Hiring Employees in India as a Foreign Company: Complete Guide 2026

Why Foreign Companies Are Hiring in India

India is home to the world's largest working-age population, with over 900 million people between 15 and 64 years old. The country produces more than 1.5 million engineering graduates and 3 million other graduates every year, creating an enormous talent pool that foreign companies increasingly want to access. Whether you are building a technology team in Bangalore, a finance back-office in Mumbai, or a customer support centre in Hyderabad, hiring in India offers compelling cost advantages without sacrificing quality.

But hiring employees in India as a foreign company is not as simple as posting a job listing and sending an offer letter. India's employment law framework is one of the most complex in the world — a layered system of central laws, state-specific rules, mandatory social security contributions, and detailed contract requirements that can expose non-compliant employers to significant penalties. The four new Labour Codes, which came into effect on 21 November 2025, have added another layer of change that every foreign employer must understand.

This guide covers every aspect of the hiring process, from establishing legal presence to structuring compliant compensation packages, so you can build your India team with confidence.

What This Guide Covers

This comprehensive guide covers every aspect of hiring employees in India as a foreign company. For deep dives on specific subtopics, see our detailed guides:

• Hiring Contractors vs Employees in India — Understanding the legal distinction and misclassification risks
• India Employment Contracts for Foreign Employers — Mandatory clauses, enforceability, and state-specific requirements
• India's New Labour Codes for Foreign Employers — The four codes, implementation status, and what changes for your payroll
• India Payroll Setup for Foreign Companies — End-to-end payroll configuration, tax withholding, and monthly filings
• Provident Fund and ESI Compliance for Foreign Companies — Registration, contribution rates, and filing deadlines
• Employee Termination Rules in India — Notice periods, severance, retrenchment procedures, and legal risks
• ESOP Taxation in India for Foreign Companies — Grant-to-exit taxation, FEMA compliance, and cross-border structuring
• Expat Salary Structuring and India Tax — Shadow payroll, equalisation, and DTAA benefits for expatriate employees

Legal Entity Options for Hiring in India

A foreign company cannot directly employ individuals in India without some form of legal presence. Attempting to do so creates an unintended permanent establishment (PE) under Indian tax law and applicable Double Taxation Avoidance Agreements, which can trigger corporate tax liability on your global income attributable to India. There are four primary options.

Option 1: Wholly Owned Subsidiary (Private Limited Company)

The most common and recommended approach for foreign companies planning to hire more than 5 to 10 employees in India. A wholly owned subsidiary structured as a Private Limited Company gives you full control over employment relationships, intellectual property, and operations.

Key requirements include a minimum of two directors (at least one resident director who has stayed in India for 120+ days in the preceding financial year), two shareholders (the foreign parent can hold 100% of shares in most sectors under the automatic route), no minimum capital requirement (though practically INR 1 lakh is needed for bank account opening), and registration with the Registrar of Companies via the SPICe+ form.

Setup timeline is 15 to 25 business days once documents are apostilled and ready. Total setup cost including government fees and professional charges ranges from INR 50,000 to INR 1,50,000.

Option 2: Branch Office

A Branch Office can hire employees in India but requires prior RBI approval, is limited to specified activities, and the foreign parent bears full liability. Branch offices are taxed at 40% (versus 25.17% for a subsidiary), making them less tax-efficient for long-term operations. See our Branch Office vs Subsidiary comparison for a detailed analysis.

Option 3: Employer of Record (EOR)

An EOR is a third-party organisation that already has a legal entity in India. The EOR becomes the legal employer of your workers for payroll, tax, and compliance purposes while you retain day-to-day management control. This option works well for companies hiring 1 to 5 employees to test the market before committing to a subsidiary. EOR fees typically range from USD 200 to USD 600 per employee per month. The trade-off is that you have less control over employment terms and cannot directly hold intellectual property assignments.

Option 4: Independent Contractors

You can engage Indian professionals as independent contractors without a local entity, but this carries significant misclassification risk. Indian courts and tax authorities examine the substance of the relationship — not just the contract label — to determine whether a worker is actually an employee. If reclassified, you face retroactive PF, ESI, gratuity, and tax liabilities plus penalties. Read our detailed guide on contractors vs employees in India before choosing this route.

