What an EOR actually does in India

Start with the thing that confuses most founders. There are two employers in this arrangement, and they do different jobs.

The EOR is the legal employer. Its name is on the contract. Its name is on the payslip. Its name goes on the PF filing and the tax return. If a labour officer knocks, they knock on the EOR's door.

You are the working employer. You set the goals, run the standups, do the reviews, and decide when someone gets a raise. The employee sits in your Slack and uses your email address.

That split is the whole product. Everything else is plumbing. Here is the plumbing an Indian EOR handles:

• The employment contract. Drafted under Indian law, with the notice period, probation, leave, and termination terms that Indian courts will actually enforce.
• Payroll in rupees. Salary computed, tax deducted at source, money in the employee's bank account on the same date each month.
• Provident fund. 12% from the employee and 12% from you, on wages up to ₹15,000 a month as the mandatory floor. Add roughly 1% more for EDLI and admin charges, so a realistic employer outgo is closer to 13% of PF wages.
• ESI. 3.25% from the employer and 0.75% from the employee, but only for people earning ₹21,000 a month gross or less. Most engineers are well above that line, so this often does not apply.
• Professional tax. A small state tax, deducted monthly, with different rules and different registrations in every state that levies it.
• Gratuity. A lump sum you owe when someone leaves. Fifteen days of last drawn wages for every completed year, divided by 26. More on this below, because the rules changed.
• Tax paperwork for the employee. Investment declarations at the start of the year, proof collection at the end, quarterly TDS returns, and Form 16 in June.
• The exit. Notice period, final settlement, relieving letter, gratuity payout, and PF closure.

None of that is glamorous. All of it carries penalties if you get it wrong, and most of it changed in the last twelve months.

How it works, step by step

The process is short. The delays are almost never on the EOR's side.

From our own onboardings: the single biggest delay is the relieving letter from the previous employer. Indian companies often hold it for 30 to 45 days after the last working day. Ask the candidate for it on day one, not on the day before joining.

What it costs, with the real arithmetic

Three numbers make up your monthly bill. Most pricing pages only show you one of them.

1. The salary. Whatever you agreed with the employee.
2. The statutory add-ons. Employer PF, ESI if applicable, gratuity accrual, insurance. Real money, paid to the government or to an insurer, not to the EOR.
3. The EOR fee. The provider's margin. This is the only part you can shop around on.

Here is what that looks like for one senior engineer at ₹20,00,000 a year, which is a normal Bengaluru or Hyderabad number in 2026.

That PF line is worth staring at. The gap between the statutory floor and a full-basic contribution is roughly ₹96,000 a year on one person. Ask your EOR which one they have quoted you. Ask before you sign, because switching later means telling the employee their PF just changed.

The flat fee cuts both ways. $99 a month is $1,188 a year. On a ₹20 lakh package that is small. On a ₹5 lakh package it is a meaningful share of the total. Percentage pricing works the other way round: 12% of salary is cheap on a junior and brutal on a principal engineer. Do the sum for your actual team, not for a generic one.

What is usually included

• Contract drafting and onboarding
• Monthly payroll and payslips
• TDS deduction, quarterly returns, Form 16
• PF, ESI, professional tax and labour welfare fund filings
• Employee self-service portal
• Exit processing and final settlement

What usually costs extra

• Laptops and equipment, plus shipping and customs
• Group medical and life cover beyond a basic plan
• Recruitment, if you want the provider to find the person too
• Off-cycle payments, bonuses run outside the normal date
• Currency conversion margin on the money you send
• Any severance above the legal minimum

EOR, PEO, third party payroll: what the words mean

Six vendors will use six different words for roughly the same thing. Some of the differences are real. Some are branding. Here is how to tell them apart, and which ones mean something specific in India.

Employer of Record

An Indian company employs your worker. It signs the contract, runs payroll, files everything, and carries the employment relationship. You direct the work. One legal employer, no shared liability. This is the model this guide describes.

PEO

Professional Employer Organisation. In the United States a PEO is a co-employer: you and the PEO are both legally the employer, and you share liability. That structure exists because American law recognises co-employment.

