Hiring employees in India in 2026: EOR structure, costs, and compliance

A first hire in India through an Employer of Record is lawful and common, but the label does not settle how Indian law treats it. Under the labour codes in force since November 2025, one company employing a person who works for another can fall within contract-labour rules, with a licensing threshold, limits on core activities and, above that threshold, a duty on the client to pay wages the provider fails to pay.

For employers, the practical questions are whether the arrangement falls within contract-labour rules, which state-level requirements apply, and what the employee will cost beyond gross salary. Budget for provident fund, state insurance, gratuity and bonus, withhold tax under the new Income-tax Act, and settle final wages within two working days of exit.

India has no statute that defines an employer of record or gives the model a separate legal status. The framework changed with the consolidation of India’s central labour laws into four codes covering wages, industrial relations, social security, and occupational safety, health and working conditions.

The codes did not all take effect in the same way, and that matters when a provider says “the new codes apply”. The Industrial Relations Code and the Occupational Safety, Health and Working Conditions Code were brought into force in full on 21 November 2025, the latter by notification S.O. 5321(E). The Code on Wages and the Code on Social Security were commenced on the same date by listed provisions, so some sections came into force earlier or sit outside those notifications. The central rules under the Occupational Safety Code were issued in a Gazette notification in May 2026.

Two practical consequences follow:

• State rules still matter: Central rules govern establishments in the central sphere, while private-sector employers outside that sphere fall under state rules issued on their own timetable. The state where an employee works therefore still determines much of the practical compliance position.
• Older contract-labour guidance needs care: Guidance written before late 2025 that treats the Contract Labour (Regulation and Abolition) Act, 1970 as the operative contract-labour law should be read with care, because the occupational safety code replaced it in full.

This is the question the India decision turns on. The occupational safety code defines contract labour broadly: a worker hired in or in connection with an establishment by or through a contractor, whether or not the principal employer knows of it. An arrangement is judged on what actually happens, not on what the commercial contract calls it.

Part of the code’s contract-labour chapter applies at a threshold that is higher than the law it replaced:

The two tests run separately:

• Client threshold: A client counts the contract labour working at its establishment across all contractors.
• Provider threshold: A provider counts its own contract-labour workforce.

Both tests look back over the preceding twelve months, so falling below 50 later does not undo an earlier crossing. The chapter does not apply where the work is only intermittent or casual in nature.

A contractor covered by the chapter needs a licence before supplying contract labour to any establishment under section 47. The licence also carries a security deposit that can be used to pay workers if wages go unpaid.

The code also prohibits contract labour in the core activities of an establishment under section 57, with exceptions where:

• The activity is ordinarily carried out through contractors
• It does not require full-time workers for the major portion of working hours
• A sudden increase in volume has to be completed within a set time

A first India hire doing ongoing sales, engineering or operations work for the client’s own business sits close to this line, and “the person works remotely” does not answer it. The assessment depends on the actual role and the actual business.

Where the contract-labour chapter applies, section 55 makes the contractor responsible for paying contract labour by bank transfer or electronic mode and for informing the principal employer of what it paid. If the contractor fails to pay within the prescribed period, or pays short, the principal employer must pay the wages in full or the unpaid balance, then recover the amount from the contractor.

The principal employer can also carry other responsibilities:

• Welfare facilities: The code places welfare facilities for contract labour on the principal employer.
• Unlicensed contractor: Where a contractor that needed a licence did not hold one, the employment is treated as contrary to the code.

A clause in the service agreement stating that the provider is solely responsible creates an indemnity. It gives the client a right to recover money, but it does not remove a duty the statute owes to the worker. A regulator or worker can still look to the client.

That is why the provider’s licence position, payment evidence, and financial standing are procurement questions rather than paperwork.

Registration, minimum wage, professional tax, labour welfare fund and holidays are all state-specific, and the state that governs is usually the one the employee actually works in, not the one where the employing entity is registered.

For each employee, the employing entity needs to map:

• The work state and city, and the shops and establishments registration that covers that location
• The state minimum-wage notification, and the employee’s classification by skill, zone and industry
• Professional tax registration and enrolment, where the state levies it
• Labour welfare fund status, state holidays, and any state leave, overtime and exit rules that are more favourable than central law

Under the First Schedule to the Code on Social Security, provident fund coverage applies to every establishment employing 20 or more employees, and state insurance to every establishment employing 10 or more persons other than a seasonal factory, with contributions payable from the date the scheme’s benefits are notified for the area.