The Four New Labour Codes: What Changed on 21 November 2025

India's employment law landscape underwent its most significant transformation in decades when the four new Labour Codes came into effect on 21 November 2025. These codes consolidate and replace 29 existing central labour laws into four streamlined statutes. The Central Government published draft rules on 30 December 2025, with final rules expected by 1 April 2026.

Code on Wages, 2019

This code replaces the Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act. The most significant change for foreign employers is the new definition of "wages" — basic pay plus dearness allowance must constitute at least 50% of total CTC. This directly increases employer contributions to PF, ESI, and gratuity, since these are calculated on the wage component. Companies that previously structured salaries with a low basic pay (say 30 to 40% of CTC) to minimise statutory contributions must now restructure compensation.

Industrial Relations Code, 2020

This code governs trade unions, standing orders, and industrial disputes. For foreign employers, the key provisions include mandatory standing orders for establishments with 300 or more workers (previously 100), a requirement for government permission to lay off, retrench, or close establishments with 300 or more workers, recognition of fixed-term employment as a statutory category with equal benefits as permanent employees, and a 14-day notice requirement before strikes or lockouts.

Code on Social Security, 2020

This code consolidates social security provisions including EPF, ESI, gratuity, and maternity benefits. Notable changes include extension of social security coverage to gig and platform workers, fixed-term employees becoming eligible for gratuity after just one year of service (previously five years), and the central government being empowered to set up a Social Security Fund.

Occupational Safety, Health and Working Conditions Code, 2020

This code replaces 13 existing laws covering factories, mines, dock workers, building workers, and contract labour. Key provisions include a single registration for establishments (replacing multiple registrations under different acts), mandatory annual health check-ups for employees above 40 years in notified establishments, mandatory appointment letters for all workers, a national database for inter-state migrant workers, and overtime limits of 125 hours per quarter.

For a complete analysis, see our guide on India's new labour codes for foreign employers.

Employment Contracts: Mandatory Requirements

Under Indian law, employment contracts can be oral or written, but written contracts are strongly recommended and, with the new labour codes, a written appointment letter is now mandatory for all workers. For foreign companies, a well-drafted employment contract is your primary defence against disputes.

Essential Clauses

Every employment contract in India should include the following mandatory elements:

• Parties and effective date: Full legal name of the employer entity (your Indian subsidiary, not the foreign parent) and the employee
• Job title and description: Clearly defined role, reporting structure, and primary responsibilities
• Place of work: Specific city and office address, plus any remote or hybrid work arrangements
• Compensation: Complete CTC breakdown including basic salary, HRA, allowances, variable pay, and employer statutory contributions
• Working hours: Standard hours per day and per week (typically 9 hours/day, 48 hours/week under the new code)
• Leave policy: Paid leave, sick leave, casual leave, and maternity or paternity leave entitlements
• Probation period: Duration (typically 3 to 6 months) and confirmation process
• Notice period: Required notice for both employer and employee (typically 30 to 90 days)
• Confidentiality and IP assignment: Non-disclosure obligations and assignment of all work product to the employer
• Termination clauses: Grounds for termination, severance terms, and dispute resolution mechanism
• Governing law and jurisdiction: Must specify Indian law and the specific state jurisdiction

Non-Compete Clauses: A Critical Warning

Unlike the US or UK, post-employment non-compete clauses are generally unenforceable in India. Section 27 of the Indian Contract Act, 1872, declares any agreement in restraint of trade as void. While non-compete clauses during employment and non-solicitation clauses after employment may be enforceable, a broad non-compete restricting an employee from joining a competitor after leaving is unlikely to hold up in Indian courts. Structure your protection through strong confidentiality, IP assignment, and non-solicitation provisions instead.

For detailed contract templates and state-specific requirements, see our guide on employment contracts for foreign employers.

Provident Fund (PF) Compliance

The Employees' Provident Fund is India's primary retirement savings programme and is mandatory for all establishments with 20 or more employees. However, most foreign companies voluntarily register for PF even with fewer employees, as it is a standard market expectation.