Indian law does not have a co-employment concept. There is no statutory framework that makes two companies jointly the employer of the same person in the way a US PEO does. So when a vendor sells you a "PEO in India," they are almost always selling an EOR with an American label on the box.

That is not dishonest by itself. But ask the question that settles it: whose name is on the employment contract? If the answer is "ours," it is an EOR. If the answer is complicated, keep asking.

One real risk sits behind the label. A foreign company that thinks it is a co-employer may behave like one, giving instructions on discipline, termination and pay in ways that look like the acts of an employer. That behaviour is exactly what tax and labour authorities look at when they test who the real employer is.

Third party payroll

This is the phrase Indians actually use. If you say "EOR" to a candidate in Pune, some will not know the term. Say "third party payroll" and everyone knows immediately.

It means the same thing operationally: the employee is on a vendor's rolls, not the client's. But it carries something the English term does not, and you should know about it before you make an offer.

The status problem. In the Indian job market, "on rolls" and "third party payroll" are not neutral descriptions. Being on a vendor's payroll is widely read as a lower-status arrangement, associated with contract staffing, weaker job security and slower progression. Good candidates ask about it. Some decline over it.

This is a real hiring cost of the EOR model in India and no vendor will raise it with you. Handle it in the offer conversation: be clear that you are a foreign company without an Indian entity yet, that the arrangement is standard for that situation, and that the salary, equity and role are yours, not the vendor's. Said plainly and early, it is a non-issue. Discovered on the offer letter, it kills deals.

Staffing and manpower supply

Different animal. A staffing agency supplies workers to your establishment, usually temporary, often rotating, priced as a markup on the hourly or monthly rate. In Indian law this is contract labour, and it is a regulated arrangement with its own chapter in the OSH Code.

What changed on 21 November 2025:

• The threshold for the contract labour rules rose from 20 workers to 50. A contractor supplying fewer than 50 does not need a licence.
• Contractor licences are now single licences, valid up to five years, and no longer tied to each principal employer.
• Principal employers no longer need a separate registration to engage contract labour.
• Welfare facilities are now the principal employer's sole responsibility, with no recovery from the contractor.
• If the contractor does not pay wages, the principal employer pays them.
• If you engage contract labour through an unlicensed contractor, you take on all the contractor's duties yourself.
• The Code draws a line between core and non-core activity, and puts conditions on using contract labour in core activity.

That last set matters if you have an Indian entity and you are using a staffing vendor to bulk up a team. The liability runs uphill to you. If you have no Indian establishment at all, most of this chapter does not reach you, which is one of the quieter reasons the EOR model works the way it does.

Payroll outsourcing

You have an Indian company. You are the employer. A vendor processes the payroll, files PF, ESI, professional tax and TDS, generates Form 16 and runs an employee helpdesk. No employment layer, so it costs less than an EOR. This is the right product once you have your own entity, and plenty of companies keep paying EOR fees long after they should have switched.

AOR and Contractor of Record

Agent of Record and Contractor of Record are the contractor equivalents. The person stays self-employed, invoices for their work, gets no PF and no gratuity. The provider handles the agreement, the payments and the classification risk. Cheaper than an EOR, and correct only when the person genuinely is independent.

GEO and umbrella company

Global Employment Organisation is a synonym for EOR. Some firms use it to suggest a broader strategic service. Judge them on what they actually do, not the acronym. Umbrella company is a British and European structure for contractors and has no real Indian equivalent.

BPO, GCC and outsourcing

Worth separating clearly, because founders sometimes shop for the wrong thing. With outsourcing, a BPO firm does the work for you: you buy an outcome, and their staff are managed by them. With an EOR, you buy an employment wrapper: the work is yours, the direction is yours, and only the legal employment sits elsewhere. A Global Capability Centre is your own India office, at scale, with your own entity. Different products, different price, different amount of control.

The 50% wage rule changed your cost

On 21 November 2025 India switched on four labour codes at once. They replace 29 older laws. The central rules were notified in May 2026 and states are still catching up at different speeds.

One change matters more than all the others put together.

Indian salaries were traditionally built with a small basic pay and a long tail of allowances. House rent allowance, conveyance, special allowance, and so on. The reason was simple: PF and gratuity are calculated on basic pay, so a low basic meant a low statutory bill. Basic pay of 30% to 40% of the package was normal.

