India Employment Law for Foreign Companies: A 2026 Compliance Guide

A foreign company employing staff in India must comply with the same statutory framework as a domestic employer, now set by India's four Labour Codes (in force since 21 November 2025): Provident Fund (PF), Employees' State Insurance (ESI), gratuity, Tax Deducted at Source (TDS), state professional tax, and the Shops & Establishments Act, plus contract, notice and IP rules. You do not need an Indian entity to do this — an Employer of Record can carry these obligations on your behalf — but the obligations themselves are non-negotiable, and getting them wrong creates back-pay, penalty and reclassification risk. This guide explains each one in plain terms.

This is general information, not legal advice. For a specific situation, confirm with a qualified India employment adviser or an EOR that carries the compliance.

What are India's Labour Codes, and what changed for foreign employers?

India's four Labour Codes (the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020) took effect on 21 November 2025, replacing 29 older central labour laws (Press Information Bureau). Every obligation in this guide now sits under one of them. For a foreign company hiring a few engineers, the changes that matter most are a single definition of "wages", gratuity for fixed-term employees after one year, and a two-working-day deadline for final wages when someone leaves.

Implementation is still rolling out. Central rules under all four Codes were notified in May 2026; states are notifying their own rules, and until they do, existing state rules continue where they're consistent with the Codes. For a private tech employer the state is usually the "appropriate government", so state rules govern procedure. State Shops & Establishments Acts were not folded into the Codes and still govern much of leave and working hours for office staff.

What counts as "wages" now (the 50% rule)?

Under the Codes, "wages" means basic pay plus dearness allowance (and any retaining allowance). If allowances make up more than half of total pay, the excess is added back, so gratuity and other statutory payments are calculated on at least half of total remuneration. Excluded items such as HRA, conveyance, statutory bonus, overtime and employer PF contributions count towards that test; performance incentives, ESOPs and reimbursements are not wages at all. The Codes don't require basic pay to be 50% of CTC: the 50% figure is a calculation rule for statutory payments, not a pay-structure mandate. The Ministry of Labour and Employment FAQs give a worked example: on total pay of ₹76,000 with basic plus DA of ₹20,000 and allowances of ₹40,000, allowances exceed half of total pay (₹38,000) by ₹2,000, so statutory wages become ₹22,000.

The statutory obligations, one by one

Provident Fund (PF)

A retirement-savings scheme administered by the EPFO, now governed by the Code on Social Security, 2020 (which replaced the EPF Act, 1952). From 17 September 2026, the wage ceiling for mandatory PF coverage is ₹25,000 a month, and employer and employee each contribute 12% (see the EPFO contribution rates for the EPS, EDLI and admin split). If contributions are made only up to the ceiling, that's up to ₹3,000 a month from the employer, which keeps the absolute cost modest for higher software salaries. EPFO is still issuing the implementing rules, so check current figures in SynkPay's India employee cost calculator. PF must be deposited monthly (the long-standing due date is the 15th of the following month; confirm it as EPFO issues the new rules), and registration is mandatory where applicable.

Employees' State Insurance (ESI)

A health-insurance and social-security scheme run by ESIC under the Code on Social Security, 2020, applicable to employees earning up to INR 21,000/month, now assessed on the Code's wage definition. Where it applies, the employer contributes 3.25% and the employee 0.75%. Most software engineers earn above the ceiling, so ESI often doesn't apply to them — but it does for lower-paid support and operations staff.

Gratuity

Gratuity is now governed by the Code on Social Security, 2020 (which replaced the Payment of Gratuity Act, 1972): 15 days' wages for each completed year of service, payable after five years for permanent employees and after one year for fixed-term employees (pro rata), capped at ₹20 lakh. It is calculated on the last drawn wage as defined by the Code, so the 50% rule above applies, and works out to about 4.81% of wages per month of service. The five-year condition is waived on death or disablement. Gratuity must be paid within 30 days of becoming payable; employers typically provision for it in their accounts and pay it when an eligible employee leaves.

Tax Deducted at Source (TDS)

Under the Income-tax Act, 2025, which came into force on 1 April 2026 and replaced the 1961 Act, employers must withhold income tax from salaries each month, deposit it with the tax authorities by the prescribed monthly due date, and issue employees an annual certificate of tax deducted, which is their proof of tax paid. Under the 1961 Act the deposit was due by the 7th of the following month and the certificate (Form 16) by 31 May; check the current due dates and form names under the 2025 Act and its rules before relying on them.

Professional tax

A state-level tax on employment, levied by states such as Karnataka, Maharashtra and Tamil Nadu (some states don't levy it at all). Amounts are small and capped annually, but the employer must deduct and remit it in each applicable state.

Shops & Establishments Act

A state-level law governing working hours, leave, holidays and conditions of employment. It was not folded into the Labour Codes. Registration and compliance are state-specific, which is why multi-city India teams have a multi-state compliance layer.

Contract, notice and termination

India employment is contract-based, and the contract must reflect statutory minimums. Key points for foreign employers:

• Appointment letters: mandatory for every employee under the OSH Code.

