India HR and Payroll Glossary
Clear definitions of every term you need to know when hiring employees in India.
A
AB5 (California Assembly Bill 5)
AB5 is a California statute, signed September 18, 2019 and effective January 1, 2020, that codified the ABC test for worker classification under the state's wage orders, Labor Code, and Unemployment Insurance Code.
ABC Test
The ABC Test is a three-prong worker classification test used by many US states to determine whether a worker is an employee or an independent contractor, with the hiring entity bearing the burden to prove all three prongs.
Accountable Plan
An accountable plan is an employer reimbursement or allowance arrangement that meets three IRS conditions in Publication 463: the expense has a business connection, the employee adequately accounts for it within a reasonable period of time, and any excess reimbursement is returned within a reasonable period of time. Reimbursements paid under such a plan are not treated as taxable wages.
ACH (Automated Clearing House)
The Automated Clearing House is the batched US electronic funds-transfer network governed by Nacha rules, used for direct deposit of payroll, vendor and contractor payments, and consumer debits, with a Same Day ACH per-payment limit of $1 million effective March 18, 2022.
ACH Transfer
An ACH transfer is an electronic credit or debit moved through the US Automated Clearing House network, a nationwide batch system that depository institutions use to send each other payments such as direct-deposit payroll and bill payments. The Federal Reserve describes the ACH as a nationwide network of depository institutions exchanging batches of electronic credit and debit transfers, and processing follows the Nacha Operating Rules.
Agent of Record (AOR)
An Agent of Record, or AOR, is a provider that engages, contracts with, and pays independent contractors on a company's behalf and takes on the classification and compliance responsibility for those engagements. It is distinct from an Employer of Record, which legally employs workers, and from a PEO, which co-employs a company's existing staff.
AML (Anti-Money Laundering)
Anti-Money Laundering (AML) is the body of US laws, regulations, and supervisory practices, anchored in the Bank Secrecy Act, that requires financial institutions and certain businesses to detect, prevent, and report the use of the financial system for money laundering, terrorist financing, and other illicit activity.
Apprentices Act, 1961
The Apprentices Act, 1961 governs apprenticeship training in India, requiring designated and optional trades to engage apprentices at prescribed stipend rates and ratios under the National Apprenticeship Promotion Scheme.
B
B-Notice
A B-notice is the backup withholding notice a payer sends a payee after the IRS issues a CP2100 or CP2100A, which flags that a name and TIN combination on a filed information return does not match IRS records. A First B-notice asks the payee for a correct TIN on a Form W-9, and a Second B-notice within a three-calendar-year period requires the payee to validate the TIN with the SSA or IRS.
Backup Withholding
Backup withholding is a 24 percent federal income tax that a US payer must withhold from certain reportable payments when the payee fails to provide a correct TIN or when the IRS notifies the payer that the payee is delinquent on prior reporting.
Basic Salary
Basic salary is the core fixed component of an Indian salary structure, typically 40-50% of CTC, that determines PF contributions, gratuity, HRA exemption, and other statutory calculations.
Beneficial Owner
Under the US Corporate Transparency Act, a beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls not less than 25 percent of its ownership interests, with the definition codified at 31 USC 5336(a)(3) and implemented through FinCEN regulations.
Beneficial Ownership Information Report (FinCEN)
The Beneficial Ownership Information (BOI) report is the filing required by the US Corporate Transparency Act under which reporting companies disclose the identity of their beneficial owners and company applicants to the Financial Crimes Enforcement Network (FinCEN), with scope narrowed by a FinCEN interim final rule of 21 March 2025 to apply only to foreign entities registered to do business in a US State or Tribal jurisdiction.
Bonus Calculation Formula
Statutory Bonus = Qualifying Wages x Bonus Percentage (8.33% to 20%), with qualifying wages capped at ₹7,000/month and eligibility limited to employees earning up to ₹21,000/month.