That is over. Under the Code on Wages, basic pay plus dearness allowance must be at least half of total remuneration. If your allowances push past 50%, the excess gets added back into wages for the purpose of calculating benefits.

The effect:

• PF, gratuity, bonus and leave encashment are all computed on a bigger base.
• Published estimates put the extra statutory cost at roughly 3% of gross CTC for a typical old-style structure.
• Take-home pay falls unless the package is restructured, because more of the same money is being routed into retirement and exit benefits.
• The liability accrues from 21 November 2025, even where enforcement is still finding its feet.

The Ministry of Labour issued clarifying FAQs in January and March 2026. Two of those clarifications catch people out. Overtime counts inside the 50% calculation. And employer PF sits in the denominator of total remuneration, which makes the threshold slightly easier to hit than the first reading suggests.

Why this matters when you are choosing a provider. A salary structure built before November 2025 is now wrong. If an EOR shows you a CTC breakup with basic pay at 40%, they have not updated their engine. That is a cheap thing to check and it tells you a lot.

Gratuity is no longer a five-year problem

Gratuity is an Indian idea that surprises most foreign employers. It is a lump sum the employer owes when someone leaves. You fund all of it. The employee contributes nothing.

The formula: fifteen days of last drawn wages, times completed years of service, divided by 26. The statutory ceiling is ₹20 lakh, and ₹20 lakh is also the lifetime tax-free limit for the employee across every employer they ever have.

For decades the rule was five years of service before anything was owed. Most people left before five years, so most companies quietly never paid it.

Section 53(2) of the Code on Social Security changed that for fixed-term employees. A fixed-term employee now earns gratuity on a pro-rata basis, and the qualifying period under the draft central rules is one year rather than five. If you hire on twelve-month or eighteen-month contracts, which foreign companies often do when they are testing a market, you now have a real gratuity bill you probably did not budget for.

Two more details that catch finance teams:

• The new wage definition applies to the whole payout. Gratuity uses last drawn wages, a single number at the time of exit. So the higher basic pay from the 50% rule flows through to service rendered long before November 2025. The Ministry has said it will not chase retrospective contributions, but the final cheque is bigger.
• Companies reporting under Ind AS 19 must book the increase now. The one-year rule and the wider wage base are a plan amendment. That is past service cost, recognised straight to the profit and loss account, not spread over future years.

On tax, the Income-tax Act 2025 came into force on 1 April 2026 and applies to income from the 2026 to 2027 tax year onward. It renumbers a great many provisions but leaves the gratuity exemption itself alone: still ₹20 lakh, still a lifetime cap for private sector employees. Returns filed in mid-2026 still run on the 1961 Act. Your payroll provider should be quoting the correct section number for the correct year, and quite a few are not.

You now have two days to settle an exit

This one is short and it bites.

Section 17(2) of the Code on Wages says all wages owed to a departing employee must be paid within two working days of their last day. Resignation, termination, retrenchment, dismissal, closure. All of it.

The Indian norm used to be 30 to 45 days. Plenty of companies still run on that clock.

What has to move in two days: unpaid salary, leave encashment, pro-rata bonus, pending reimbursements, overtime.

What does not: gratuity keeps its own 30-day timeline, and PF transfer runs on the EPFO's schedule.

Two working days is not enough time to chase a laptop, get three department sign-offs, and run a manual calculation. It only works if the exit process starts on the day the resignation is accepted, with asset recovery and clearances running in parallel rather than one after another. Ask any provider you are evaluating how they hit this. If the answer is vague, they are missing it.

Permanent establishment, the risk you cannot see

This is the section most India EOR pages skip, and it is the one that costs the most when it goes wrong.

Permanent establishment, or PE, is a tax idea. If your foreign company is judged to have a taxable presence in India, India can tax the profits attributed to that presence. Foreign companies are taxed at 35%, higher than the domestic company rate. Add interest and penalties and a few years of back assessments, and this stops being an accounting footnote.

A properly structured EOR reduces PE risk a great deal, because the Indian entity employing the person is the EOR, not you. It does not eliminate the risk. Here is what actually triggers it.

