Hiring in India from the UK: Employment Law & Social Security

Why UK Companies Are Hiring in India — And What the Law Demands

India is the UK's second-largest source of skilled tech talent and the fastest-growing destination for offshore operations by British firms. In 2025, over 600 UK-headquartered companies operated subsidiaries, branch offices, or contractor arrangements in India. The India-UK Comprehensive Economic and Trade Agreement (CETA), signed in July 2025, is accelerating this trend by reducing trade barriers and establishing the first-ever bilateral Social Security Agreement between the two countries.

But hiring in India from the UK is not a simple payroll extension. India's employment law framework is multi-layered — governed by central legislation, state-specific rules, and sector-specific regulations. The four new Labour Codes, effective from 21 November 2025, have fundamentally restructured compliance obligations for all employers, including foreign-owned entities. A UK company that gets this wrong faces penalties ranging from INR 50,000 to INR 10 lakh per violation, potential prosecution of directors, and reputational damage that can derail market-entry plans.

This guide covers the complete legal framework for UK businesses hiring in India — from choosing the right employment structure to managing social security contributions under the new codes and the forthcoming UK-India SSA.

Choosing Your Employment Structure in India

Before hiring a single employee, a UK company must decide how it will legally employ workers in India. The structure you choose determines your tax obligations, compliance burden, and exposure to Indian employment law.

Option 1: Establish a Wholly Owned Subsidiary

A private limited company incorporated under the Companies Act 2013 is the most common structure for UK companies with long-term India plans. This requires a minimum of two directors (at least one resident director who has stayed in India for 182+ days), a registered office in India, and registration with the Registrar of Companies via SPICe+ form. The subsidiary becomes the legal employer, bearing full responsibility for Indian employment law compliance.

Incorporation typically takes 15-20 business days and costs INR 15,000-50,000 in government fees, plus INR 50,000-2,00,000 in professional fees. You will also need a Digital Signature Certificate (DSC) for each director and a GST registration if providing taxable services.

Option 2: Use an Employer of Record (EOR)

An EOR is a locally incorporated company that legally employs your workers on your behalf while you retain day-to-day management control. This allows zero-day market entry — you can issue compliant offer letters within 48 hours. EOR providers handle payroll, EPF/ESI registration, tax withholding, and labour law compliance. Monthly costs range from USD 199 to USD 599 per employee depending on the provider. However, the EOR model has limitations: you cannot claim the employees as your own for transfer pricing purposes, intellectual property ownership can be ambiguous, and you have no direct control over statutory registrations.

Option 3: Engage Independent Contractors

Engaging Indian professionals as independent contractors avoids employment law obligations entirely — but only if the relationship genuinely qualifies as independent contracting. Indian courts apply a multi-factor test examining control, economic dependence, integration into the business, and provision of tools and equipment. Misclassification triggers retrospective application of all employment benefits including EPF, ESI, gratuity, and bonus, plus penalties. For guidance on this distinction, see our detailed analysis in hiring contractors vs employees in India.

Option 4: Branch Office or Liaison Office

A branch office can hire employees in India but requires RBI approval and is limited to specific permitted activities. A liaison office cannot undertake any commercial or revenue-generating activity, which severely limits its hiring utility. See our branch office vs liaison office comparison for a full breakdown.

India's Four New Labour Codes: What UK Employers Must Know

The Government of India enacted four Labour Codes that came into force on 21 November 2025, consolidating 29 legacy labour laws into a streamlined framework. Every UK company employing workers in India must restructure its payroll, contracts, and compliance processes to align with these codes.

Code on Wages, 2019

This code introduces a uniform definition of "wages" across all labour laws. The critical rule: wages must constitute at least 50% of total remuneration. Allowances (HRA, conveyance, special allowance) cannot exceed 50% of the total CTC. This directly impacts EPF, ESI, gratuity, and bonus calculations because all are computed on "wages" as newly defined. Many companies that previously structured compensation with a low basic salary (30-35% of CTC) must now restructure to ensure the 50% floor is met.

Code on Social Security, 2020

This code extends social security coverage to all workers, including gig workers and platform workers. For UK companies, the key changes are: (a) EPF now applies universally to all establishments with 20 or more employees regardless of industry type, (b) ESI coverage is expanded pan-India — the previous requirement for establishments to be in "notified areas" has been eliminated, (c) fixed-term employees become eligible for gratuity after just one year of continuous service rather than the previous five years, and (d) a single electronic registration system replaces the multiple registration requirements under the old laws.