BSA Reporting (Bank Secrecy Act)
BSA reporting is the set of forms US financial institutions and certain non-financial businesses must file under the Bank Secrecy Act (31 USC 5311 et seq.) to record currency transactions, suspicious activity, foreign financial accounts, and cross-border movements of monetary instruments.
C
Change Order
A change order is a written, signed instrument used under a Statement of Work's change-control clause to record an agreed adjustment to scope, schedule, or fees within the SOW's existing structure, typically signed by project-level signatories rather than the original SOW executives, and used for tactical changes that do not require a formal SOW amendment.
Chapter 3 and Chapter 4 Withholding
Chapter 3 and Chapter 4 are the two US withholding regimes that apply to payments to foreign persons. Chapter 3 is NRA withholding under Internal Revenue Code sections 1441 through 1443, on US-source FDAP income. Chapter 4 is FATCA withholding under sections 1471 through 1474, aimed at certain foreign financial institutions and entities. Both generally use a 30 percent rate, and when both could apply, Chapter 4 takes priority.
Co-employment
A workforce arrangement where two or more entities share employer responsibilities and liabilities for the same worker.
Code on Social Security, 2020
The Code on Social Security, 2020 consolidates 9 central social-security laws (EPF, ESI, Gratuity, Maternity Benefit, Building Workers, Unorganized Workers, etc.) into a unified social security framework.
Code on Wages, 2019
The Code on Wages, 2019 consolidates four central labour laws — Payment of Wages, Minimum Wages, Payment of Bonus, and Equal Remuneration Acts — into a single code applicable to all employees regardless of wage threshold.
Common Law Test (Worker Classification)
The Common Law Test is the federal worker classification standard the IRS uses for income tax withholding, FICA, and FUTA, evaluating behavioral control, financial control, and the relationship of the parties.
Common-Law Employee
A common-law employee is a worker whose business has the right to control what will be done and how it will be done, even if the worker has freedom of action. Under the IRS common-law rules the determination weighs three categories of evidence: behavioral control, financial control, and the type of relationship between the parties.
Compliance Calendar
An India payroll compliance calendar is the monthly, quarterly, and annual schedule of statutory filings and remittances an employer must complete — covering PF, ESI, TDS, Professional Tax, and labour returns.
Constructive Receipt
Constructive receipt is the cash-method tax doctrine under which income is treated as received, and therefore taxable, when an amount is credited to the taxpayer's account or made available without substantial restriction, even if the taxpayer has not physically taken possession of it. It fixes the year a cash-basis taxpayer must report income to the period the money first became available.
Contract Labour (Regulation and Abolition) Act, 1970
The Contract Labour (Regulation and Abolition) Act, 1970 regulates engagement of contract labour through registration, licensing, and welfare obligations, with the threshold raised from 20 to 50 workers under the OSH Code, 2020.
Conveyance Allowance
Conveyance Allowance is a salary component paid to cover commuting costs, now fully taxable for most Indian employees after the Rs 1,600 monthly exemption was withdrawn in FY 2018-19.
Correspondent Banking
Correspondent banking is the arrangement under which one bank (the correspondent) holds deposits, makes payments, and provides other services for another bank (the respondent), most often to enable cross-border payments in a currency or jurisdiction the respondent does not directly access, using nostro and vostro accounts to settle the underlying funds.
Cost to Company (CTC)
CTC is the total annual expenditure an employer incurs on an employee, including salary, allowances, benefits, and statutory contributions.
D
DAC7 (EU Directive on Administrative Cooperation)
DAC7 is Council Directive (EU) 2021/514, an amendment to the EU's Directive on Administrative Cooperation that forces digital platform operators to collect and report seller and contractor data to EU tax authorities each year.
Dearness Allowance (DA)
Dearness Allowance is a cost-of-living adjustment paid to employees to offset the impact of inflation, linked to the Consumer Price Index (CPI).
Dearness Relief (DR)
Dearness Relief is a cost-of-living adjustment paid to pensioners and retired employees, mirroring the Dearness Allowance paid to serving employees and revised in line with the Consumer Price Index.
