Employee benefits in India: Statutory and competitive

As with any other new country, a foreign employer’s first hire in India can be complex for several reasons. The offer must meet local employment requirements and compete with packages from Indian employers familiar with local expectations.  To build a lawful, competitive India offer, start with the statutory benefits that apply, check the employee’s pay thresholds and work state, then add the benefits candidates typically expect.

Before you start, you will need to confirm three important details:

• the state where the person works
• the proposed monthly pay split
• the headcount of the employing establishment.

Companies hiring without a legal entity in India often use an Employer of Record (EOR) to employ individuals and administer statutory benefits.

India’s statutory benefits come from four new Labour Codes, in effect since November 2025.

The Code on Social Security covers provident fund, pension, state health insurance, gratuity and maternity benefit; the Code on Wages covers the statutory bonus. Beyond the Labour Codes, states can also make their own rules.

As of September 2026, 10 states have published final rules. The rest are due by the end of October 2026.

Labour Code benefits:

Each benefit has individual tests used to establish coverage, eligibility, amount, and tax treatment. A role may pass one threshold and fall outside another, so check each row against the hire’s pay and work location. Leave varies most. State Shops and Establishments Acts, the state laws that regulate offices and shops, set the most leave and holiday rules for office staff. The India leave guide sets out those entitlements by type.

Employers must provide the statutory benefits listed above to eligible employees.  Whether a worker is owed one of the above benefits depends on whether the law sees them as an employee, not what the contract calls them. Engaging a freelancer through an Agent of Record (AOR), a provider that contracts with and pays independent contractors, does not change that test.

The Codes use one definition of wages, which sets the base for gratuity and the thresholds for bonus and social security. Wages include basic pay, dearness allowance (a cost-of-living component of Indian salaries) and retaining allowance. Items such as house rent allowance, conveyance allowance, statutory bonus, overtime, commission and employer pension or provident fund contributions are initially excluded. If those excluded items exceed 50% of total remuneration, the excess should be added back to wages.

For example, if total monthly remuneration is ₹100,000, the add-back works like this:

1. Identify the included pay: in this case, basic pay and dearness allowance is ₹35,000.
2. Identify the excluded allowances: in this case, ₹65,000.
3. Work out the limit for exclusions: 50% of ₹100,000 is ₹50,000.
4. Find the excess: ₹65,000 of allowances is ₹15,000 over the ₹50,000 limit.
5. Add the excess back: ₹35,000 plus ₹15,000 gives statutory wages of ₹50,000.

The add-back is often summarised as “basic pay that must be 50% of CTC”. CTC (cost to company) is the Indian term for the full annual package. The Code does not require basic pay to be a set share of CTC; it uses the add-back instead. The add-back applies to the listed allowances; gratuity and other termination benefits are not part of that calculation. Calculate the employee’s salary components according to the statutory definition of wages to determine the applicable benefit contributions and entitlements.

The Employees’ Provident Fund (EPF) is a retirement savings account. The Employees’ Pension Scheme (EPS) pays a monthly pension, and the Employees’ Deposit Linked Insurance Scheme (EDLI) gives life cover to qualifying EPF members. The Employees’ Provident Fund Organisation (EPFO) administers all three.

• Wage ceiling: As of September 2026, the wage ceiling for compulsory coverage was raised to ₹25,000 a month, up from ₹15,000. Employees earning between ₹15,000 and ₹25,000 may now fall within all three schemes, subject to each scheme’s eligibility rules.
• Employer pension contribution: 8.33% of the employer’s 12% contribution goes into the pension scheme. These rates were set before the Codes came into force, so employers should confirm them against current notices. For EPF wages of ₹25,000, this comes to ₹2,083 a month, up from ₹1,250 under the old ₹15,000 ceiling. The employer’s share, after that, ordinarily goes into the employee’s EPF account.
• Before payroll: Check EPFO’s latest circular on prorating contributions for September 2026 and enrolling newly eligible employees.

Gratuity is a lump sum paid when employment ends: on termination, retirement, resignation, death or disablement, or the expiry of a fixed-term contract. The default rule requires at least five years’ continuous service, but it does not apply on death or disablement. Fixed-term employees follow a separate one-year rule for gratuity eligibility.

For a monthly-paid employee, the Labour Ministry’s gratuity formula is 15 days’ wages for each completed year of service, at the last-drawn rate:

Gratuity = last-drawn monthly statutory wages × 15 ÷ 26 × completed years of service

The 15 ÷ 26 converts a month’s wages into 15 days’ wages, treating a month as 26 working days. If a worker has worked for over 6 months in a year, that year is taken as full.

Here is how the calculation would work for an employee leaving after 7 years and 8 months on statutory wages of ₹50,000 a month:

• Service counted: 8 years
• Gratuity per year: ₹50,000 ÷ 26 × 15 = about ₹28,846
• Total gratuity: ₹28,846 × 8 = about ₹230,769
• If calculated only on ₹35,000 of basic pay and dearness allowance: ₹161,538

The difference shows why the statutory wage add-back is important for gratuity.

The maximum statutory gratuity commonly applied is ₹20 lakh (₹2 million). Employers will need to confirm this pre-Code figure against current notifications before quoting a cap to a senior hire.

Employees’ State Insurance (ESI) is a government scheme, administered by the Employees’ State Insurance Corporation (ESIC), that gives covered employees medical care and cash benefits. It generally applies to non-seasonal factories with at least 10 individuals, and states have extended it to specified shops, hotels, restaurants, and other sectors. The Code on Social Security adds voluntary coverage for establishments with fewer than 10 employees, covers notified hazardous occupations even with one employee, and extends coverage to all of India rather than only notified areas.