Service PE

Most Indian tax treaties follow the UN model and include a service PE clause. If your company furnishes services in India through employees or other personnel beyond a threshold, you have a PE. Under the India and United States treaty the threshold is commonly 90 days in any twelve-month window for services to unrelated parties, and as low as 30 days where the services go to an associated enterprise. Other treaties sit between 90 and 183 days.

The part that catches people: India aggregates days across everyone. Three people in India for 35 days each in the same twelve months is 105 days, not 35.

One helpful development. In December 2025 the Delhi High Court held, in a case under the India and Singapore treaty, that physical presence in India is a mandatory precondition for a service PE. Delivering services remotely does not create one. The court also said vacation days and business development days do not count toward the threshold. Only days when services are actually performed. That ruling is treaty specific, but it pushed back hard on the idea of a virtual PE.

Dependent agent PE

If someone in India habitually concludes contracts on your behalf, or negotiates the terms that you then rubber-stamp, you can have a PE with no day count at all. This is the real risk with EOR arrangements, and it has nothing to do with the EOR.

It has to do with what you asked the person to do. Hire an engineer through an EOR and your exposure is small. Hire a country sales lead through an EOR, give them a quota, and let them close deals with Indian customers, and you are in a different conversation. The paperwork says they work for the EOR. The behaviour says they are your agent.

Fixed place PE

An office, branch, or workshop in India that is at your disposal and used for your business. Most treaties treat continuous use over about six months as the trigger. An EOR-employed person working from their own home is generally fine. A room your company rents and calls the India office is not.

Practical rules

• Keep contract signing authority with people outside India.
• Track travel days for everyone in aggregate, not per person, against the specific treaty that applies to you.
• Do not rent an India office and then tell yourself the EOR covers it.
• Be careful with revenue-facing roles. Delivery and engineering roles carry much less risk than sales roles with signing power.
• Get a tax opinion once your India headcount reaches the point where a mistake would hurt. That is usually somewhere around five people, not twenty.

Also note that the Income-tax Act 2025, in force from 1 April 2026, carries forward the substance of the old PE and business connection provisions but renumbers and redefines around them. If you have a standing tax memo written against the 1961 Act, it needs a read-through.

Your non-compete does not work here

American and British founders paste their standard offer letter into India and assume it holds. It does not.

Section 27 of the Indian Contract Act 1872 says every agreement that restrains a person from exercising a lawful profession, trade or business is void to that extent. India does not apply the reasonableness test that England and most American states use. There is no version of a post-employment non-compete that survives by being narrow enough. Twelve months, one city, one named competitor, all void.

The Delhi High Court reconfirmed this in Varun Tyagi v. Daffodil Software in 2025. This is settled ground.

What does hold up:

• Restrictions during employment. An employee owes you exclusivity while they work for you. Enforceable, and the Supreme Court has said so since 1967.
• Confidentiality. Protecting genuine trade secrets is enforceable and is not treated as a restraint of trade.
• Non-solicitation. Stopping someone from poaching your clients or your team stands a far better chance in court than stopping them from working.
• Garden leave. Keep paying them through the notice period and keep them out of a competitor's building for that time.
• IP assignment. Enforceable under Indian intellectual property law, entirely separate from section 27.

So write the contract for the country. A good India EOR should push back on your template rather than translating it. If they sign off on a two-year non-compete without a word, they are not reading what they sign.

India is not one country for payroll

PF and income tax are national. A lot of the rest is not.

Professional tax is levied by states, and not every state levies it. Karnataka, Maharashtra, Telangana, Tamil Nadu, West Bengal and others each set their own slabs, their own filing dates, and their own registration process. Delhi, Uttar Pradesh and Haryana do not charge it at all.

Labour welfare fund is the same story. Different states, different tiny amounts, different due dates, and it is the sort of filing that gets missed for two years before anyone notices.

Shops and establishments registration is state law too, and it drives working hours, weekly off, leave entitlement and holiday lists. A Karnataka holiday calendar and a Maharashtra holiday calendar are different documents.

And the labour codes themselves are landing at different speeds. States write their own rules under the central codes. Some have notified final rules. Many are still in draft.

The practical consequence for you: a distributed India team of eight people across four states is four registration sets, four filing calendars, and four sets of state rules that are moving right now. This is the boring reason people use an EOR.

