HR Director's Guide to Hiring in India — Labor Law & Best Practices

Why HR Directors Need an India-Specific Hiring Playbook

India is the world's most populous country and the fastest-growing major economy, making it a top destination for foreign companies looking to build teams. But India's labor regulatory environment is unlike anything you will encounter in the US, UK, or EU. With four new labour codes that replaced 29 legacy statutes effective November 21, 2025, payroll structures, social security contributions, and termination rules have fundamentally changed.

This guide is written specifically for HR directors at foreign companies hiring in India — whether you are setting up a wholly owned subsidiary, a branch office, or engaging employees through an Employer of Record (EOR). Every section includes specific numbers, current rates, and actionable steps verified for 2025-2026.

India's Four New Labour Codes — What Changed in November 2025

On November 21, 2025, India officially implemented four consolidated labour codes, replacing 29 fragmented statutes that had governed employment for decades. As an HR director, understanding these codes is non-negotiable.

Code on Wages, 2019

This code merged the Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, and Equal Remuneration Act into a single framework. The most critical change for payroll teams is the 50% basic pay rule: basic pay plus dearness allowance must now constitute at least 50% of an employee's total Cost to Company (CTC). Any allowances that push the non-basic portion above 50% get reclassified as "wages," directly increasing your EPF, gratuity, and bonus liabilities.

Industrial Relations Code, 2020

Companies with up to 300 employees can now hire and terminate workers without seeking government approval — up from the previous threshold of 100. This gives foreign companies significantly more workforce flexibility. Standing orders are now mandatory only for establishments with 300+ workers.

Code on Social Security, 2020

EPF coverage now applies universally to all establishments with 20 or more employees, regardless of industry type — the old industry-specific schedule has been eliminated. ESIC now applies pan-India, removing the previous requirement for establishments to be in "notified areas." Fixed-term employees now qualify for gratuity after just one year of service instead of the previous five.

Occupational Safety, Health and Working Conditions Code, 2020

This code consolidates 13 prior acts and mandates annual health checkups for employees in factories and mines, caps daily working hours at 8 hours (with overtime at 2x wages), and requires establishments with 10+ workers to maintain health and safety standards.

Employment Structures for Foreign Companies

Before you hire a single employee in India, you need a legal entity. The structure you choose has direct implications on your labor law obligations.

Wholly Owned Subsidiary (Private Limited Company)

This is the most common and recommended structure for foreign companies planning to hire in India. A foreign subsidiary registered as a private limited company under the Companies Act, 2013 gives you full operational control, the ability to hire employees directly, and access to all labor law benefits for your workforce. Most sectors allow 100% FDI under the automatic route.

Branch Office

A branch office can hire employees for its permitted activities but has restrictions — it cannot carry out manufacturing or processing activities. It is an extension of the parent company, not a separate legal entity, which can create permanent establishment risk.

Employer of Record (EOR)

If you want to hire 1-10 employees in India without setting up a legal entity, an EOR acts as the legal employer while you direct the day-to-day work. This is fastest to set up but more expensive per employee and gives you less control over HR policies.

Mandatory Social Security Obligations

Every foreign company hiring in India must budget for mandatory employer contributions beyond the gross salary. These are non-negotiable and apply from day one of employment.

Employees' Provident Fund (EPF)

EPF applies to all establishments with 20 or more employees. Both employer and employee contribute 12% of basic wages, with the wage ceiling set at INR 15,000 per month. The employer's 12% is split as follows:

• 3.67% to EPF (Employee Provident Fund)
• 8.33% to EPS (Employee Pension Scheme), capped at INR 15,000 basic

Employer also pays 0.5% toward EDLI (Employee Deposit Linked Insurance) and an administrative charge of 0.5% on EPF. Total employer outflow on PF: approximately 13% of basic wages.

Employees' State Insurance (ESI)

ESI applies to employees earning a gross salary of INR 21,000 or less per month. Contribution rates:

• Employer: 3.25% of gross salary
• Employee: 0.75% of gross salary

ESI provides medical benefits, maternity benefits, disability benefits, and dependent benefits. Once an employee's salary exceeds INR 21,000 per month, you must provide equivalent group medical insurance — typically costing INR 5,000-15,000 per employee per year. For more on ESI, see our PF and ESI compliance guide.