PF Contribution Rates (2025-2026)

The current PF wage ceiling is INR 15,000 per month — meaning the employer's pension contribution (8.33%) is capped at INR 1,250 per month. However, the full 12% employee contribution and the employer's 3.67% EPF contribution apply on the actual basic salary if it exceeds INR 15,000. The Supreme Court directed the government in January 2026 to take a final decision on increasing the wage ceiling (likely to INR 21,000 or INR 25,000) within four months.

PF returns must be filed monthly by the 15th of the following month through the EPFO's unified portal. Late payment attracts interest at 12% per annum and damages of 5% to 25% depending on the delay period.

Employee State Insurance (ESI) Compliance

ESI provides medical, disability, maternity, and dependent benefits to employees. It is mandatory for establishments with 10 or more employees (20 in some states) where any employee earns gross wages up to INR 21,000 per month (INR 25,000 for employees with disabilities).

ESI Contribution Rates (2025-2026)

Once an employee's wages cross INR 21,000 per month, they exit ESI coverage. In practice, most employees at foreign companies in India earn above this threshold, so ESI applicability is typically limited to junior support staff, office assistants, and entry-level roles. You must still register with ESIC if you have eligible employees.

For registration procedures and filing deadlines, see our complete guide on PF and ESI compliance for foreign companies.

Gratuity: The Mandatory Retirement Benefit

Under the Payment of Gratuity Act, 1972 (now subsumed under the Code on Social Security, 2020), every employer with 10 or more employees must pay gratuity to employees who have completed five or more years of continuous service. Under the new codes, fixed-term employees qualify after just one year.

Gratuity Calculation

The formula is: Gratuity = (15 / 26) x Last Drawn Salary (Basic + DA) x Years of Service

The maximum tax-exempt gratuity for private sector employees is capped at INR 20 lakh. The employer must pay gratuity within 30 days of it becoming due. Failure to pay within this period attracts interest on the delayed amount.

Example: An employee with a last drawn basic salary of INR 80,000 per month who has completed 10 years of service would receive gratuity of (15/26) x 80,000 x 10 = INR 4,61,538.

Most employers accrue gratuity at approximately 4.81% of basic salary annually as part of CTC. This is a real cost that foreign companies must factor into their total employer cost calculations.

Salary Structuring: Understanding CTC in India

Indian compensation packages are expressed as Cost to Company (CTC), which includes not just take-home salary but also employer statutory contributions and benefits. Understanding CTC is critical because the gap between CTC and the employee's in-hand salary is significant — typically 15% to 30% depending on the salary level and tax bracket.

Standard CTC Components

The 50% Basic Pay Rule

Under the Code on Wages, basic salary plus dearness allowance must constitute at least 50% of total CTC. This is the most consequential change for salary structuring. Previously, many companies kept basic salary at 30 to 40% of CTC to minimise PF and gratuity costs. The new rule means higher statutory contributions and, consequently, lower take-home pay for employees at the same CTC level. Foreign companies setting up payroll in India in 2026 should structure compensation compliant with this rule from the outset. See our detailed guide on payroll setup for foreign companies.

Total Employer Cost: What You Actually Pay

Understanding the true cost of hiring in India requires looking beyond CTC. The employer bears several costs above and beyond what appears in the employee's salary structure.

Employer Cost Breakdown for a Mid-Level Employee (CTC INR 15 Lakh)

The key insight: the employer's true cost is approximately 2% to 5% above the stated CTC when PF contributions are already included in CTC (which is standard practice). However, if you quote a "salary" that does not include employer PF, your actual cost is 13% to 17% higher.

Salary Benchmarks by Role (2026)

LPA = Lakhs Per Annum. INR 1 lakh = INR 100,000 (approximately USD 1,200 at current exchange rates). Bangalore commands a 15 to 30% premium over other cities for technology roles due to the concentration of multinational R&D centres and product companies.

Minimum Wages: State-by-State Obligations

India's minimum wage framework operates at both the central and state level. The Code on Wages, 2019, requires the central government to set a national floor wage below which no state can go. States then set their own minimum wages above this floor, categorised by skill level and industry.