Disregarded Entity
A disregarded entity is a business with a single owner that is not treated as an entity separate from its owner for federal income tax purposes. This is the default classification for a domestic single-member LLC that does not elect corporate treatment, so the LLC's activity is reported directly on the owner's return.
Double Taxation
Double taxation is when the same income is taxed by two jurisdictions. For cross-border income, it is relieved mainly by income tax treaties, which allocate taxing rights and reduce withholding, and by the foreign tax credit, which lets a person offset US tax with foreign income tax already paid on the same income.
E
Economic Reality Test
The Economic Reality Test is the worker classification standard the US Department of Labor uses under the Fair Labor Standards Act, examining whether a worker is economically dependent on the hiring entity or in business for themselves.
Effectively Connected Income (ECI)
Effectively Connected Income (ECI) is income a foreign person earns from a US trade or business, taxed on a net basis at graduated rates rather than the flat 30 percent that applies to FDAP income, and documented to a payer on Form W-8ECI to remove it from NRA withholding.
EIN (Employer Identification Number)
An Employer Identification Number (EIN) is a federal tax identification number that the IRS issues to identify a business entity. A US company generally needs an EIN before it can hire employees, run payroll, withhold and deposit employment taxes, and file the information returns the IRS requires.
EIN (Employer Identification Number)
An EIN is a nine-digit federal tax identification number assigned by the IRS to a business entity, used on payroll, 1099, 1042 and other federal tax filings.
Electronic Challan-cum-Return (ECR)
ECR is the monthly digital filing employers submit to EPFO containing member-wise wage and contribution data, replacing the paper Form 5/10/12A/3A/6A.
Employee Deposit Linked Insurance (EDLI)
EDLI is a statutory life insurance scheme under EPFO funded by 0.5% employer contribution on basic salary (capped at ₹15,000), paying up to ₹7 lakh on death of an active EPF member.
Employee State Insurance (ESI)
ESI is a mandatory social security and health insurance scheme for Indian employees earning up to ₹21,000 per month, funded by employer and employee contributions.
Employee Stock Option Plan (ESOP)
An ESOP is a compensation plan under which Indian companies grant employees the right to purchase company shares at a predetermined exercise price after a vesting period.
Employees' Pension Scheme (EPS)
EPS-1995 is a statutory pension scheme under EPFO providing monthly pension to members from age 58, with employer contribution of 8.33% of wages capped at ₹15,000.
Employees' Provident Fund Organisation (EPFO)
EPFO is the statutory body under the Ministry of Labour & Employment that administers India's three Provident Fund schemes — EPF, EPS, and EDLI — covering over 70 million members.
Employer of Record (EOR)
An EOR is a third-party organization that legally employs workers on behalf of another company, handling payroll, taxes, benefits, and compliance in the worker's country.
EPS Pension Formula
EPS pension is calculated as (Pensionable Salary x Pensionable Service) / 70, with pensionable salary capped at ₹15,000 unless a higher pension option was exercised.
Equal Remuneration Act, 1976
The Equal Remuneration Act, 1976 prohibits gender-based discrimination in wages and recruitment for the same or similar work. It is now subsumed into the Code on Wages, 2019, which preserves and extends its protections.
ESIC Insurance Number (IP Number)
An ESIC IP Number (Insured Person Number) is the unique 10-digit identifier issued to every employee covered under the Employees' State Insurance Act once registered by their employer.
ESIGN Act (Electronic Signatures in Global and National Commerce Act)
The ESIGN Act is the US federal statute, codified at 15 USC 7001 et seq. and enacted in 2000, that gives electronic signatures and electronic records the same legal effect as their paper equivalents for transactions in or affecting interstate or foreign commerce, subject to specific consumer-consent and retention requirements.
Estimated Taxes
Estimated taxes are the periodic payments the IRS uses to collect income tax, and other taxes such as self-employment tax, on income that is not subject to withholding. Individuals, including sole proprietors, partners, and S corporation shareholders, generally pay estimated tax in four installments across the year using Form 1040-ES when they expect to owe enough tax at filing.
