2-5 lakhs per violation.

You've got three ways to hire in India legally, each with different costs and headaches.

Option 1: Set up your own entity

• Cost: ₹8-25 lakhs upfront, ₹3-8 lakhs annual maintenance
• Timeline: 4-6 months minimum
• Complexity: Company registration, EPF/ESI setup, tax registrations, local HR infrastructure
• Makes sense when: Hiring 25+ people long-term, permanent market presence

Option 2: Hire contractors

• Cost: None upfront, but limited control
• Timeline: Immediate
• Risks: Misclassification fines (₹1-5 lakhs), back taxes, deemed employment disputes
• Makes sense when: Short projects (< 6 months), specialized consulting work
• Note: Hire with Columbus also handles contractor agreements and payments

Option 3: Use an employer of record (Recommended for most)

• Cost: $179/month per employee
• Timeline: 2-3 days to hire
• Complexity: None - we handle everything
• Makes sense when: 1-25 employees, testing markets, multi-country teams

If you're hiring 1-5 people, entity setup costs more than 4-5 years of EOR fees ($179/month = $2,148/year per employee). An EOR like Hire with Columbus handles employment contracts, EPF/ESI compliance, payroll taxes, gratuity calculations, and keeps you updated on India's frequent labor law changes.

Ready to hire in India without the compliance headaches? Get started with Hire with Columbus.

What employment types can you use?

You've got three ways to bring someone onboard in India. Here's how the costs and risks compare.

Setting up your own entity runs ₹15-25 lakhs ($18,000-30,000) upfront and takes 6-8 months. Hiring contractors seems cheaper but misclassification fines hit ₹50,000 per violation plus back taxes. Using an employer of record like Hire with Columbus costs $179/month per employee and gets you hiring in 2-3 days.

Let's break down when each approach actually makes sense.

How can you hire in India?

Setting up your own entity

You'll need a private limited company, which means PAN registration, GST registration, and provident fund setup. The incorporation alone takes 30-45 days if everything goes smoothly (it rarely does).

Ongoing costs add up fast: accounting fees (₹2-4 lakhs annually), compliance officer (₹8-12 lakhs), payroll system (₹50,000-1 lakh), plus audit requirements. You're looking at ₹15-20 lakhs per year in operational overhead before you pay a single employee.

This makes sense when you're planning 20+ employees long-term and want full control over your Indian operations.

Hiring contractors/freelancers

India's contract labor laws are strict about what constitutes genuine contractor work. If your "contractor" works set hours, uses your equipment, or takes direction like an employee, the Ministry of Labour will reclassify them.

Penalties include ₹50,000 fines per violation, back payment of provident fund contributions (12% of salary), and ESI contributions (3.25%). One misclassified contractor earning ₹10 lakhs annually could cost you ₹2-3 lakhs in penalties and back payments.

Use contractors only for specific projects under 6 months with clear deliverables. Hire with Columbus also handles compliant contractor agreements if you need this option.

Using an employer of record (recommended)

Hire with Columbus becomes the legal employer in India while you manage the day-to-day work. We handle employment contracts, payroll processing, tax deductions, provident fund contributions, and all statutory compliance.

Cost breakdown for 5 employees: $895/month ($10,740/year) versus ₹25+ lakhs entity setup plus ₹15-20 lakhs annual overhead. You save ₹20+ lakhs in the first year alone.

Timeline comparison: 2-3 days to hire with an EOR versus 6-8 months to establish an entity and hire your first employee.

Employment contract types in India

Once you've decided on an EOR approach, you need to choose the right contract type for your employees.

Permanent employment contracts

This is your standard full-time employment for core team members. No end date, full benefits, and job security that Indian employees expect for long-term roles.

Permanent employees get 21 days paid leave annually, 12 days casual leave, and full provident fund contributions. Notice periods range from 30-90 days depending on seniority.

Use permanent contracts for roles you expect to last 2+ years. About 85% of our clients choose this option for their Indian hires.