Code on Industrial Relations, 2020

This code governs standing orders, dispute resolution, and retrenchment. Companies with 300 or more workers now need government permission before layoffs, retrenchment, or closure — the threshold was raised from 100 under the old law. For smaller UK operations, this means greater flexibility in workforce management, but you must still follow the prescribed procedure for termination including notice periods and severance pay.

Code on Occupational Safety, Health and Working Conditions, 2020

This code mandates a maximum of 48 working hours per week, overtime pay at twice the ordinary rate, and annual health check-ups for employees in hazardous processes. It also requires every establishment with 10 or more employees to maintain a safety committee. For our comprehensive analysis, read India's 4 new Labour Codes for foreign employers.

Mandatory Social Security Contributions in India

Every employer in India — including foreign-owned subsidiaries — must register for and contribute to multiple social security schemes. The costs are significant and non-negotiable.

Employees' Provident Fund (EPF)

Both employer and employee contribute 12% of wages (as defined under the new codes). The employer's 12% is split: 3.67% goes to the employee's EPF account and 8.33% goes to the Employees' Pension Scheme (EPS), capped at a wage ceiling of INR 15,000 per month. Additionally, the employer pays 0.50% towards Employee Deposit Linked Insurance (EDLI) and 0.50% as administrative charges (minimum INR 500/month). The effective employer cost is approximately 13% of wages, not the headline 12%.

Employees' State Insurance (ESI)

ESI applies to employees earning up to INR 21,000 per month (INR 25,000 for employees with disabilities). The employer contributes 3.25% and the employee contributes 0.75% of gross wages. ESI now applies pan-India to all establishments with 10 or more employees, eliminating the previous "notified area" restriction. This is a significant expansion that catches many foreign employers off guard.

Gratuity

Under the new codes, fixed-term employees become eligible for gratuity after just one year of service. The calculation remains: (15/26) x last drawn wages x years of service. For a UK company hiring fixed-term contractors who are reclassified as fixed-term employees, this creates an immediate financial liability. The current tax-exempt ceiling for gratuity is INR 25 lakh.

Professional Tax

A state-level levy capped at INR 2,500 per employee per year under Article 276(2) of the Constitution. Each state has different rates and filing frequencies. Maharashtra charges INR 200/month (with a slightly higher amount in February) for employees earning above INR 10,000. The employer must register separately in each state where it has employees.

Total Employer Cost Stack

The total employer cost above gross salary typically ranges from 20% to 35%, depending on compensation structure and state of operation.

The UK-India Social Security Agreement (SSA)

On 10 February 2026, India and the UK signed a Social Security Agreement as part of the broader CETA framework. This agreement — technically called the Double Contribution Convention (DCC) — addresses a major pain point for UK companies with India operations: dual social security contributions.

What the SSA Covers

The SSA eliminates dual social security contributions for employees temporarily assigned between the UK and India for up to 36 months. A UK employee posted to India for a project of up to three years will continue contributing to the UK's National Insurance system and will be exempt from Indian EPF contributions. Conversely, an Indian employee posted to the UK will continue under the Indian EPF/ESI framework and be exempt from UK National Insurance.

What the SSA Does Not Cover

The SSA covers contributions only — it does not extend to benefits such as pensions or healthcare entitlements. It does not alter visa or immigration rules. Indian professionals working in the UK still need to meet existing immigration criteria including sponsorships and salary thresholds. If a worker's stay exceeds 36 months, they are no longer considered a "detached worker" and must begin contributing to the host country's social security programme.

Implementation Timeline

The SSA is scheduled to come into force concurrently with the CETA, planned for the first half of 2026. UK companies should prepare by: (a) identifying all employees on cross-border assignments between the UK and India, (b) obtaining Certificates of Coverage from HMRC for UK-to-India assignees, and (c) reviewing existing India payroll configurations to implement the exemptions once the SSA takes effect.