EU AI Act
The EU AI Act, Regulation (EU) 2024/1689, is the first comprehensive horizontal regulation of artificial intelligence systems, classifying systems by risk and imposing the heaviest obligations on prohibited and high-risk uses including most HR and worker-management AI.
EU Platform Work Directive
The EU Platform Work Directive (Directive (EU) 2024/2831) is a 2024 EU law that creates a rebuttable legal presumption of employment for platform workers and adds transparency rules for algorithmic management of workforce decisions.
Exempt vs Non-Exempt Employee
Under the Fair Labor Standards Act, non-exempt employees are entitled to minimum wage and overtime pay, while exempt employees are not. An employee is exempt only if they are paid on a salary basis at or above the threshold and their job duties meet one of the specific exemption tests. Job titles alone never decide the question.
F
Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) is the US federal law that sets minimum wage, overtime pay, recordkeeping, and youth employment standards for covered workers. Its protections reach employees, not independent contractors, which makes worker classification the gateway question for FLSA coverage.
FATCA (Foreign Account Tax Compliance Act)
FATCA is a 2010 US law (sections 1471 to 1474 of the Internal Revenue Code, Chapter 4) that requires foreign financial institutions and certain non-financial foreign entities to identify US-owned accounts and report them to the IRS, backed by a 30 percent withholding tax on non-compliant payees.
FATF (Financial Action Task Force)
The Financial Action Task Force is the intergovernmental body that sets the global standards for combating money laundering, terrorist financing, and proliferation financing, embodied in its 40 Recommendations and enforced through mutual evaluations and the public grey and black lists.
FCPA (Foreign Corrupt Practices Act)
The Foreign Corrupt Practices Act, codified at 15 USC 78dd-1 et seq., is the US law that prohibits US persons and US-listed issuers from corruptly paying foreign officials to obtain or retain business, and requires public companies to maintain accurate books and adequate internal accounting controls.
FDAP Income
FDAP income is fixed, determinable, annual, or periodical income from US sources, such as interest, dividends, rents, royalties, and compensation for services, that is paid to a foreign person and is subject to 30 percent NRA withholding on the gross amount unless a treaty applies.
FICA (Federal Insurance Contributions Act)
FICA is the federal payroll tax that funds Social Security and Medicare. On the employee side it is 6.2 percent for Social Security up to the annual wage base plus 1.45 percent for Medicare, for 7.65 percent total, and the employer matches each portion, so the combined rate is 15.3 percent. A 0.9 percent Additional Medicare Tax applies to high earners.
Fixed Term Employment
A time-bound employment contract where the employee receives all statutory benefits from day one, with the relationship ending automatically on the specified date.
Food Allowance and Meal Coupons
Meal coupons (Sodexo, Zaggle, Zeta) are non-transferable food vouchers exempt as a perquisite under Rule 3(7)(iii); the per-meal limit was raised from Rs 50 to Rs 200 in the Income-Tax Rules, 2026.
Force Majeure
Force majeure is a contractual doctrine that excuses or suspends a party's contractual performance when an extraordinary event beyond the party's reasonable control prevents performance, with US contracts relying on negotiated force-majeure clauses backed by the common-law doctrines of impracticability (Restatement (Second) of Contracts 261-262) and, for sale-of-goods contracts, the Uniform Commercial Code 2-615.
Foreign Source Income
Foreign source income is income assigned to a non-US source under the US source rules, and for a nonresident alien it is generally not subject to US tax, NRA withholding, or Form 1042-S reporting, which is why services performed entirely outside the US by a foreign contractor fall outside US withholding.
Foreign Tax Credit (FTC)
The foreign tax credit is the main US mechanism for relieving double taxation. It lets a US taxpayer credit income taxes paid or accrued to a foreign country against the US tax owed on that same income, dollar for dollar. Individuals, estates, and trusts claim it on Form 1116, and corporations claim it on Form 1118.
Form 1040-NR
Form 1040-NR is the US Nonresident Alien Income Tax Return, the federal return a nonresident alien files to report US-source income and income effectively connected with a US trade or business, and to settle tax owed beyond what was already withheld at the source.