Gratuity

Under the new Code on Social Security, gratuity accrual begins from day one of employment. The accrual rate is approximately 4.81% of basic pay plus DA per month. Fixed-term employees now qualify for gratuity after just one year, rather than the previous five-year threshold. The gratuity formula is: (Last drawn basic + DA) x 15/26 x years of service.

Professional Tax

Professional tax is a state-level levy, with rates and slabs varying by state. Most states cap it at INR 2,500 per year. States like Maharashtra, Karnataka, West Bengal, and Tamil Nadu actively collect professional tax. As an employer, you must register and deduct this from employee salaries.

Employment Contracts — What Indian Law Requires

India does not have a single statute governing employment contracts, but the new labour codes and judicial precedents establish clear requirements. For a deep dive, see our guide on India employment contracts for foreign employers.

Mandatory Contract Clauses

Every employment contract in India should include:

• Job title, department, and reporting structure
• CTC breakdown showing basic pay (minimum 50% of CTC), allowances, and employer PF/ESI contributions
• Working hours (typically 8 hours/day, 48 hours/week)
• Leave entitlements — minimum 15 days earned leave per year under most state Shops & Establishment Acts
• Notice period — typically 30-90 days for professional roles
• Probation period — 3-6 months is standard, with a shorter 15-day notice during probation
• Non-compete and confidentiality clauses (note: post-employment non-competes are generally unenforceable in India under Section 27 of the Indian Contract Act)
• Governing law and jurisdiction

Fixed-Term Employment

The Industrial Relations Code, 2020 formally recognizes fixed-term employment contracts. Key requirements:

• Fixed-term employees must receive identical wages and benefits as permanent employees in the same role
• Same EPF, ESI, and medical insurance coverage
• Gratuity eligibility after just one year (not five)
• Contract must specify the start and end dates explicitly

Salary Structure — The 50% Basic Pay Rule

The single most impactful change under the new labour codes is the restructuring of salaries. Under the Code on Wages, basic pay + DA must be at least 50% of gross salary. This has cascading cost implications:

As this table shows, restructuring salaries to comply with the 50% rule increases employer costs by approximately 3-5% of CTC. For a team of 50 employees earning INR 1 lakh gross, that translates to roughly INR 20 lakh per year in additional employer costs.

Hiring Foreign Employees in India

If your Indian entity needs to bring in foreign nationals — whether as expat managers or specialized technical staff — there are additional visa and salary requirements. For a detailed overview, see our guide on India employment visas for foreign companies.

Employment Visa Requirements

• Minimum salary threshold: USD 25,000 per annum (approximately INR 21 lakh)
• Exemptions exist for ethnic cooks, language teachers (non-English), and NGO honorary workers
• The employer must demonstrate that the foreign hire possesses specialized skills unavailable locally
• Initial visa validity: 1 year, renewable annually
• The foreign employee must register with the FRRO within 14 days of arrival

Tax Obligations for Foreign Employees

Foreign employees working in India are subject to Indian income tax on their India-sourced salary. If they stay 182+ days in a financial year, they become tax residents and may be taxed on global income. Employers must deduct TDS from salary payments under Section 192.

Termination and Severance — Legal Requirements

Terminating employees in India is more regulated than in the US or UK. India does not follow "at-will" employment. For more, see our article on employee termination rules in India.

For Workmen (Non-Managerial Employees)

Under the Industrial Relations Code, companies with up to 300 workers can retrench without government permission, subject to:

• 30 days' written notice or pay in lieu of notice
• Retrenchment compensation: 15 days' average pay for every completed year of continuous service
• Last-in-first-out (LIFO) principle applies unless justified otherwise
• One month's notice to the appropriate government

For Managerial/Supervisory Employees

Termination is governed by the employment contract. Typical notice periods range from 30-90 days. Severance is not mandated by statute but is often negotiated. Gratuity is payable regardless of the reason for termination (after qualifying period).