EOR or your own company? The honest math

Every EOR guide tells you an Indian entity costs a fortune to set up. Some quote ₹5 lakh. That number is wrong, and we would rather you heard it from us.

Registering a private limited company in India is cheap. For a standard two-director company the incorporation itself runs about ₹7,000 to ₹25,000. With foreign shareholding and the extra FEMA work, budget roughly ₹35,000 to ₹90,000 all in. Incorporation takes five to ten working days with clean documents, and fifteen to twenty-five working days when foreign directors are involved and papers need apostille.

So if entity setup is cheap, why does anyone use an EOR? Because incorporation is the easy part. What follows is not.

So the decision is not about setup fees. It is about whether you want a compliance function in a country you do not live in.

One thing that shifts the crossover: flat pricing pushes it later than percentage pricing. At $99 per employee per month, twelve people cost about $14,000 a year in fees. Twelve people at 12% of a ₹20 lakh salary cost far more than that. Run your own numbers before taking anyone's rule of thumb, including ours.

Choosing between EOR, contractor and staffing

Names aside, three models are genuine alternatives for the same hire. Here is how they differ where it counts.

The contractor route is popular because it is cheap and fast. It is fine when the person really is independent: they have other clients, they set their own hours, they use their own equipment, they invoice for outcomes.

It stops being fine when they work full time for you, on your schedule, on your laptop, reporting to your manager, for two years. At that point Indian authorities can treat them as an employee regardless of what the contract says. The bill is back-dated PF with interest and damages, plus gratuity, plus whatever else applies. If you are already paying someone like an employee, an EOR is the honest version of what you are doing.

When an EOR is the wrong answer

We sell this service. We would still tell you not to buy it in these five cases.

1. You already have an Indian company. Then you want payroll outsourcing, not an EOR. Same work, no employment layer, lower cost.
2. You are hiring one junior person on a small salary. A flat monthly fee on a ₹4 lakh package is a large percentage of the total. Look at contractor arrangements or a local agency instead.
3. You are past fifteen people in India and staying. Set up the entity. The per-employee fee has stopped being the cheap option.
4. The role needs a licence the EOR cannot hold. Certain regulated activities require a specific registration. The EOR can employ the person, but that does not license the work.
5. You want a proper India office with your name on the door. The moment you have premises at your disposal, the PE analysis changes and the EOR is not solving your main problem anymore.

Eleven questions to ask an Indian EOR

Most comparison content compares logos. Ask these instead, and pay attention to how fast the answers come back.

1. Do you employ through your own Indian entity, or through a partner? If it is a partner, who is the actual employer on the contract?
2. Show me a sample CTC structure for a ₹20 lakh package under the 50% wage rule. What is the basic pay?
3. Whose name goes on the employment contract, and are there any taxes on top of your quoted fee?
4. Do you contribute PF at the ₹15,000 statutory floor or on full basic pay? What does that do to my monthly invoice?
5. How do you fund gratuity? Do you set it aside, or do you invoice me for it at the point of exit?
6. How do you hit the two working day final settlement rule? Walk me through your exit process.
7. Which states are you registered in for professional tax and shops and establishments?
8. What is your notice period to terminate the agreement, and what happens to my employees if I leave?
9. What happens to my employees if you go out of business?
10. What exactly does the FX conversion cost me? Give me the spread, not just the wire fee.
11. Can I speak to two of your clients who hire the same kind of role I do?

One more. Ask what they charge for a mid-month exit and a mid-month join in the same cycle. It is a small question that tells you whether you are talking to a payroll operator or a sales team.

What an EOR will not do for you

• It will not manage the person. Performance, direction, culture and retention stay yours. An EOR that promises to manage your employee is describing outsourcing, which is a different product.
• It will not cover you for bad decisions. If you fire someone in a way that breaks the law, the EOR executes it, but the decision was yours and the liability follows the conduct.
• It will not remove PE risk entirely. See above. The structure helps a lot. Your behaviour still matters more.
• It will not sponsor visas by default. An EOR employs Indian residents. Bringing a foreign national into India is a different exercise.
• It will not fix a salary you got wrong. If you underpay against the Indian market, the person leaves. No provider fixes that.