Form 1042
Form 1042 is the IRS Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. A withholding agent files one Form 1042 each year to report and reconcile the tax it withheld under chapters 3 and 4 of the Internal Revenue Code on US-source income paid to foreign persons.
Form 1042-S
Form 1042-S is the IRS information return a US withholding agent files to report US-source income paid to a foreign person and the tax withheld under chapters 3 and 4 of the Internal Revenue Code.
Form 1096
Form 1096 is the Annual Summary and Transmittal of U.S. Information Returns, the paper cover sheet a filer submits to the IRS with paper copies of information returns such as the 1099 series. It is not used when those returns are filed electronically.
Form 1099-K
Form 1099-K is the IRS information return on which payment settlement entities, including third-party settlement organizations, report gross payment-card and third-party network transactions for goods and services.
Form 1099-MISC
Form 1099-MISC is the IRS information return a US business files to report rents, royalties, prizes, attorney payments and other miscellaneous income paid to US persons during a calendar year.
Form 1099-NEC
Form 1099-NEC is the IRS information return a US business files to report $600 or more of nonemployee compensation paid to a US independent contractor during a calendar year.
Form 10F
Form 10F is a self-declaration non-residents e-file on the Indian Income Tax portal to supply information needed to claim DTAA benefits when their Tax Residency Certificate is incomplete.
Form 12BA
Form 12BA is a statement of perquisites, profits in lieu of salary, and other fringe benefits issued by employers to employees alongside Form 16 for tax year reporting.
Form 12BB
Form 12BB is the investment and tax declaration form an employee submits to their employer to claim deductions and exemptions while computing TDS on salary.
Form 15CA
Form 15CA is an online declaration filed on the Income Tax e-filing portal by any person remitting funds to a non-resident, capturing remittance details and the basis for tax withholding under Section 195.
Form 15CB
Form 15CB is a chartered accountant's certificate under Rule 37BB certifying the tax withholding on a foreign remittance to a non-resident exceeding ₹5 lakh in a financial year.
Form 16
Form 16 is an annual TDS certificate issued by an employer to each employee, summarizing salary paid and income tax deducted during the financial year.
Form 16A
Form 16A is a TDS certificate issued for non-salary payments such as rent, professional fees, interest, and contractor payments where tax is deducted under Sections 194A, 194C, 194I, or 194J.
Form 19 (PF Withdrawal)
Form 19 is the EPF withdrawal claim form used by employees to withdraw their Provident Fund balance after leaving an employer or upon retirement.
Form 2210
Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, is the IRS form used to figure whether a taxpayer owes a penalty for paying too little estimated tax during the year and, if so, how much. It matters most to self-employed people such as independent contractors, who pay tax in quarterly installments instead of through employer withholding.
Form 24Q
Form 24Q is the quarterly TDS return that employers in India must file with the Income Tax Department reporting tax deducted from employee salaries under Section 192.
Form 26AS
Form 26AS is a consolidated annual tax statement showing all tax deducted, tax collected, advance tax, and self-assessment tax credited against a taxpayer's PAN, available on the income tax e-filing portal.
Form 26Q
Form 26Q is the quarterly TDS return Indian deductors file to report tax deducted on non-salary payments to residents such as contractor fees, professional fees, rent, interest and commission.
Form 27Q
Form 27Q is the quarterly TDS return Indian deductors file to report tax deducted on payments to non-residents and foreign companies under Section 195 of the Income Tax Act.
Form 8233
Form 8233 is the IRS form a nonresident alien individual gives a US withholding agent to claim a tax treaty exemption from withholding on compensation for personal services performed in the United States.
Form 8832 (Entity Classification Election)
Form 8832 is the IRS form an eligible entity uses to elect how it will be classified for federal tax purposes, as a corporation, a partnership, or an entity disregarded as separate from its owner. It is the form behind the so-called check-the-box election.
Form 8919
IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages, is filed by a worker who was treated as an independent contractor but believes they were an employee. It figures and reports the worker's share of Social Security and Medicare tax that an employer should have withheld but did not.