Central Government Minimum Wages (2025-2026)

Key State Minimum Wages (Selected Major States)

For foreign companies hiring skilled professionals, minimum wages are rarely a binding constraint — your market-rate salaries will be well above these thresholds. However, compliance is still required, and you must track state-specific revisions. Minimum wage violations attract penalties of up to INR 50,000 for a first offence under the Code on Wages.

Professional Tax: The State-Level Payroll Deduction

Professional Tax (PT) is a state-level tax levied on salaried employees and professionals. The employer is responsible for deducting PT from employees' salaries and remitting it to the state government. The maximum annual PT is capped at INR 2,500 by the Constitution of India.

PT is applicable in most states including Maharashtra, Karnataka, Andhra Pradesh, Telangana, Gujarat, West Bengal, and Tamil Nadu. It is notably not applicable in Delhi, Rajasthan, and certain union territories. In Maharashtra, for example, PT is structured as INR 200 per month for 11 months and INR 300 in February, totalling INR 2,500 annually.

While the amounts are small, employers must register for PT in each state where they have employees, file periodic returns, and deduct accurately. Non-compliance attracts penalties and interest.

Registrations Required Before Hiring Your First Employee

Before you can legally hire employees in India, your subsidiary must complete several registrations. Under the SPICe+ incorporation process, some registrations are bundled, but others require separate applications.

Mandatory Registrations Checklist

1. Shops and Establishments Registration: Required within 30 days of starting operations, filed with the local municipal authority. Governs working hours, rest days, overtime, and leave. State-specific — you must register in each state where you have employees.
2. EPFO Registration: Required when you reach 20 employees (or voluntarily). Obtained through the EPFO unified portal. Required before making first PF contribution.
3. ESIC Registration: Required when you reach 10 employees (20 in some states) with any employee earning below INR 21,000/month. Registered through the ESIC portal.
4. Professional Tax Registration: Required in applicable states. Separate registration as employer (for deducting from employees) and as an entity (for paying PT on your own behalf).
5. TAN Registration: Tax Deduction Account Number for withholding income tax from employee salaries. Typically obtained during SPICe+ incorporation.
6. Labour Welfare Fund Registration: Required in states that mandate it (Maharashtra, Karnataka, Tamil Nadu, and others). Employer and employee both contribute small amounts (INR 6 to INR 60 per half year depending on the state).
7. GST Registration: Required if your annual turnover exceeds INR 20 lakh (INR 10 lakh in special category states) or if you are engaged in inter-state supply.

Step-by-Step: Hiring Your First Employee in India

Once your Indian subsidiary is incorporated and the registrations above are in place, the actual hiring process follows these steps.

Step 1: Define the Role and Compensation Structure

Prepare a detailed job description and a CTC structure compliant with the new wage code (basic salary at least 50% of CTC). Research market rates using the salary benchmarks in this guide or platforms like Glassdoor India, Naukri, or AmbitionBox. Factor in all employer costs beyond CTC.

Step 2: Source and Interview Candidates

Major recruitment channels in India include Naukri.com (India's largest job portal), LinkedIn, referrals (the dominant channel for mid-to-senior roles), campus recruitment (for entry-level hiring from IITs, NITs, and top universities), and staffing agencies for volume hiring or specialised roles.

Step 3: Issue the Offer Letter

The offer letter should include the CTC breakdown, joining date, location, designation, and reporting structure. It is conditional on background verification and document submission. Standard practice is to give candidates 3 to 7 days to accept.

Step 4: Conduct Background Verification

Background checks in India typically cover identity verification (Aadhaar, PAN card), previous employment verification, educational qualifications, criminal record check, and address verification. Third-party verification agencies charge INR 1,500 to INR 5,000 per candidate. Most checks are completed within 7 to 14 days.

Step 5: Collect Onboarding Documents

Required documents include PAN card (mandatory for tax withholding), Aadhaar card (for PF linkage), bank account details (for salary credit), passport-size photographs, previous employer relieving letter and Form 16 (tax certificate), educational certificates, and emergency contact details.

Step 6: Execute the Employment Contract

Issue a detailed employment agreement on your Indian subsidiary's letterhead. Both parties sign. The contract should follow the requirements outlined in the Employment Contracts section above. Under the new labour codes, a mandatory appointment letter must be issued to every worker.