Employment Contracts and Compliance Requirements

While written employment contracts are not strictly mandatory under Indian law (with the exception of fixed-term contracts and certain state-specific rules), they are essential for foreign employers. A well-drafted contract for an Indian employee hired by a UK-owned entity should include:

• Designation and job description — must align with the standing orders applicable to your establishment
• Compensation structure — clearly breaking down wages (minimum 50% of CTC), allowances, and benefits
• Working hours and overtime — 48 hours/week maximum, overtime at 2x the ordinary rate
• Leave entitlements — minimum 15 days earned leave per year (1 day per 20 days worked), plus 12 public holidays and sick leave as per state rules
• Notice period — typically 30-90 days; must be reciprocal
• Non-compete clauses — Indian courts generally do not enforce post-employment non-compete restrictions under Section 27 of the Indian Contract Act, making this a significant gap for UK employers accustomed to enforceable restrictive covenants
• Intellectual property assignment — essential for UK tech companies; must be drafted under Indian IP law to be enforceable
• Termination provisions — must comply with the Industrial Relations Code 2020, including notice requirements, severance pay, and grounds for termination

For detailed guidance on structuring employment contracts, see India employment contracts for foreign employers.

Tax Implications: PAYE, Withholding Tax, and DTAA

UK companies hiring in India must navigate dual tax obligations. On the India side, the subsidiary or EOR must deduct Tax Deducted at Source (TDS) from employee salaries under Section 192 of the Income Tax Act. The employer files TDS returns quarterly (Forms 24Q) and issues Form 16 to each employee annually.

UK-India DTAA Rates

The Double Taxation Avoidance Agreement between India and the UK, signed in 1993 and still in force, provides relief on cross-border payments:

For every outward remittance from India (salary repatriation, dividends, management fees), the Indian entity must obtain a Form 15CA/15CB certification from a Chartered Accountant before the bank will process the transaction. This costs INR 5,000-15,000 per remittance.

Permanent Establishment Risk

If a UK company hires employees in India without establishing a formal entity, it risks creating a Permanent Establishment (PE) under Article 5 of the UK-India DTAA. A PE would subject the UK company's India-attributable profits to Indian corporate tax at 35% (for foreign companies) plus surcharge and cess. This is a critical risk for UK companies using contractor or remote-employee arrangements without proper structuring.

Practical Hiring Workflow: Step by Step

Once you have chosen your employment structure, the operational steps for hiring in India follow this sequence:

Step 1: Entity Setup and Registrations

1. Incorporate subsidiary via SPICe+ (15-20 business days)
2. Obtain PAN and TAN (issued during incorporation)
3. Register for GST (7-10 business days)
4. Open a corporate bank account (15-30 business days — this is often the longest step)
5. Register with EPFO (Employees' Provident Fund Organisation) portal
6. Register with ESIC (Employees' State Insurance Corporation) portal
7. Obtain Shops and Establishment licence from the local municipal authority
8. Register for Professional Tax in the relevant state(s)

Step 2: Pre-Hiring Compliance

1. Draft employment contracts compliant with the Industrial Relations Code 2020
2. Establish standing orders (certified by the labour authorities within 6 months)
3. Set up payroll with the 50% wages rule under the new Code on Wages
4. Configure TDS deduction schedules

Step 3: Onboarding and Payroll

1. Collect employee KYC documents (Aadhaar, PAN, bank details)
2. Register employees on EPFO and ESIC portals using their Universal Account Numbers (UAN)
3. Process first payroll with all statutory deductions
4. File monthly EPF returns (by 15th of the following month) and ESI contributions
5. File quarterly TDS returns (Forms 24Q and 26Q)

Step 4: Ongoing Compliance Calendar

For comprehensive compliance tracking, our annual compliance service covers all statutory deadlines for foreign-owned companies in India.

Key Takeaways

• Choose your structure carefully — a subsidiary gives full control but requires 15-20 days to incorporate; an EOR enables same-week hiring but limits long-term flexibility and costs USD 199-599/employee/month
• Budget 20-35% above gross salary for mandatory employer contributions including EPF (13%), ESI (3.25%), gratuity provisioning (4.81%), Professional Tax, and statutory bonus
• Restructure compensation immediately — the new Labour Codes require wages to be at least 50% of total CTC, directly increasing social security contribution bases
• Prepare for the UK-India SSA — once in force (expected H1 2026), it will eliminate dual social security contributions for assignments up to 36 months; identify affected employees now
• Guard against PE risk — hiring Indian workers without a formal entity can create a Permanent Establishment, subjecting UK company profits to 35% Indian corporate tax

For a broader view of company registration options, see our UK country guide. If you need help navigating the new Labour Codes, our foreign subsidiary registration service includes full employment law onboarding support.