Form 945
Form 945, Annual Return of Withheld Federal Income Tax, is the annual return a payer files to report federal income tax withheld from nonpayroll payments, most commonly backup withholding, the 24 percent withheld when a payee fails to furnish a correct TIN.
Form SS-4
Form SS-4 is the IRS Application for Employer Identification Number (EIN). A US business files it to obtain the nine-digit EIN it uses to run payroll, deposit employment taxes, and file information returns such as Form 1099-NEC.
Form SS-8
Form SS-8 is the IRS form titled Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Either a worker or the firm that engages them can file it to ask the IRS to decide whether the worker is an employee or an independent contractor.
Form W-2
Form W-2, Wage and Tax Statement, is the IRS information return a US employer files and furnishes for each employee to report wages paid and the income, Social Security, and Medicare taxes withheld during the calendar year. It is the employee counterpart to Form 1099-NEC, which reports payments to an independent contractor.
Form W-7 (ITIN Application)
Form W-7 is the IRS application a foreign individual files to apply for, renew, or replace an Individual Taxpayer Identification Number (ITIN), the nine-digit tax-processing number issued to people who must file or be reported on a US return but do not qualify for a Social Security number.
Form W-8BEN
Form W-8BEN is the IRS certificate a non-US individual gives a US payer to establish foreign status and claim any reduced withholding under an income tax treaty.
Form W-8BEN-E
Form W-8BEN-E is the IRS certificate a foreign entity gives a US payer to document non-US status, FATCA classification, and any treaty claim on US-source income.
Form W-8ECI
Form W-8ECI is the IRS certificate a foreign person gives a US withholding agent to certify that income is effectively connected with the conduct of a trade or business in the United States, removing it from the flat 30 percent NRA withholding so it is taxed on a net basis and reported on the foreign person's own US return.
Form W-9
Form W-9 is the IRS form a US person gives a payer to certify their taxpayer identification number and avoid 24% backup withholding on reportable payments.
Full and Final Settlement (FnF)
Full and final settlement is the comprehensive financial settlement an employer must complete when an employee exits, covering all pending dues, benefits, and recoveries.
FUTA (Federal Unemployment Tax Act)
FUTA is the federal unemployment tax imposed on employers under the Federal Unemployment Tax Act. According to IRS Topic 759, the rate is 6.0 percent on the first $7,000 of each employee's wages, and employers who pay state unemployment tax on time generally receive a credit of up to 5.4 percent, for a net federal rate of 0.6 percent. It is reported annually on Form 940.
FX Margin
FX margin is the spread that a bank or payment provider adds above the live interbank mid-market rate when converting one currency to another, and it is typically the largest single cost in a cross-border payment, often 1 to 4 percent and frequently disclosed only as a built-in rate rather than a separate fee.
G
Gig Worker (India)
A gig worker in India is defined under Section 2(35) of the Code on Social Security, 2020 as a person who performs work outside a traditional employer-employee relationship, with State-level welfare regimes in Rajasthan and Karnataka.
Governing Law Clause
A governing law clause specifies which jurisdiction's substantive law applies to the interpretation and enforcement of a contract, and under the Restatement (Second) of Conflict of Laws section 187 US courts will generally honour the parties' choice provided the chosen state has a substantial relationship to the parties or the transaction and the choice does not violate a fundamental policy of a state with a materially greater interest.
Gratuity
Gratuity is a lump-sum payment an employer must pay to an employee who has completed five or more years of continuous service, calculated based on last drawn salary and tenure.
Gratuity Calculation Formula
Gratuity = (Last Drawn Salary x 15 x Years of Service) / 26, paid by employers under the Payment of Gratuity Act 1972 with a tax-exempt ceiling of ₹20 lakh.
Green Card Test
The green card test is one of the two IRS tests for US resident-alien status. A foreign individual who is a lawful permanent resident of the US, a green card holder, at any time during the calendar year is generally a US tax resident, taxed on worldwide income, and gives a US payer Form W-9 rather than Form W-8BEN.