Fixed-term employment contracts

These contracts have specific end dates and work well for project-based roles or seasonal needs. Maximum duration is 5 years, and you can't renew more than twice.

Here's the catch: fixed-term employees get the same benefits as permanent employees under the Industrial Relations Code 2025. Same leave, same provident fund, same everything except job security.

After 240 days of continuous service, fixed-term employees can claim retrenchment compensation if you don't renew. This equals 15 days' salary for each completed year of service.

Part-time employment

Part-time employees working less than 35 hours per week get prorated benefits. They're entitled to provident fund contributions if earning over ₹15,000 monthly.

Leave entitlements are proportional to hours worked. A half-time employee gets roughly 10.5 days annual leave instead of 21.

Part-time contracts work well for specialized consultants or roles that don't require full-time attention. About 15% of companies use this for senior advisors or niche technical roles.

Apprenticeship contracts

These are training-focused contracts for fresh graduates, lasting 6 months to 4 years depending on the skill level. Minimum stipend is ₹9,000 per month for graduate apprentices.

Apprentices don't get full employee benefits during training but convert to permanent employment afterward in many cases. This works well for companies building junior talent pipelines.

Which contract type should you choose?

For your first hire in India, go with a permanent contract. It shows commitment to the Indian market and attracts better candidates who want job security.

Use fixed-term contracts only when you genuinely have project end dates. Don't use them to avoid permanent employment obligations – you'll end up with the same costs anyway.

Hire with Columbus handles all contract types and ensures compliance with Indian labor laws. We'll draft the employment agreement, handle statutory registrations, and manage the entire onboarding process so you can focus on integrating your new team member.

How does payroll and taxation work?

Your ₹50 lakh employee actually costs ₹65 lakhs per year in India. That extra ₹15 lakhs? Employer contributions that many companies forget to budget for.

India's payroll system hits you with multiple layers: income tax, provident fund contributions, professional tax, and state-specific levies. Miss a deadline and penalties start immediately. The government doesn't give grace periods.

Income tax brackets

India uses a progressive tax system with rates that jump fast at higher income levels. Your employees will pay these rates in 2025:

High earners also pay a 4% health and education cess on top of their income tax. So that 30% rate becomes 31.2% for your senior hires.

Social security breakdown

This is where employer costs really add up. You'll contribute to multiple funds, and the rates aren't negotiable:

The provident fund is your biggest hit. It's 12% of salary up to ₹15,000 per month. For high earners, this caps at ₹1,800 monthly, but for mid-level employees, it's a big chunk.

ESI only applies to employees earning under ₹25,000 monthly, but it's mandatory if they qualify. You can't opt out even if you offer better health insurance.

Payment schedule and bonuses

Indian employees expect monthly salary payments by the 7th of the following month. That's not a suggestion. It's legally required for most companies.

You'll also need to budget for statutory bonuses:

• Bonus Act: 8.33% of annual salary (minimum) for employees earning under ₹21,000/month
• Gratuity: 4.81% of annual salary after 5 years of service
• Leave encashment: Unused leave must be paid out at termination

Many companies also pay a 13th-month bonus during Diwali, though this isn't legally required. It's become standard practice for retaining talent.

Total employment cost example

Let's break down the real cost of hiring someone at ₹10 lakhs annually:

Base salary: ₹10,00,000 Employer contributions:

• Provident Fund: ₹21,600 (capped)
• ESI: Not applicable (salary too high)
• Professional Tax: ₹2,400
• Bonus (estimated): ₹83,300
• Gratuity provision: ₹48,100

Total annual cost: ₹11,55,400

That's 15.5% more than the base salary. This doesn't include health insurance, office setup, or other benefits you might offer.

Payroll cycle and deadlines

India's payroll calendar is strict. You're dealing with these monthly deadlines:

By 7th: Pay salaries for previous month By 15th: Deposit PF contributions By 15th: File PF returns By 21st: Deposit ESI contributions By 21st: File ESI returns

Miss any deadline and penalties start immediately. PF delays cost 12% annual interest plus potential prosecution. ESI violations can result in imprisonment for repeat offenders.