Common Pitfalls in Termination

• Sexual harassment complaints: Under the POSH Act, you cannot terminate an employee who has filed a complaint during the pendency of an inquiry
• Maternity: The Maternity Benefit Act prohibits termination during pregnancy or maternity leave
• Disability: The Rights of Persons with Disabilities Act, 2016 provides additional protection
• Union membership: Termination for union activity is an unfair labor practice

State-Level Labor Law Variations

Labor is a concurrent subject in India — both the central government and state governments can legislate on it. As an HR director, you must comply with state-specific rules on top of the four central labour codes.

Shops and Establishments Act

Every state has its own Shops and Establishments Act governing working conditions for commercial establishments. Registration is mandatory — typically within 30 days of commencing operations. Key variations include:

• Karnataka: Maximum 10 hours/day, 48 hours/week. 18 days earned leave per year.
• Maharashtra: Establishments must close for one day per week. Professional tax registration is mandatory.
• Delhi: Night shifts permitted for women with safety conditions met under recent amendments.
• Tamil Nadu: 12 days casual leave, 12 days sick leave per year.

Wage Payment Deadline

Under the new Code on Wages, salaries must be paid by the 7th of the following month for all employers. This is a national requirement — no state variation.

Compliance Checklist for HR Directors

Use this checklist to ensure your Indian hiring operations are fully compliant. For a broader compliance overview, see our annual compliance checklist for Indian companies.

Before Your First Hire

• Register your legal entity (subsidiary, branch office, or engage an EOR)
• Obtain a Digital Signature Certificate (DSC) for authorized signatories
• Register with the EPFO portal for PF
• Register with the ESIC portal for ESI (if applicable)
• Register under the applicable state Shops and Establishments Act
• Obtain professional tax registration (if applicable in your state)
• Set up payroll with the 50% basic pay structure
• Draft employment contracts compliant with Indian law

Monthly Obligations

• Deposit EPF contributions by the 15th of the following month
• Deposit ESI contributions by the 15th of the following month
• Deposit TDS on salaries by the 7th of the following month
• Pay professional tax (monthly or quarterly depending on state)
• Pay salaries by the 7th of the following month

Annual Obligations

• File annual PF returns
• File annual ESI returns
• Issue Form 16 (TDS certificates) to all employees by June 15
• Conduct annual performance reviews for probationary confirmations
• Review and renew employment visas for foreign employees

Best Practices for Foreign Companies Hiring in India

1. Hire a Local HR/Compliance Lead Early

Indian labor compliance is complex and state-specific. Your first or second hire should be someone with deep knowledge of Indian labor law, payroll, and statutory compliance. This role will pay for itself many times over in avoided penalties.

2. Use a Reputable Payroll Provider

For your first 10-50 employees, consider outsourcing payroll to a provider who handles EPF, ESI, TDS, and professional tax filings. This reduces the risk of errors during the learning curve. For guidance, see our article on setting up payroll for your first 10 Indian employees.

3. Build CTC Structures That Comply From Day One

Do not adopt a salary structure that fails the 50% basic pay test. Restructuring salaries retroactively creates arrears, employee dissatisfaction, and compliance risk.

4. Invest in a POSH Framework

The Prevention of Sexual Harassment (POSH) Act is mandatory for all employers with 10+ employees. You must constitute an Internal Complaints Committee (ICC), conduct annual training, and file an annual report. Non-compliance carries penalties of up to INR 50,000.

5. Plan for Gratuity Liability From Day One

With gratuity accruing from the first day under the new codes, you should make actuarial provisions for gratuity liability in your financial statements. For a team of 50 employees with average basic pay of INR 50,000, the annual gratuity accrual is approximately INR 14.4 lakh.

Leave Policies and Working Hours

India's leave framework is governed by a combination of central legislation and state-specific Shops and Establishments Acts. HR directors must design leave policies that meet the statutory minimums while remaining competitive in India's talent market.