Gross Salary
Gross salary is the total compensation an employee earns before any deductions for taxes, provident fund, or other statutory contributions.
Gross-Up
A gross-up is an upward adjustment to a payment so the recipient nets a target amount after taxes or fees are deducted, with the payer absorbing the added cost. The grossed-up figure is found by dividing the desired net by one minus the applicable rate.
H
Hold Period (Payment)
A hold period is the interval between when funds are initiated or received by a payment platform and when those funds become available to the end recipient, typically driven by KYC and AML verification, rolling reserve requirements, and the underlying clearing time of the payment rail (ACH 1 to 3 business days, domestic wire same day, international wire 1 to 5 business days).
House Rent Allowance (HRA)
HRA is a salary component provided to employees to cover rental housing expenses, partially or fully exempt from income tax based on a prescribed formula.
I
IBAN (International Bank Account Number)
An IBAN, or International Bank Account Number, is an internationally standardized identifier for a specific bank account, defined by ISO 13616. It is built from a two-letter country code, two check digits, and a country-specific basic bank account number, and it is widely required to route cross-border transfers in Europe and many other regions.
Income Tax Treaty
A US income tax treaty is a bilateral agreement between the United States and a foreign country that reduces or eliminates US withholding on certain income, allocates taxing rights between the two countries, and lets a treaty-country resident claim a reduced rate or exemption on US-source income through a W-8BEN or Form 8233.
Indemnification Clause
An indemnification clause is a contractual allocation of risk under which one party (the indemnitor) agrees to defend, hold harmless, and reimburse the other party (the indemnitee) for specified categories of losses arising from third-party claims, typically including IP infringement, breach of confidentiality, and breach of law.
Industrial Dispute
An industrial dispute is a disagreement between employers and workers (or between workers themselves) over employment, terms of employment, or working conditions, as defined under Section 2(k) of the Industrial Disputes Act 1947 and now subsumed by the Industrial Relations Code 2020.
Industrial Relations Code, 2020
The Industrial Relations Code, 2020 consolidates Trade Unions Act, Industrial Employment (Standing Orders) Act, and Industrial Disputes Act into a unified framework governing trade unions, dispute resolution, and termination.
Information Return
An information return is a form a payer files with the IRS, and furnishes to the recipient, to report certain payments made during the calendar year. Examples include Form 1099-NEC, 1099-MISC, 1099-K, W-2, and 1042-S. Most paper information returns are submitted to the IRS under a Form 1096 transmittal.
IP Assignment
An IP assignment is a contractual transfer of intellectual property rights (typically copyright, but also patent, trademark, or trade-secret rights) from the creator to another party, which under US copyright law requires a signed writing under 17 USC 204(a) to validly transfer copyright ownership.
IR35 (UK Off-Payroll Working Rules)
IR35 is the UK rule set that treats payments to a contractor's personal service company as employment income when the underlying engagement looks like employment, requiring PAYE deduction by either the contractor's company (Chapter 8) or the end client/fee payer (Chapter 10).
IRS 20-Factor Test
The IRS 20-Factor Test is the framework set out in Revenue Ruling 87-41 that lists twenty common-law factors the IRS historically used to decide whether a worker is an employee or an independent contractor for federal employment tax purposes.
IRS Publication 515
IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, is the annual IRS guide for withholding agents that pay income to foreign persons, covering who must withhold, what income is subject to withholding, the applicable rates, and the reporting obligations under chapters 3 and 4.
ITIN (Individual Taxpayer Identification Number)
An ITIN is a nine-digit tax processing number issued by the IRS to individuals who have a US federal tax filing or reporting requirement but are not eligible for a Social Security Number.
ITIN (Individual Taxpayer Identification Number)
An ITIN is a nine-digit IRS tax processing number issued to individuals who must file or appear on a US federal tax return but are not eligible for a Social Security Number.
L
Labour Welfare Fund
Labour Welfare Fund (LWF) is a statutory contribution collected by state governments from employers and employees to finance welfare activities for workers.