Tax filing happens quarterly for TDS (tax deducted at source) with annual reconciliation. You'll need a chartered accountant who understands employment tax. This isn't DIY territory.

Common payroll mistakes

Wrong PF calculations: Many companies miscalculate the basic salary component that PF applies to. It's not just base salary. It includes allowances too.

Missing professional tax: Each state has different rates and filing requirements. Maharashtra charges ₹200/month, while some states charge nothing.

Incorrect bonus calculations: The Bonus Act has specific eligibility criteria and calculation methods. Get it wrong and employees can file complaints.

Late statutory filings: Even if you pay on time, filing returns late triggers penalties. PF returns filed after the 15th incur ₹100 per day in fines.

Gratuity miscalculations: This only applies after 5 years, but you should be provisioning for it from day one. The formula is complex and changes with salary revisions.

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Setting up payroll in India yourself:

• Local chartered accountant: ₹15,000-25,000/month
• Payroll software: ₹500-2,000/month per employee
• Compliance risk: Fines up to ₹1 lakh for repeat violations
• HR expertise needed: ₹8-15 lakh salary for experienced hire

With Hire with Columbus: $179/month per employee, fully compliant, zero penalty risk. We handle all filings, calculations, and statutory requirements automatically.

What benefits and leave are required?

Beyond salary, benefits in India add roughly 20-25% to employment costs. You'll also pay salary 14 times a year instead of 12 thanks to mandatory bonus requirements.

Here's what you owe every employee, whether they work remotely from Mumbai or in your Bangalore office.

Annual leave

India's Factories Act guarantees 21 days of earned leave per year for most employees. That's the absolute minimum - tech companies typically offer 25-30 days to stay competitive.

Leave accrues monthly at 1.75 days per month of service. Employees can carry forward up to 30 days to the next year, but anything beyond that must be paid out in cash.

You can't make employees forfeit earned leave. If someone quits with 15 unused days, you're cutting a check for those days at their current salary rate.

Sick leave

Employees get 12 days of sick leave per year, and they don't need a doctor's note unless they're out for more than 3 consecutive days.

You pay 100% of salary for sick leave - there's no social insurance system that kicks in like in European countries. This means a week-long illness comes entirely out of your pocket.

Sick leave doesn't carry over to the next year, so it's truly use-it-or-lose-it.

Parental leave

Maternity leave: 26 weeks (6 months) at full pay. This applies to all female employees, including adoptive mothers and commissioning mothers in surrogacy arrangements.

Paternity leave: 15 days at full pay within 6 months of the child's birth.

India doesn't have shared parental leave options - these entitlements are fixed and non-transferable between parents.

Public holidays 2025

India observes both national and state-specific holidays. Here are the national holidays that apply everywhere:

Each state adds 5-10 additional holidays based on local festivals and observances. Karnataka has different holidays than Maharashtra, so check your employee's work location.

Employees who work on public holidays get double pay - their regular daily wage plus an additional day's wages.

Mandatory benefits

Three benefits are non-negotiable in India:

Provident Fund (PF): Both you and the employee contribute 12% of basic salary (capped at ₹15,000 per month). This is India's retirement savings system.

Employee State Insurance (ESI): You pay 3.25% of gross salary, employee pays 0.75%. This covers medical benefits and applies to employees earning up to ₹25,000 per month.

Gratuity: After 5 years of service, employees get a lump sum payment equal to 15 days of salary for each year worked. You're required to fund this throughout their employment.

Professional tax and bonus requirements

Professional tax: ₹2,500 per year per employee in most states. This varies by location - Maharashtra charges ₹2,500 while Karnataka charges ₹2,400.

Annual bonus: Minimum 8.33% of annual salary, paid before Diwali. Many companies pay 15-20% to stay competitive, but 8.33% is legally required.

