India Hiring & Compliance
India hiring and statutory compliance, answered straight.
The exact rules for hiring, paying, and staying compliant in India. Every figure verified and dated. Updated as the law changes.
Last updated: May 2026What is the employer PF contribution rate in India?
The employer contributes 12% of an employee's wages to PF, matching the employee's own 12%.
Of the employer's 12%, 8.33% goes to the Employees' Pension Scheme (capped at ₹1,250 per month, since the pension wage ceiling is ₹15,000) and the remaining 3.67% goes to the EPF account. The employer also pays a small admin and insurance charge on top.
PF is mandatory for establishments with 20 or more employees. The wage ceiling for compulsory contribution is ₹15,000 per month. Above that, the employer can contribute on actual wages or cap it at ₹15,000.
One thing changed in 2025. Under the new Code on Wages, basic pay must be at least 50% of total CTC. For employees whose basic was previously kept low, this raises the PF base and the contribution that goes with it. You can model the full cost with our India hiring cost calculator.
What is the 50% wage rule under India's new labour codes?
The 50% wage rule means basic pay plus dearness allowance must make up at least half of an employee's total CTC.
If allowances like HRA and special allowance exceed 50% of CTC, the excess is added back to "wages" for calculating PF, gratuity, and other statutory benefits. This came into force with the labour codes on 21 November 2025.
For years, Indian employers kept basic pay at 30 to 40% of CTC to reduce statutory costs. That model is no longer allowed. The practical effect is higher PF and gratuity for many employees, slightly lower take-home, and higher employer statutory cost even when headline CTC stays the same.
If you are budgeting an India hire, model the statutory cost on a 50% basic, not a low one.
What is the ESI threshold in India in 2026?
ESI applies to employees earning ₹21,000 or less in gross wages per month, as of May 2026.
The employer contributes 3.25% and the employee 0.75%. The threshold is ₹25,000 for employees with a disability. ESI is mandatory for establishments with 10 or more employees in covered areas.
Worth flagging: this ceiling is under active government review. In January 2026 the Supreme Court directed the EPFO and the Centre to decide on revising the linked PF wage ceiling within four months. A change to the ESI cap could land in 2026, so treat ₹21,000 as current but not permanent.
For most professional hires through an EOR, salaries sit above ₹21,000 and ESI does not apply.
How much does an EOR cost per employee in India?
Most EOR providers in India charge a flat monthly fee per employee, typically a few hundred US dollars per employee per month.
Pricing models split two ways. A flat per-employee fee is the most common and the most predictable. Some providers charge a percentage of the employee's salary, which gets expensive as salaries rise. On top of the EOR fee sits the employee's actual salary plus statutory employer costs (PF, gratuity accrual, insurance), which the EOR passes through.
When you compare quotes, separate the EOR service fee from the pass-through statutory cost. A low headline fee with a percentage model can cost more than a higher flat fee.
Saileor's EOR pricing starts at $99 per employee per month, a flat fee with no setup cost and no lock-in. That covers processing, compliance, the employee portal, and reporting.
How is gratuity calculated in India?
Gratuity equals last drawn wages multiplied by 15, multiplied by years of service, divided by 26.
"Wages" means basic pay plus dearness allowance. The formula is unchanged. The maximum tax-exempt amount for private sector employees is ₹20 lakh under Section 10(10). Employers must pay gratuity within 30 days of it becoming due, with 10% annual interest on delays.
The labour codes changed who qualifies. Permanent employees still need five years of continuous service. But fixed-term employees are now eligible after just one year, down from five. The 50% wage rule also raises the gratuity base for employees who previously had low basic pay.
Which Indian states levy professional tax?
Professional tax is levied by the state where work is performed, and major states that levy it include Maharashtra, Karnataka, Tamil Nadu, Telangana, Andhra Pradesh, West Bengal, Gujarat, Kerala, and Madhya Pradesh.
It is capped at ₹2,500 per person per year under Article 276 of the Constitution. States that do not levy it include Delhi, Haryana, Punjab, Rajasthan, and Himachal Pradesh.
One trap costs companies real money: professional tax follows the state where the employee actually works, not where the company is registered. A Delhi-registered firm with staff working from a Karnataka office must deduct Karnataka PT.
Professional tax is the single most error-prone item in Indian payroll, and state rules shift. Always confirm against the current state notification before you run payroll. We do this every cycle.
How fast must full and final settlement be paid in India now?
Under the new Code on Wages, full and final settlement must be paid within two working days of an employee's last working day.
This applies to resignation, termination, retrenchment, and dismissal. It is a major change. Earlier practice often stretched final payouts to 30 or 45 days.
The two-day clock covers settlement of wages. Other exit items like gratuity follow their own timelines (gratuity within 30 days). The shift means exit processing has to be ready before the last working day, not started after it.
If your current provider still works on a 30-day F&F cycle, they are running on pre-2025 rules.
What is the difference between EOR, AOR, and payroll outsourcing in India?
An EOR legally employs your workers for you, an AOR engages contractors on your behalf, and payroll outsourcing runs payroll for people you already employ through your own entity.
Use an EOR when you want to hire full-time employees in India but have no legal entity there. The EOR is the legal employer and carries the compliance liability.
Use an AOR when you engage independent contractors or freelancers and need compliant agreements, correct classification, and timely payouts without the misclassification risk.
Use payroll outsourcing when you already have an Indian entity and just want someone to run monthly processing, statutory filings, and employee queries.
The deciding question is simple. No entity and hiring employees, EOR. No entity and engaging contractors, AOR. Have an entity, payroll outsourcing. Not sure which fits? Our EOR matchmaker works it out in six questions.
When must an employer issue Form 16 in India?
Employers must issue Form 16 to employees by 15 June following the end of the financial year.
For the financial year 2025-26, which ended 31 March 2026, Form 16 is due by 15 June 2026. It follows the Q4 TDS return, which is due by 31 May. Failure to issue Form 16 on time attracts a penalty of ₹100 per day under Section 272A(2)(g).
Form 16 has two parts. Part A shows TDS deducted and deposited. Part B shows the salary breakup and deductions. An employee needs both to file an accurate income tax return.
Do I need a legal entity to hire an employee in India?
No. You can hire a full-time employee in India without setting up a legal entity by using an Employer of Record.
Setting up your own Indian entity takes three to six months and meaningful capital, plus ongoing compliance. An EOR lets you hire compliant, full-time staff in days, because the EOR is already the legal employer and handles payroll, statutory filings, and labour law.
An entity makes sense once your India team is large enough that running it directly is cheaper than per-employee EOR fees. Below that, an EOR gets you a compliant hire without the setup. Many companies start with an EOR and move to their own entity later.
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