• Notice period: resignation notice is set by the contract, not by the Codes: commonly one to three months; many employers standardise at one month for predictability.

• Salary timing: monthly wages must be paid before the 7th of the following month.

• Changing terms: changing wages, hours, leave or other listed service conditions for workers requires 21 days' notice.

• Termination: must follow the contract and the Industrial Relations Code, 2020 (which replaced the Industrial Disputes Act, 1947). Many individual-contributor engineers can count as "workers" under the Code (people in managerial or administrative roles, and supervisors earning over ₹18,000 a month, are excluded). Retrenching a worker with a year or more of service requires one month's written notice or pay in lieu, retrenchment compensation of 15 days' average pay per completed year, notice to the appropriate government, and a further 15 days' wages paid into the Worker Re-skilling Fund. Arbitrary termination invites disputes.

• Fixed-term employees: must get the same hours, wages and benefits as comparable permanent staff, and qualify for pro-rata gratuity after one year.

• Full and final settlement: when an employee leaves, the Code on Wages requires outstanding wages to be paid within two working days; gratuity, where due, follows within 30 days. Settle accrued leave and other contractual dues in the same process.

Intellectual property

For software and product companies this is critical. Work product does not automatically vest in a foreign company unless the contract assigns it. A compliant India employment contract should include automatic IP assignment, confidentiality, trade-secret, non-solicitation and return-of-materials clauses enforceable under Indian law (including the Copyright Act, 1957). Treat these as standard contract terms, not optional extras.

How foreign companies comply without an entity

There are three routes — covered in detail in EOR vs contractor vs entity in India:

1. Your own Indian entity — full control, but $15,000–50,000 to set up, $3,000–8,000/month to run, and you administer every obligation above.

2. An Employer of Record (EOR) — the EOR is the legal employer and carries all the statutory compliance, while the person works for you. No entity required. Rule of thumb: at a flat $349 per head, your own entity usually only pays off somewhere around 15–25 India employees, depending on what the entity costs you to run. See the best EOR companies in India, or a specialist such as SynkPay's India EOR service, which has run a directly owned India entity since 2016 and handles PF, ESI, gratuity, TDS and IP clauses as standard.

3. A PEO (co-employment) — for companies that already have an Indian entity but want the back-office compliance run for them. US-style PEO doesn't exist in the same form under Indian law, so most India "PEO" offers are EOR or HR outsourcing underneath, and without an Indian entity you need an EOR; see PEO services in India.

FAQ

What employment laws must a foreign company follow to hire in India?

Under India's four Labour Codes, in force since 21 November 2025, the core obligations are Provident Fund (PF), Employees' State Insurance (ESI) where applicable, gratuity, Tax Deducted at Source (TDS), state professional tax, and the Shops & Establishments Act, plus compliant employment contracts, notice/termination rules and IP assignment. These apply whether you employ through your own entity or an Employer of Record — the obligations are the same; only who carries them differs.

Can a foreign company hire in India without registering an entity?

Yes. An Employer of Record becomes the legal employer in India on your behalf and carries all statutory compliance — PF, ESI, professional tax, TDS, gratuity when it falls due and compliant contracts — while the worker performs their job for your company. You avoid the cost of an Indian subsidiary (typically $15,000–50,000 upfront plus $3,000–8,000 a month) and the three to six months it takes before one can operate. It's the standard route for foreign companies making their first India hires; at a flat $349 per head, your own entity usually only pays off somewhere around 15–25 India employees.

What are the employer's statutory costs when hiring in India?

Provident Fund (12% of wages from the employer; from 17 September 2026 the mandatory-coverage wage ceiling is ₹25,000 a month, so up to ₹3,000 a month if contributions are made only up to the ceiling), PF admin and EDLI charges, ESI (3.25% employer share where applicable, for employees earning up to ₹21,000 a month), and state professional tax (small, capped, and deducted from the employee's pay). For typical software salaries, recurring employer statutory costs (PF, PF admin and EDLI charges, and ESI where applicable) usually come to under 5% of gross salary, with the share falling as pay rises; at or below the ESI ceiling they are about 9–10%. Gratuity should be budgeted on top as a monthly provision: 15 days' wages per completed year (about 4.81% of wages as defined by the Code, so roughly 2.4% of gross when Code wages are 50% of gross), payable after five years for permanent employees or one year for fixed-term employees. SynkPay invoices it only when it falls due.

Does a foreign company automatically own IP created by its India employees?

Not automatically — it depends on the contract. The employment agreement must include explicit IP assignment, confidentiality and trade-secret clauses enforceable under Indian law (including the Copyright Act, 1957) for work product to vest in your company. Always confirm these clauses are present and standard before an India employee begins work, especially for software and product roles.

What happens if a foreign company misclassifies an India worker as a contractor?

Misclassification exposes the company to back-dated PF and ESI contributions, gratuity, notice pay, unpaid statutory benefits and penalties, and potentially tax liability. India has strong precedent for reclassifying contractors who function as employees (fixed hours, your systems, no other clients). For ongoing full-time roles, employing the person through an EOR or your own entity removes this risk.