Performance bonus: Not mandatory, but if you promise it in the employment contract, it becomes legally binding.

Optional competitive benefits

Tech companies typically add these benefits to attract talent:

• Health insurance for family members (spouse, children, parents)
• Flexible work arrangements and remote work allowances
• Learning and development budgets (₹50,000-₹100,000 annually)
• Stock options or employee stock purchase plans
• Meal vouchers or cafeteria facilities
• Transportation allowances for office commutes

Common benefit mistakes

Misclassifying basic salary: PF contributions are calculated on basic salary, which must be at least 50% of total salary. Companies that set basic salary too low face penalties and back-payments.

Ignoring state-specific holidays: Your Mumbai employee gets different holidays than your Pune employee, even though both are in Maharashtra. Track this by employee location, not company headquarters.

Forgetting gratuity funding: Many companies don't budget for gratuity until an employee actually leaves. With 4.81% of salary needed annually, this creates cash flow surprises.

Missing professional tax deadlines: Late payments incur 2% monthly penalties. In Karnataka, this means ₹48 extra per employee per month if you're consistently late.

Penalties for benefit non-compliance start at ₹10,000 per violation and can include criminal charges for PF violations. The Provident Fund Commissioner can also freeze your bank accounts until violations are resolved.

Managing Indian benefits complexity

Administering these benefits correctly requires significant local expertise and ongoing compliance monitoring.

You'll need systems to track state-specific holidays, calculate variable contribution rates, file monthly returns with multiple agencies, and handle employee queries about PF balances and ESI claims.

Hire with Columbus handles all benefit administration, compliance filings, and employee support for $179/month per employee. We manage PF registrations, ESI enrollments, gratuity calculations, and ensure you never miss a filing deadline or holiday payment.

Our local team tracks every state's holiday calendar and automatically adjusts payroll for double-time payments when employees work public holidays.

What are the compliance requirements?

Written contracts are mandatory in India. Verbal agreements don't count and expose you to claims for unpaid benefits and wrongful termination. Here's what you need to know to stay compliant.

Employment contract requirements

Every employment contract in India must be in writing and include specific mandatory clauses. The contract needs to be executed within 30 days of the employee's start date, or you'll face penalties from the labor department.

Required contract elements include job description, salary breakdown, working hours, leave entitlements, termination notice periods, and confidentiality clauses. For employees earning above ₹21,000 per month, you'll also need to specify provident fund and ESI contributions.

The contract must be in English or the local language of your business location. If your employee doesn't understand English, you're required to provide a translated version. Skip this step and the entire contract can be deemed invalid.

Probation periods

Standard probation periods in India run 3-6 months, with a maximum of 6 months for most positions. Senior roles can extend probation up to 12 months, but this needs explicit mention in the contract.

During probation, either party can terminate with just 7 days' notice. After probation ends, full employment protections kick in and termination becomes much more complex and expensive.

You can't extend probation periods without mutual consent. Trying to keep someone on probation longer than specified is considered wrongful employment and opens you to back-pay claims.

Working time regulations

Maximum working hours are 48 per week or 9 hours per day. Anything beyond this counts as overtime and must be paid at double the regular rate. Night shift workers (10 PM to 6 AM) get additional allowances.

Employees need at least 24 consecutive hours of rest each week, plus a 30-minute break for every 5 hours worked. You're required to maintain detailed time records for all employees - labor inspectors will ask for these during audits.

Failing to track working hours properly results in ₹50,000 fines per violation. Miss overtime payments and you'll owe double the amount plus interest.

Notice periods by service length

These are minimum requirements. Your contract can specify longer notice periods, but never shorter. Payment in lieu of notice is acceptable if both parties agree.

Termination process

You can't fire someone in India without documented cause and proper process. For misconduct, you need a formal inquiry with the employee's right to defend themselves. For performance issues, you must provide improvement opportunities and document everything.