Step 7: Register the Employee for Statutory Benefits

Within the first month, register the employee with EPFO (submit form for Universal Account Number), enrol in ESIC (if applicable), add to group health insurance policy, and set up payroll with correct tax deductions and statutory contributions.

Step 8: Run First Payroll

Process the first salary with correct TDS (Tax Deducted at Source), PF deduction (employee and employer), ESI deduction (if applicable), and Professional Tax deduction. File TDS return (Form 24Q) quarterly, PF returns monthly by the 15th, and ESI returns by the 15th of the following month.

Notice Periods and Termination Rules

Terminating employees in India is significantly more regulated than in most Western jurisdictions. There is no at-will employment concept in Indian law.

Notice Period Requirements

During probation, either party can typically terminate with 7 to 30 days' notice (as specified in the contract). After confirmation, the standard notice period ranges from 30 to 90 days depending on the employment contract, seniority level, and state-specific laws. The Delhi Shops and Establishments Act mandates 30 days' notice for employees with more than three months of service. Karnataka requires 30 days' notice for employees with more than six months of service.

Retrenchment of "Workmen"

The termination of "workmen" (employees performing manual, clerical, or supervisory work earning below a specified threshold) is governed by the Industrial Relations Code. Key requirements include one month's notice or wages in lieu of notice, retrenchment compensation of 15 days' average pay for each completed year of service, and government permission for retrenchment if the establishment has 300 or more workers.

Separation Payments

On termination, the employer must pay the final salary and any accrued leave encashment within 2 working days, gratuity (if eligible) within 30 days, and any variable or bonus amounts as per the contract. The employer must also issue a relieving letter and Form 16 for tax purposes.

For a comprehensive guide on termination procedures, see our article on employee termination rules in India.

Leave Entitlements

Indian law mandates several types of leave. The specific entitlements vary by state, but the following are standard minimums.

Statutory Leave Types

India has among the most generous maternity leave provisions globally — 26 weeks of fully paid leave for the first two children. This is not optional; it is a statutory requirement under the Maternity Benefit Act, now part of the Code on Social Security. Companies with 50 or more employees must also provide creche facilities.

Common Mistakes Foreign Companies Make

Having worked with hundreds of foreign companies setting up India operations, these are the most frequently observed compliance failures.

Mistake 1: Hiring Without a Legal Entity

Some foreign companies try to pay Indian workers directly from abroad, treating them as contractors. This creates permanent establishment risk and can result in corporate tax liability of 40% on India-attributable income plus penalties.

Mistake 2: Ignoring State-Specific Laws

Employment law in India is a concurrent subject — both the central and state governments can legislate. A company with employees in Mumbai and Bangalore must comply with both Maharashtra and Karnataka state rules, which differ on working hours, leave entitlements, overtime rates, and registration requirements.

Mistake 3: Misclassifying Employees as Contractors

Indian authorities are increasingly scrutinising contractor relationships, particularly for workers who work fixed hours, use company equipment, report to a manager, and work exclusively for one company. Reclassification triggers retroactive PF, ESI, gratuity, and tax liabilities.

Mistake 4: Not Restructuring Salary for the 50% Basic Pay Rule

Companies that continue to operate with the old salary structure (basic pay at 30 to 40% of CTC) are non-compliant with the Code on Wages. This exposes them to penalties and retroactive recalculation of PF and gratuity contributions.

Mistake 5: Treating Indian Employment as At-Will

Foreign companies, particularly those from the US, often assume they can terminate employees at will. In India, termination without proper notice, documented cause, and due process can result in labour disputes, reinstatement orders, and compensation awards by labour courts.

Mistake 6: Forgetting FEMA Reporting

When the foreign parent invests capital into the Indian subsidiary, FC-GPR must be filed within 30 days and the FLA return annually. Many companies focus on hiring and forget these RBI obligations, attracting penalties of up to three times the amount involved.

Data Privacy and Employee Information Protection

Foreign companies hiring in India must also consider data privacy requirements when handling employee personal information. India's Digital Personal Data Protection Act, 2023 (DPDPA) establishes a framework for processing personal data of Indian residents. As an employer, you are a "Data Fiduciary" under the Act and must obtain clear, informed consent from employees before collecting and processing their personal data.

