The Legal Reality: You Can’t Just Wire Money
Many foreign companies assume they can hire someone in India, agree on a monthly payment, and wire it to their bank account. This approach creates problems for both parties:
- The worker has no TDS deducted, complicating their tax filing
- No PF or ESI contributions are made, violating Indian social security law
- The worker has no employment protections (severance, gratuity, leave entitlements)
- The company has no enforceable IP assignment under Indian law
- The arrangement may be deemed disguised employment by Indian tax authorities
To legally employ someone in India, you need a legal entity in India — either your own or through an Employer of Record.
Your Three Options
Option 1: Hire as an Independent Contractor
How it works: You sign a services agreement with an individual in India (or their sole proprietorship/company). They invoice you, you pay the invoice, and they handle their own taxes.
When it works:
- The person genuinely operates independently — multiple clients, sets their own schedule, provides their own equipment
- Project-based or advisory work with clear deliverables
- Short-term engagements
When it doesn’t work:
- The person works exclusively for you, full-time, on an ongoing basis
- You control their schedule, tools, and work methods
- They’re integrated into your team like any other employee
Risk: Worker misclassification. If Indian authorities determine the relationship is actually employment, the company faces back-payment of PF, ESI, and tax obligations, plus penalties. The Indian Supreme Court has established clear tests for distinguishing employees from contractors based on control, integration, and economic dependence.
Option 2: Set Up Your Own Indian Entity
How it works: Register a Private Limited Company in India, hire the person as a direct employee of that entity.
Timeline: 8–16 weeks for entity registration and all statutory registrations.
Best for: Companies committed to India long-term with 15+ employees planned.
Read more: EOR vs Setting Up Your Own Entity in India
Option 3: Use an Employer of Record (EOR)
How it works: The EOR employs the person on your behalf. They handle the employment contract, payroll, tax withholding, statutory benefits, and compliance. You manage the person’s work.
Timeline: 5–10 business days from decision to employee start date.
Best for: Companies hiring 1–20 employees in India who need speed and simplicity.
Step-by-Step: Hiring Through an EOR
Step 1: Select Your EOR Provider
Evaluate providers on:
- India-specific expertise — Do they have their own entity in India? How many Indian employees do they manage?
- State coverage — Are they registered in the states where your employees will work?
- Pricing transparency — Flat fee or percentage? What’s the FX markup?
- Compliance track record — Can they provide references from companies with India EOR employees?
- Onboarding speed — How quickly can they generate contracts and start payroll?
Step 2: Define the Compensation Package
Work with your EOR to structure the CTC. Key decisions:
- Total CTC amount — This is the all-in cost including employer PF, ESI (if applicable), and gratuity
- Basic salary percentage — Typically 40–50% of CTC. Higher basic = higher PF savings but lower take-home
- Variable pay or bonus — If applicable, define the structure and payout schedule
- Benefits — Group health insurance, meal allowance, work-from-home allowance
Important: Always discuss compensation in CTC terms with Indian candidates. They expect it and will calculate their take-home from it.
Step 3: Employment Contract Generation
The EOR creates an employment contract that includes:
- Role, responsibilities, and reporting structure
- CTC breakdown with all components
- Leave policy (earned leave, sick leave, casual leave) compliant with the applicable state’s Shops & Establishments Act
- Probation period (typically 3–6 months in India)
- Notice period (typically 1–3 months, matching industry standards)
- IP assignment clause
- Confidentiality and non-disclosure provisions
- Termination clauses aligned with Indian labour law
Step 4: Employee Onboarding
Once the contract is signed, the EOR handles:
Documentation collection:
- PAN card (mandatory for TDS)
- Aadhaar card (for PF KYC linking)
- Bank account details (for salary credit)
- Previous employer Form 12B (for TDS continuity, if mid-year joining)
- Investment declaration (for TDS calculation under old regime)
- Cancelled cheque or bank statement
Statutory registrations:
- UAN generation or linking for Provident Fund
- ESIC registration if gross salary is ≤ ₹21,000/month
- Professional Tax enrollment in the applicable state
Welcome and orientation:
- Employment letter issuance
- Benefits enrollment
- Payroll system setup
Step 5: Ongoing Management
After onboarding, your monthly responsibilities are minimal:
- Approve payroll — Review the EOR’s payroll summary and approve
- Manage the employee’s work — Assign tasks, provide feedback, conduct reviews
- Communicate leave and attendance — Coordinate with the EOR on any LOP or schedule changes
- Annual salary revisions — Work with the EOR to implement raises (typically in April, at the start of India’s financial year)
The EOR handles everything else: monthly payroll processing, statutory filings, tax deposits, compliance renewals, and employee queries about payslips or PF.
Onboarding Timeline: What to Expect
| Day | Activity |
|---|---|
| Day 1 | EOR agreement signed, employee details submitted |
| Day 2–3 | Employment contract drafted and sent to employee |
| Day 3–5 | Employee signs contract, submits documents |
| Day 5–7 | Statutory registrations initiated (PF, PT) |
| Day 7–10 | Payroll system setup complete, employee active |
| Day 30 | First salary processed |
Total: 5–10 business days from engagement to employee start date.
Documents Your Indian Employee Will Need From You
While the EOR handles the legal employment, your employee will still expect certain things from your company:
- Offer letter or role confirmation with title, responsibilities, and reporting line
- Equipment — Laptop, monitors, peripherals (many EOR providers can procure and ship locally)
- Software access — Email, Slack, project management tools, code repositories
- Team introduction — Buddy system, onboarding call with the team
- Work-from-home setup — Many Indian professionals work remotely. Consider a one-time WFH setup allowance
Tax Implications for Your Company
Using an EOR in India generally does not create a Permanent Establishment (PE) for your company in India, because the EOR is the legal employer and the employees are on the EOR’s payroll. However, tax rules around PE are complex and depend on your home country’s tax treaty with India.
Key considerations:
- The EOR’s invoice to you is a business expense, deductible in your home jurisdiction
- No Indian corporate tax obligation if there’s no PE
- Transfer pricing rules generally don’t apply since there’s no related-party transaction (the EOR is a third party)
- Consult a cross-border tax advisor if you have doubts about PE risk
Common Questions
Can I hire interns through an EOR?
Yes, though the terms differ. Internships in India typically involve a fixed stipend, shorter duration (3–6 months), and fewer statutory benefits. Most EOR providers can accommodate intern engagements.
What about employee IP rights?
The EOR employment contract includes an IP assignment clause that transfers all work product rights from the employee to the EOR, and from the EOR to your company. This creates an enforceable chain of IP ownership under Indian law.
Can the employee work from any state?
Yes, but the EOR needs to be registered in that state for Professional Tax and Shops & Establishments purposes. Confirm state coverage with your EOR provider before approving an employee’s work location.
What if I need to terminate the employee?
Indian labour law requires following due process for termination: documented performance issues (for cause), notice period compliance, and full-and-final settlement within the prescribed timeline. The EOR manages the legal aspects, but you make the decision and provide the rationale.
How do I handle salary revisions?
Coordinate with your EOR. They’ll restructure the CTC, update statutory contributions, adjust TDS calculations, and issue a revised appointment letter. Most companies in India do annual appraisals in March/April aligned with the financial year.
Key Takeaways
- You need a legal entity in India (your own or an EOR) to legally employ someone
- An EOR gets you from zero to first employee in 5–10 business days
- Always discuss compensation in CTC terms with Indian candidates
- The EOR handles compliance, payroll, taxes, and statutory benefits
- Your role is managing the employee’s work, approving payroll, and making HR decisions
- Verify your EOR’s state-level coverage before finalizing employee work locations