How to hire employees in India: contracts, TDS, PF and costs

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To hire employees in India you need an offer letter and appointment letter, a salary structure that works with Indian tax and provident fund rules, registration for EPF and often ESI and professional tax, and monthly TDS on salaries. Foreign companies can employ through an Indian subsidiary or an employer of record. This guide covers the options, contracts and salary structure, tax and statutory contributions, leave, gratuity, notice, costs and the practical steps.

Why companies hire in India

India has one of the world's largest pools of software engineers, data specialists, finance and customer operations professionals, with strong English skills and a long history of serving international clients. Many companies hire individual specialists or build whole teams in cities such as Bengaluru, Hyderabad, Pune, Chennai, Delhi NCR and Mumbai.

Indian employment and payroll rules combine national laws with state-level rules, such as each state's shops and establishments act and professional tax. India has also consolidated many older labour laws into four labour codes, with central and state rules being finalised in stages. Because details vary by state and change over time, check current rules with your EOR or a local adviser.

Your options

• Set up an Indian subsidiary (usually a private limited company) and run local payroll. Suits larger teams; setup and compliance take time.
• Use an employer of record, which employs the person through its Indian entity. See what an employer of record is.
• Engage contractors, common in India's freelance market, but only appropriate for genuinely independent professionals. See contractor misclassification.

Offer letters and appointment letters

In India, hiring usually involves an offer letter setting out the role, salary and start date, followed by an appointment letter or employment contract with full terms. The contract typically covers job title and duties, place of work, salary and its components, working hours, probation, leave, notice period, confidentiality, intellectual property and non-solicitation.

Post-employment non-compete clauses are generally not enforceable in India, so rely on confidentiality and intellectual property clauses to protect your business.

Salary structure: CTC and components

Indian salaries are usually quoted as annual cost to company (CTC), which includes the employer's provident fund contribution and sometimes gratuity and insurance. The salary is split into components, such as basic salary, house rent allowance (HRA), special allowance and others.

The split matters because provident fund and gratuity are calculated on basic wages, and some components were historically tax-efficient. The labour codes introduce a definition of "wages" that limits how much of pay can be excluded from the base for these calculations. Have your EOR or payroll provider design a structure that complies with current rules, and be clear with candidates about the difference between CTC and monthly take-home pay.

Income tax and TDS on salaries

Employers deduct tax at source (TDS) from salaries each month based on the employee's estimated annual tax. Most employees now use the new tax regime, which is the default. For financial year 2026-27, its slabs are: nil up to ₹4 lakh, then 5%, 10%, 15%, 20%, 25% and 30% in ₹4 lakh steps, with 30% above ₹24 lakh. Salaried employees get a standard deduction of ₹75,000, and a rebate makes tax nil where taxable income does not exceed ₹12 lakh. A 4% health and education cess applies on the tax.

Employees can choose the old regime with deductions and exemptions instead. At year end, the employer issues Form 16. Our India income tax calculator applies the new regime, and payroll in India explains the process.

Provident fund (EPF)

The Employees' Provident Fund applies to establishments with 20 or more employees, and many smaller employers and all EORs join it. Both employer and employee contribute 12% of basic wages, often on a wage ceiling of ₹15,000 a month, though contributions can be made on full wages. Part of the employer's share goes to the Employees' Pension Scheme.

Each employee has a Universal Account Number (UAN). Contributions are paid monthly to the EPFO, generally by the 15th of the following month.

ESI, professional tax and labour welfare fund

• Employees' State Insurance (ESI): covers health and related benefits for employees earning up to ₹21,000 a month. Contributions are 0.75% from the employee and 3.25% from the employer. Most professional salaries are above the threshold.
• Professional tax: a state tax on employment, deducted from salary in states that levy it, up to a maximum of ₹2,500 a year per employee.
• Labour welfare fund: small contributions in some states.

These depend on where the employee works, which is one reason payroll in India is usually handled by specialists.

Gratuity and bonus

Gratuity is a lump sum paid when employment ends, traditionally after five years of continuous service, calculated as 15 days' wages for each completed year of service, subject to a cap. The labour codes allow fixed-term employees to qualify after one year. Many employers budget for gratuity monthly as part of CTC.

Statutory bonus under the bonus law applies to employees below a wage threshold and is at least 8.33% of wages, subject to conditions. Many professional salaries are above the threshold, but performance bonuses are common anyway.

Leave and holidays

Leave entitlements are largely set by state shops and establishments acts and the labour codes, so they vary by state. Typical professional employers offer around 12 to 20 days of earned or privilege leave, casual and sick leave, plus national and festival holidays. Under the Maternity Benefit Act, eligible women receive 26 weeks of paid maternity leave for their first two children. Paternity leave is not mandated for private employers in most cases but is increasingly offered.