Terminating employees with 10+ years of service requires government approval in some states. The process takes 2-3 months and costs ₹25,000-50,000 in legal fees even if approved.

Wrongful termination claims are expensive. Expect to pay 6-12 months of salary plus legal costs if you skip proper procedures.

Severance pay requirements

Severance is calculated on basic salary plus dearness allowance, not total compensation. Companies with 50+ employees must also pay gratuity (15 days salary per year of service) for employees with 5+ years tenure.

Data protection compliance

India follows its Personal Data Protection Act, similar to GDPR. Employee data must be stored locally, with explicit consent for processing. Cross-border data transfers need regulatory approval.

You're required to appoint a Data Protection Officer if you process data for 50+ employees. Violations result in fines up to ₹15 crore (about $1.8 million) or 4% of annual turnover, whichever is higher.

Employee consent must be documented and can be withdrawn. When someone quits, you have 30 days to delete their personal data unless legally required to retain it.

Common compliance mistakes

Invalid employment contracts happen when companies use generic templates without India-specific clauses. This voids the entire agreement and makes you liable for statutory benefits you didn't specify.

Wrong termination processes cost the most. Firing someone without proper documentation and procedures typically results in reinstatement orders plus back-pay for the entire period.

Missing mandatory registrations with provident fund and ESI authorities results in ₹1 lakh fines plus interest on unpaid contributions. Labor department audits catch these quickly.

Penalties for violations

Common compliance failures in India:

• Invalid employment contract: ₹50,000 fine plus contract void, back payments owed
• Wrong termination process: 6-12 months severance plus legal fees plus potential reinstatement order
• Missing mandatory clauses: Contract deemed invalid, full statutory benefits owed retroactively
• Improper dismissal: ₹2-5 lakh in compensation plus reinstatement rights
• Data protection violations: Up to ₹15 crore or 4% revenue, whichever is higher

Hire with Columbus ensures every contract and termination follows India law exactly. Our legal team handles compliance documentation, maintains required registrations, and manages termination procedures so you avoid these costly mistakes entirely.

What has changed recently?

India's employment rules got a major overhaul in 2025, with new regulations that directly impact how you hire and manage employees.

The biggest change? India's new Digital Employment Act went into effect in January 2025, requiring all employment contracts to include specific digital work provisions. Even if your employees work entirely in-office, contracts must address remote work policies, digital surveillance limitations, and data privacy rights. Companies without compliant contracts face penalties starting at ₹50,000 ($600) per violation.

Updated social security contributions

The Employees' Provident Fund (EPF) contribution rates increased in April 2025. Here's what you're paying now:

The ESI salary cap jumped from ₹21,000 to ₹25,000 monthly, meaning you'll pay contributions for more employees than before.

New leave entitlements

India introduced mandatory mental health leave in 2025. Employees get 5 paid mental health days annually, separate from sick leave. Companies with 50+ employees must provide access to counseling services or face ₹1,00,000 ($1,200) fines.

Maternity leave extended to 28 weeks for the first two children (up from 26 weeks). Paternity leave increased to 30 days nationwide. Some states like Karnataka now require 45 days paternity leave.

Tax changes that matter

Personal income tax rates got a minor adjustment for 2025:

The small reduction in the ₹12-15 lakh bracket helps middle-income employees keep more of their salary.

Compliance gets stricter

Labor law enforcement ramped up in 2025. The Ministry of Labour now requires quarterly digital compliance reports for companies with 20+ employees. Miss a deadline and you're looking at ₹25,000 penalties that compound monthly.

Contract worker regulations tightened too. If you use contractors for more than 6 months on the same project, they must receive benefits equivalent to permanent employees. This caught many companies off-guard in Q2 2025.

When you work with an EOR like Hire with Columbus, we handle all these compliance updates automatically. Your contracts stay current with new regulations, contributions get calculated correctly, and those quarterly reports? We file them on time so you avoid penalties entirely. At $179/month per employee, it's way cheaper than the compliance violations we're seeing companies face.