Key obligations include providing employees with a clear privacy notice explaining what data you collect and why, implementing appropriate security safeguards to protect employee data, allowing employees to access, correct, and request erasure of their personal data, appointing a Data Protection Officer if your processing volume exceeds the prescribed threshold, and notifying the Data Protection Board of India in case of a data breach. Cross-border transfer of employee data (for instance, sharing HR data with your global headquarters) is permitted but may be restricted to certain countries as notified by the central government. Penalties for non-compliance under the DPDPA can reach up to INR 250 crore (approximately USD 30 million) for significant violations.

From a practical standpoint, if your Indian subsidiary shares employee personal information with the parent company or uses global HR platforms hosted outside India, you should implement data processing agreements, conduct data protection impact assessments, and ensure your privacy policy explicitly addresses cross-border data transfers.

Social Security Agreements and International Workers

India has signed Social Security Agreements (SSAs) with 22 countries, including Belgium, Germany, France, South Korea, Japan, Netherlands, Hungary, Czech Republic, Denmark, Luxembourg, Sweden, Finland, Norway, Australia, Austria, Canada, Portugal, United Kingdom, Switzerland, and others. These agreements are critical for foreign companies deploying employees between India and the home country.

How SSAs Work

Without an SSA, an employee working in India would need to contribute to Indian social security (PF) while potentially remaining liable for social security contributions in the home country — effectively paying twice. SSAs eliminate this dual contribution by establishing which country's social security system applies based on the duration of the posting.

For short-term assignments (typically up to 5 years, though the exact period varies by agreement), the employee remains covered under the home country's social security system and receives a Certificate of Coverage (COC) exempting them from Indian PF contributions. For longer assignments, the employee switches to the Indian social security system.

Practical Steps

To avail SSA benefits, the employer must obtain a Certificate of Coverage from the home country's social security authority before the employee starts working in India, submit the COC to the Indian EPFO to claim exemption from PF contributions, and maintain documentation proving the posting is temporary. If your country does not have an SSA with India, both the employer and employee must contribute to Indian PF at the standard rates. International workers (employees who are citizens of countries with SSAs) contribute at a special rate to the International Workers' PF scheme managed by EPFO.

Hiring Remote Employees Across Indian States

A common scenario for foreign companies is hiring remote employees spread across multiple Indian states. While this offers access to a wider talent pool and lower costs (an equivalent role may cost 30 to 50% less in Tier 2 cities like Jaipur, Pune, or Chandigarh compared to Bangalore), it creates additional compliance complexity.

Multi-State Compliance Requirements

Each state where you have employees requires separate Shops and Establishments registration, separate Professional Tax registration and returns, compliance with state-specific leave and working hours rules, state-specific Labour Welfare Fund contributions, and state-specific minimum wage adherence. For example, if you have employees in Maharashtra, Karnataka, and Tamil Nadu, you need three separate Shops and Establishments registrations, three Professional Tax registrations, and must track three different sets of minimum wage notifications.

Practical Approach

Most foreign companies handle multi-state compliance by using an experienced payroll provider like ADP, Ramco, or greytHR that maintains state-specific compliance engines. The cost for outsourced payroll processing is typically INR 500 to INR 1,500 per employee per month, which is well worth the compliance certainty. Alternatively, larger companies set up an in-house compliance team or engage a firm like Beacon Filing for annual compliance services.

Tax Withholding: TDS on Employee Salaries

As an employer in India, you are legally required to deduct Tax Deducted at Source (TDS) from employee salaries under Section 192 of the Income Tax Act. This is not optional — failure to deduct or deposit TDS attracts penalties, interest, and potential prosecution.

How TDS on Salary Works

At the beginning of each financial year (April), employees submit their investment declarations (Form 12BB) listing planned tax-saving investments under Section 80C (up to INR 1.5 lakh), Section 80D (health insurance), HRA claims, and other deductions. The employer estimates the total annual tax liability based on these declarations, divides it by 12, and deducts that amount from each monthly salary payment.