Statutory Leave Entitlements

Under the new Occupational Safety, Health and Working Conditions Code, workers who have completed 180 days of service in a calendar year are entitled to one day of earned leave for every 20 days worked — roughly 15 days of earned leave per year. Beyond this federal minimum, most state acts provide additional categories:

• Casual leave: 7-12 days per year (varies by state; not carried forward)
• Sick leave: 7-12 days per year (varies by state; some states allow carryforward)
• Public holidays: 10-15 days per year (varies by state and factory calendar)
• Maternity leave: 26 weeks for the first two children, 12 weeks for the third and beyond (Maternity Benefit Act, 2017). Companies with 50+ employees must also provide a creche facility.
• Paternity leave: No statutory entitlement in the private sector, but 15 days is increasingly standard among MNCs operating in India.

Working Hours

The standard working week in India is 48 hours across 6 days (8 hours per day). The new Occupational Safety Code allows for a 4-day work week (12 hours per day) with government approval, though few companies have adopted this. Overtime is paid at 2x the ordinary rate of wages. Total working hours including overtime cannot exceed 10.5 hours per day in most states. Employees must receive at least one rest day per week, and working on a rest day triggers overtime compensation.

Leave Encashment and Tax

Unused earned leave can be encashed upon resignation or retirement. Leave encashment at the time of retirement is tax-exempt up to INR 25 lakh (increased from INR 3 lakh effective September 2023). Leave encashment during employment is fully taxable as salary income.

Data Privacy and Employee Monitoring

The Digital Personal Data Protection (DPDP) Act, 2023 imposes obligations on employers as data fiduciaries. Phase 1 implementation began in 2025, and HR directors must ensure compliance. Key requirements include obtaining employee consent before collecting personal data, providing privacy notices explaining data use, implementing data security safeguards, and restricting cross-border transfers of personal data to approved jurisdictions. Employee monitoring (email surveillance, CCTV, device tracking) is permissible but must be disclosed in the employment contract or employee handbook. Covert monitoring without disclosure creates legal exposure. For more on this, see our guide on DPDP Act compliance for foreign companies.

Contractor vs Employee Classification in India

India draws a sharp legal distinction between employees and independent contractors. Misclassification — common among foreign companies trying to hire quickly — triggers retrospective PF, ESI, gratuity, and bonus liabilities plus penalties. The key test is the degree of control: if you dictate working hours, provide tools, assign specific tasks, and integrate the individual into your organizational hierarchy, they are likely an employee regardless of what the contract says. The Supreme Court of India has consistently applied the "supervision and control" test. For foreign companies, the safest approach is to hire employees from the start if the engagement involves full-time, ongoing work at your premises under your direction. Reserve contractor engagements for genuinely independent professionals — consultants, advisors, project-based specialists — who set their own hours and provide their own tools. For a deeper analysis, see our article on hiring contractors vs employees in India.

Building an India Compensation Benchmarking Framework

Compensation in India varies dramatically by city, industry, and role level. Mumbai and Bangalore salaries are typically 15-25% higher than those in tier-2 cities like Pune, Hyderabad, or Chennai. HR directors should benchmark CTC (Cost to Company) — the standard compensation metric in India — which includes basic pay, allowances, employer PF, gratuity, insurance, and variable pay. A rough breakdown for a mid-level professional earning INR 15 lakh CTC:

Variable pay (performance bonus) of 10-20% of CTC is standard practice in India for professional roles. It is typically paid annually based on company and individual performance.

Key Takeaways

• India's four new labour codes (effective November 2025) require restructuring salaries so basic pay is at least 50% of CTC, directly increasing employer contributions to EPF and gratuity.
• EPF (12% employer + 12% employee on basic), ESI (3.25% employer for salaries under INR 21,000/month), and gratuity (4.81% of basic from day one) are mandatory social security obligations.
• Companies with up to 300 employees can now terminate workers without government approval, but notice periods and retrenchment compensation still apply.
• Employment visas for foreign workers require a minimum salary of USD 25,000/year. Foreign employees staying 182+ days become Indian tax residents.
• State-level Shops and Establishments Acts impose additional registration and compliance requirements that vary significantly across states.