Payroll tax runs through the employing entity’s Tax Deduction Account Number, which it uses to deposit salary withholding and file its statements. Professional tax and labour welfare fund contributions have no national rate, registration trigger or filing calendar, so the state notification for the actual work location is the only reliable source.

There is no single statutory percentage that turns an Indian gross salary into a loaded cost. The components depend on salary level, wage structure, and state, so the cost has to be built line by line.

The provident fund figure needs one qualification. The Code on Social Security sets the contribution at 10% of wages and substitutes 12% for establishments or classes of establishments that the central government notifies. The 12% rate is generally applied. Pension, insurance, and state insurance percentages are set by schemes and rules rather than the Code itself, so each should be confirmed against the provider’s actual remittance.

Where contributions are capped at the ₹15,000 ceiling, the employer’s provident fund and pension contribution is normally ₹1,800 a month, before insurance and administration charges. Employers can contribute on higher wages, but the statutory obligation runs to the ceiling.

• Gratuity: Accrues for every shop or establishment that employs, or employed on any day in the preceding twelve months, 10 or more employees. For a regular employee, it generally becomes payable after five years’ continuous service, at 15 days’ wages for each completed year of service or part of a year over six months. Fixed-term employees receive gratuity pro rata on expiry without the five-year condition. How this applies to a fixed term of less than one year is not settled clearly in the sources reviewed, so the treatment of a short fixed term should be confirmed.
• Statutory bonus: Under the Code on Wages, the bonus runs from a minimum of 8.33% of wages, or ₹100 if higher, to a maximum of 20%, for employees who worked at least 30 days in the accounting year. The eligibility and calculation ceilings that applied under the old Payment of Bonus Act have not been confirmed as carried into the new code, so budget from the percentages and confirm the ceilings before relying on them.
• 50% wage rule: The Code on Wages defines wages as basic pay, dearness allowance, and retaining allowance, while excluding items such as house rent allowance, conveyance, overtime, and commission. Where those excluded items add up to more than half of total remuneration, the excess is added back into wages. A salary structured with a small basic and large allowances can therefore produce a larger wage base for contributions and wage-linked payments than the payslip suggests.

A full estimate should include gross salary, employer provident fund and pension, insurance and administration charges, employer state insurance where it applies, gratuity accrual, statutory bonus, the state labour welfare fund, any additional benefits, and the provider’s fee. A cost calculator gives a starting figure, which the state-level lines then adjust.

The Income-tax Act, 2025 replaced the 1961 Act and came into force on 1 April 2026. Salary withholding now sits in section 392, which requires the person paying salary to deduct tax at the time of payment, at the average rate that applies to the employee’s estimated income for the tax year.

Under the default regime in section 202(1), the rates on total income for individuals are:

These are slab rates, not the tax actually payable. For a resident individual under this regime, section 156(2) allows a rebate of the full tax, up to ₹60,000, where total income does not exceed ₹12,00,000, with marginal relief just above that level. As a result, many salaries in the lower slabs pay no income tax at all.

Two further points matter:

• Surcharge: Above ₹50,00,000 of total income, a surcharge also applies.
• Health and education cess: A 4% cess is charged on the tax plus any surcharge.

An individual can opt out of this regime in the manner the Act allows.

In practice, the payroll employer captures the employee’s regime choice and declarations, estimates annual salary income, withholds monthly, deposits the tax within the statutory deadlines, files quarterly withholding statements, and issues an annual certificate.

The forms and section references attached to those filings changed with the new Act, so any provider still quoting 1961 Act form numbers without checking their replacements is working from an old template.

The central occupational safety rules set the following baseline rules:

• Working hours and overtime: Ordinary work is capped at 48 hours a week. Overtime is paid at twice the ordinary rate for work beyond eight hours in a day for a daily-rated worker, or beyond 48 hours in a week for other workers. No worker may be allowed more than 144 hours of overtime in a quarter. State shops and establishments laws often set their own daily limits, spread-over rules, and overtime caps, and for office staff they frequently govern.
• Annual leave: Under section 32 of the occupational safety code, a worker who has worked 180 days or more in the calendar year receives one day of leave for every 20 days worked. Maternity leave, lay-off, and annual leave taken count towards the 180 days but do not themselves earn leave. State laws may be more generous and may cover a broader group of employees than the code’s “worker” category.
• Holidays: Holidays are largely state-based. No single private-sector holiday list applies across India, so the state’s current notification, including any premium or compensatory time off for working on a holiday, is the one to apply.
• Maternity benefit: The maximum is 26 weeks, of which no more than eight may fall before the expected delivery, for a woman who has worked at least 80 days in the preceding 12 months. Where she already has two or more surviving children, the maximum is 12 weeks. The same 12-week entitlement applies to an adopting mother of a child or to a commissioning mother, starting from the date the child is handed over to her, as the case may be.