New Tax Regime vs Old Tax Regime

India currently offers two income tax regimes. The new regime (default from FY 2024-25) has lower tax rates but eliminates most deductions and exemptions. Tax slabs under the new regime for FY 2025-26 are: up to INR 4 lakh is nil, INR 4-8 lakh at 5%, INR 8-12 lakh at 10%, INR 12-16 lakh at 15%, INR 16-20 lakh at 20%, INR 20-24 lakh at 25%, and above INR 24 lakh at 30%. The old regime has higher rates but allows deductions for HRA, LTA, Section 80C investments, and more. Employees can choose which regime to follow, and the employer must calculate TDS accordingly.

TDS Deposit and Filing Deadlines

TDS deducted from employee salaries must be deposited with the government by the 7th of the following month. Quarterly TDS returns must be filed in Form 24Q by the 31st of the month following each quarter (31 July, 31 October, 31 January, and 15 June). At the end of the financial year, the employer must issue Form 16 (TDS certificate) to each employee by 15 June.

ESOPs for Indian Employees: Cross-Border Considerations

Many foreign companies offer their Indian employees stock options in the foreign parent company. This is a powerful recruitment and retention tool, but it introduces significant tax and FEMA compliance requirements.

At the grant stage, there is no tax event. At exercise, the difference between the fair market value and the exercise price is taxed as a perquisite (salary income) in the hands of the employee, with the employer required to withhold TDS. At sale, any gain above the exercise price is taxed as capital gains.

From a FEMA perspective, Indian employees holding shares in foreign companies must comply with RBI reporting requirements, and the employer may need to operate a trust or cashless exercise mechanism to facilitate cross-border transactions.

This is a complex area with significant penalties for non-compliance. See our detailed guide on ESOP taxation in India for foreign companies.

Expatriate Employees: Salary and Tax Structuring

If you plan to send employees from the parent company to India on assignment, the tax and compliance requirements are substantially different from local hiring.

An expatriate who stays in India for 182 days or more in a financial year (April to March) becomes a tax resident and is liable to pay Indian tax on global income. Even shorter stays can trigger PE risk if the expat exercises decision-making authority for the parent company from India.

Key structuring considerations include tax equalisation policies (ensuring the expat is neither better nor worse off than in the home country), shadow payroll requirements (reporting expat compensation to Indian tax authorities even if paid from abroad), DTAA benefits to avoid double taxation, social security totalisation agreements with select countries, and Section 195 withholding on payments to non-residents.

For comprehensive guidance, see our article on expat salary structuring and India tax.

Compliance Calendar: Monthly and Annual Obligations

Once you start hiring, your Indian subsidiary must meet ongoing compliance deadlines. Missing these triggers automatic penalties.

Monthly Obligations

Annual Obligations

Cost Comparison: Subsidiary vs EOR vs Contractor

To help you decide on the right hiring model, here is a comparative cost analysis for hiring a mid-level software engineer at INR 20 LPA CTC.

*Contractor cost does not include the potential liability from misclassification, which can run into multiples of the contract value if the worker is reclassified as an employee.

The subsidiary model becomes more cost-effective at scale — the fixed compliance costs are spread across more employees, and per-employee costs decrease. For 1 to 5 employees, an EOR is often the pragmatic starting point. For 5+ employees, a subsidiary is almost always the better long-term option.

Key Takeaways

• Establish legal presence first: A foreign subsidiary (Private Limited Company) is the most versatile and cost-effective structure for hiring employees in India at scale.
• Budget 2-5% above CTC: Factor in employer statutory contributions (PF admin, EDLI, insurance, compliance costs) that sit above the stated CTC when calculating your true hiring cost.
• Comply with the 50% basic pay rule: Structure all new compensation packages with basic salary at 50% or more of CTC to comply with the Code on Wages.
• Register proactively: Complete EPFO, ESIC, PT, and Shops and Establishments registrations before or immediately upon hiring your first employee — not after.
• Plan for termination complexity: India does not have at-will employment. Build proper notice periods, documented performance management processes, and separation procedures from the start.
• Seek expert help: Indian employment law is a layered system of central and state laws. Engage experienced Indian legal and tax advisory professionals, particularly for your first hire.