Check the state where the employee works and set leave in the contract at or above the legal minimum and in line with market practice.

Probation and notice

Probation of three to six months is common, sometimes extendable. Notice periods in India are often long by international standards: 30 days is common for junior staff and 60 to 90 days for experienced professionals. Candidates often need to serve their current employer's notice, which affects start dates; many companies offer to "buy out" notice periods.

When ending employment, follow the contract and the applicable law. Some protections, such as retrenchment compensation, apply mainly to "workmen" rather than managerial staff, but fairness, documentation and a clear process are always advisable.

What an employee costs

Employer costs on top of gross salary typically include the employer's EPF share, ESI for lower earners, gratuity provision, group health insurance (very common and expected), and any statutory bonus. Through an EOR, add the provider's fee.

Use the EOR cost calculator for an estimate, and compare providers in the EOR ranking and on Deel vs Multiplier. Current entry prices: Deel From USD 599 per employee per month, Multiplier From USD 499 per employee per month (monthly contract), Remote From USD 699 per employee per month.

Running payroll in India

Indian payroll involves monthly salary processing, TDS calculation and deposit, EPF and ESI contributions, professional tax by state, quarterly TDS returns, and annual Form 16. Investment declarations and proofs from employees affect TDS under the old regime.

Local payroll software handles these. Compare options in our India payroll software ranking and Zoho Payroll vs RazorpayX Payroll. If you set up an entity, you will also need accounting software that handles GST; see India accounting software and GST e-invoicing in India.

Paying salaries

Salaries are paid monthly in rupees by bank transfer, usually at the end of the month or start of the next. If you use an EOR, you fund the EOR in your currency and it pays locally. If you set up a subsidiary, you will fund it through permitted foreign investment routes, so plan cash flow ahead. For receiving money in India, see accepting online payments in India.

Data protection

The Digital Personal Data Protection Act, 2023 governs personal data in India, with detailed rules being phased in. Employers should process employee data for clear purposes, keep it secure, and give notice of how it is used. EOR and payroll providers should explain how they comply.

Hiring developers in India

For engineering roles, recruit through job boards, referrals, communities and specialist platforms; see our talent platforms ranking and how to hire remote developers. Competition for experienced engineers is strong in the main tech cities, and long notice periods mean you should plan hiring timelines with care. Salary expectations vary widely by city, skill and company type, so benchmark against current market data rather than older averages.

Contractors in India

Many Indian professionals work as freelancers, invoicing clients abroad. This is legitimate when they genuinely run their own business, but a full-time, long-term "contractor" who works only for you under your direction may be treated as an employee. For genuine contractors, see the contractor payroll ranking and how to pay international contractors.

Hiring checklist

1. Decide on EOR, subsidiary or genuine contractor.
2. Agree CTC, salary structure and start date, allowing for notice periods.
3. Issue offer and appointment letters.
4. Collect PAN, Aadhaar where appropriate, UAN, bank details and tax regime choice.
5. Register for EPF, ESI and professional tax as applicable.
6. Run payroll with TDS, and deposit contributions on time.
7. Provide group health insurance and track leave by state rules.
8. Issue Form 16 annually.

Common mistakes

• Quoting CTC without explaining take-home pay.
• Salary structures that do not meet the labour codes' wage definition.
• Ignoring state-specific rules on leave and professional tax.
• Relying on non-compete clauses.
• Underestimating notice periods when planning start dates.
• Treating long-term full-time freelancers as contractors.

Example: from CTC to take-home pay

Indian candidates think in annual CTC, so it helps to show how it turns into monthly pay. Suppose a package is ₹18 lakh CTC. The employer's provident fund share and any gratuity provision or insurance premium included in CTC are subtracted first, since they are not paid to the employee each month. The remainder is the gross salary, split into basic, HRA and other allowances. From each month's gross, the employee's own 12% PF contribution, professional tax where the state levies it, and TDS are deducted.

Under the new regime, the employee gets the ₹75,000 standard deduction, and tax is calculated on the slabs with the 4% cess. The result is monthly take-home pay noticeably lower than CTC divided by twelve. Showing this breakdown in the offer prevents disappointment and renegotiation later. The India income tax calculator gives the tax part.

Benefits Indian candidates expect

Beyond statutory items, competitive packages in India often include group medical insurance covering the employee, spouse, children and sometimes parents; group term life and accident cover; meal benefits; internet and phone reimbursement for remote staff; learning budgets; and annual performance bonuses. Larger employers may offer ESOPs. Parental medical cover is a meaningful perk for many candidates. Ask what their current employer provides, because a lower salary with strong insurance can compare favourably with a higher salary without it.

Questions