Statutory retrenchment protection under the Industrial Relations Code applies to a “worker”, a category that covers manual, skilled, technical, operational and clerical work, and excludes people employed mainly in managerial or administrative roles and supervisors earning above ₹18,000 a month. Actual duties matter more than job title, and senior staff outside the category can still hold contractual and state-law protections.

For a worker with at least one year of continuous service, retrenchment requires:

• One month’s written notice stating the reasons, or wages in lieu of notice
• Compensation of 15 days’ average pay for every completed year of service, with a part-year over six months counted
• Notice to the appropriate government authority

Standing orders apply to industrial establishments employing 300 or more workers, and the chapter requiring prior government permission for lay-offs, retrenchment and closure applies to those averaging 300 or more workers per working day over the preceding twelve months. The code also provides for employer contributions of 15 days’ last-drawn wages per retrenched worker to a worker re-skilling fund set up by government notification. The expiry of a fixed-term contract on its own terms is not retrenchment.

Final wages to anyone who resigns, is removed, dismissed or retrenched, or loses employment through closure, must be paid within two working days. That deadline covers wages, not every exit item: gratuity follows its own 30-day timetable. A provider needs an off-cycle exit payroll that can calculate final attendance, overtime, leave encashment and deductions without waiting for the next pay run.

The order matters more than any single step, because the work state and the contract-labour position decide which registrations, wage rules and exit obligations apply to everything after them.

1. Confirm the employee’s work state before anything else, because it decides the shops and establishments law, minimum wage, professional tax, labour welfare fund and holiday list that apply.
2. Assess the contract-labour position of the arrangement: whether the role is a core activity, how many contract labour the client uses across all its contractors, and whether the provider holds a licence where the code requires one.
3. Obtain the employing entity’s identifiers and registrations for that state, including its shops and establishments certificate for the actual location, provident fund and state insurance codes, and its Tax Deduction Account Number.
4. Structure the salary against the 50% wage rule, so that provident fund, bonus and gratuity are calculated on the wage base the Code on Wages will use.
5. Issue a written appointment letter before the start date, which the central rules require, stating employment type, skill category, pay components and provident fund and state insurance applicability.
6. Record the employee’s tax regime choice and declarations so that monthly withholding under the new Act starts correctly from the first payroll.
7. Agree the exit process in advance, including who runs the two-working-day final settlement and who funds gratuity.

Some engagements are genuinely independent, and treating them as employment is not automatically safer. India has no bright-line rule that turns a long-term contractor into an employee. Classification depends on the facts, including:

• Who pays and supervises the person
• Who controls the method and hours of work
• Whether the person can send a substitute
• Whether they carry business risk
• How integrated the work is into the client’s organisation

Full-time or near-exclusive work for one client, a fixed monthly fee, client-set hours and leave, client systems and email identity, and a core ongoing role all point towards employment. Where those features are present, employment is the structure that fits.

Where the work is genuinely a defined, independent service, an Agent of Record arrangement with properly drafted terms can suit it better. The Code on Social Security recognises gig and platform workers, but that recognition does not reclassify an ordinary long-term consultant. No operative contribution rate for remote professionals was confirmed in the sources reviewed.

The documents below separate a provider with working Indian compliance operations from one that lists India on a coverage page. Ask for them in writing before the first appointment letter goes out, and put the same list to every provider under consideration:

• The legal name of the Indian entity that will sign the appointment letter, with its corporate identification number, PAN, Tax Deduction Account Number and GST registration
• Its shops and establishments certificate for the employee’s actual work location, and its occupational safety code registration
• Its contractor licence under section 47 where the arrangement is caught by the contract-labour chapter, or its written reasoning for why it is not
• Its provident fund and state insurance registration details, and a sample of monthly remittance evidence
• Its professional tax and labour welfare fund registrations for the work state
• A worked salary structure showing how the 50% wage rule has been applied
• How gratuity is accrued or funded, and who pays it at exit
• An audit right over employee-level statutory remittances, and an indemnity covering unpaid wages, social security and tax

The last point needs one caution. An indemnity allocates recovery between the two companies. It does not change the statutory duty a client can owe to a worker under section 55, so evidence that wages and contributions are actually being paid matters more than the clause.