The individual wage ceiling decides who is covered. ESIC’s published ceiling is ₹21,000 in monthly wages, or ₹25,000 for a person with a disability. The general ceiling was last revised in January 2017, and the existing limits remain in place as of October 2026. Employers should check the latest ESIC notifications before relying on them.

A software engineer on ₹60,000 a month is outside ESI. Private group medical insurance is not a general legal requirement, so most professional hires rely on whatever health cover the employer chooses to add.

The Code on Social Security provides a covered employee with paid leave around childbirth and related events. To qualify, the employee ordinarily needs at least 80 days’ work in the preceding 12 months. The benefit is dependent on the family circumstance of the mother as follows:

Covered employees also have nursing breaks and crèche rights; crèche provision is required at the prescribed establishment threshold, and the Social Security Rules explain how to make claims. If an employee also qualifies for ESI maternity benefit, employers should check how the two benefits impact each other before paying out.

India has no general statutory paternity leave for private-sector employees. Competitive employers offer gender-neutral parental, adoption and caregiver leave.

The statutory bonus is an annual payment under the Code on Wages for lower-paid roles. An employee is eligible when all of the following apply:

• The organisation employs at least 20 individuals.
• The employee’s statutory wages are no more than ₹21,000 a month.
• The employee worked at least 30 days in the accounting year.

An eligible employee receives at least 8⅓% of qualifying wages or ₹100, whichever is higher, regardless of profit. Where the allocable surplus supports it, the bonus may reach 20%. A separate figure sets the calculation base. For an eligible employee earning more than ₹7,000 a month, the bonus is calculated on ₹7,000 or the notified minimum wage for the role, whichever is higher.

For example, for an employee earning ₹18,000 a month in statutory wages, where the notified minimum wage is ₹12,000:

• Eligibility: ₹18,000 is below the ₹21,000 ceiling.
• Calculation base: ₹12,000 a month, because it is higher than ₹7,000.
• Annual qualifying wages: ₹144,000.
• Minimum bonus at 8⅓%: ₹12,000.
• Maximum bonus at 20%: ₹28,800.

An employee earning ₹22,000 a month is above the ₹21,000 eligibility ceiling, so the statutory bonus does not apply.

Market-leading employers typically add group medical insurance, because ESI’s wage ceiling excludes much of the professional workforce. Common designs cover the employee, spouse or partner and children, with employer-paid or employee-paid cover for parents and parents-in-law.

Mercer Marsh Benefits’ Future of Benefits 2024 and Beyond study, covering more than 10,000 policies across 14 industries, reported an almost 300% increase over five years in companies offering flexible health insurance. Employer sponsorship of parental insurance rose from 35% in 2019 to 53% in 2024, and default cover for employees, spouses, children, and parents or in-laws reached 73% in IT, IT-enabled services, and e-commerce. Aon’s 2023 India Primary Care Benefits Report found a 51% increase since 2019 in companies offering outpatient benefits. These figures reflect the employers that took part in each study, not the whole market.

The National Pension System (NPS), a government-regulated voluntary pension, may supplement EPF. In September 2024, the chairperson of the Pension Fund Regulatory and Development Authority, which regulates NPS, reported take-up of about 11% among private corporates using it, so listing NPS on a benefits menu may not create meaningful participation.

An income tax act that took effect in 2026 replaced the previous one, which had been governing since 1961. Certain parts of the act allow eligible taxpayers to opt for an alternative, or “old”, regime.

Employer contributions to the provident fund, NPS and approved superannuation funds share an aggregate limit of ₹7.5 lakh (₹750,000) a tax year, and any excess is a taxable perquisite (a taxable non-cash benefit).

For example, if an employer pays ₹300,000 into NPS and ₹500,000 into an approved superannuation fund for one employee in a tax year (illustrative figures), the total of ₹800,000 is ₹50,000 over the limit, so that ₹50,000 and the investment growth attributable to it are taxed as a perquisite.

In India, the offer letter pay split determines statutory wages, which in turn determine provident fund coverage, bonus eligibility, and gratuity. Fix the split first.

1. Confirm the work location, the establishment’s headcount, and the applicable state Shops and Establishments Act.
2. Split the proposed pay into components and calculate statutory wages after the 50% add-back.
3. Map the statutory layer: EPF, EPS and EDLI; ESI up to the ceiling; gratuity; maternity benefit; statutory bonus up to ₹21,000; and state leave and holidays.
4. Add the market layer: group medical, term life and personal accident cover, plus competitive paid time off.
5. Choose differentiators: funded parental cover, an employer NPS contribution, a flexible-benefits wallet or gender-neutral parental leave.
6. Set up payroll with separate fields for contractual salary, statutory wages, EPF wages, ESI wages, bonus wages and income-tax salary. Using one “basic salary” base for all of them causes contribution and eligibility errors.

If you are considering employing the individual through an  Employer of Record (EOR), since they are the legal employer and administer the statutory layer, you should ask the following questions:

• Which state’s leave and holiday rules apply to this work location?
• How do you calculate statutory wages after the add-back?
• How are you applying EPFO’s instructions on the ₹25,000 ceiling?
• Which group medical cover do you offer, and who does it cover?
• How do you treat the ₹20 lakh gratuity cap pending a fresh notification?

Agree on the pay split before choosing perks. A well-structured package should account for both statutory requirements and the broader benefits typically offered in India.