Leave Encashment
Leave encashment is the cash payment an employee receives for unused earned leave, either during employment or at the time of retirement, resignation, or termination.
Leave Encashment Formula
Leave Encashment = (Basic + DA) / 30 x Unused Earned Leave Days, with Section 10(10AA)(ii) tax exemption raised to ₹25 lakh by CBDT Notification 31/2023 dated 24 May 2023.
Leave Travel Allowance (LTA)
Leave Travel Allowance is a salary component that provides tax-exempt reimbursement for domestic travel expenses incurred by an employee during leave.
LTA Block Years
LTA block years are the four-calendar-year periods under Section 10(5) within which a salaried employee can claim tax-exempt domestic travel exemption twice; the current block is 2026-2029.
M
Master Service Agreement (MSA)
A Master Service Agreement (MSA) is a standing contract that establishes the legal and commercial framework between a customer and a service provider, governing all individual projects executed under it through subsequent Statements of Work.
Maternity Benefit
A statutory entitlement under Indian law providing female employees with 26 weeks of paid leave and medical benefits during pregnancy and childbirth.
Medical Allowance (India)
Medical Allowance is a salary cash component for healthcare costs, fully taxable since FY 2018-19 when its Rs 15,000 reimbursement exemption was subsumed into the Standard Deduction.
Mid-Market Rate
The mid-market rate is the midpoint between the bid and ask quotes for a currency pair in the wholesale interbank foreign-exchange market, published as a reference rate by sources such as Reuters, Bloomberg, and the European Central Bank, and used as the unbiased benchmark against which retail FX margin is measured.
Minimum Wage
The legally mandated lowest compensation an employer must pay workers, set by central and state governments in India based on skill level, sector, and geography.
N
National Pension System (NPS)
NPS is a voluntary, defined-contribution retirement savings scheme regulated by PFRDA, available to all Indian citizens aged 18-70, with extra ₹50,000 tax deduction under Section 80CCD(1B).
Net Salary / Take-Home Pay
Net salary is the actual amount an employee receives after all statutory and voluntary deductions are subtracted from gross salary.
New Tax Regime
The new income tax regime in India (default since AY 2024-25) offers lower slab rates with reduced deductions — only Standard Deduction (₹75,000), employer NPS, and a few others apply.
Non-Resident Indian (NRI)
A Non-Resident Indian is an Indian citizen or person of Indian origin whose physical presence in India is below the thresholds set under Section 6 of the Income Tax Act, making them taxable in India only on Indian-sourced income.
Nonresident Alien (NRA)
A nonresident alien is an individual who is not a US citizen or US national and who has not passed either the green card test or the substantial presence test. An NRA is generally taxed by the US only on US-source income and gives a US payer Form W-8BEN to establish foreign status.
Notice Period
A notice period is the mandatory duration between an employee's resignation or termination and their last working day, during which the employment relationship continues.
NRA Withholding
NRA withholding is the chapter 3 regime under Internal Revenue Code sections 1441 through 1443 that requires a US withholding agent to deduct tax, generally at a 30 percent statutory rate, from US-source FDAP income paid to a nonresident alien or foreign entity, unless a treaty or other exemption reduces the rate.
O
Occupational Safety, Health and Working Conditions Code, 2020
The OSH Code, 2020 consolidates 13 central labour laws on workplace safety, working hours, and conditions, applicable to factories, mines, plantations, contract labour, and most workplaces with 10+ workers.
OFAC Sanctions Screening
OFAC sanctions screening is the process US persons use to check counterparties, contractors, and payees against the lists administered by the Office of Foreign Assets Control to ensure that funds and services do not flow to blocked persons or sanctioned jurisdictions.
Old Tax Regime
The old income tax regime in India offers higher slab rates but allows over 70 deductions and exemptions including HRA, LTA, Section 80C, 80D, and home loan interest.
P
Payment of Bonus
A statutory annual bonus mandated under the Payment of Bonus Act 1965, requiring employers to pay between 8.33% and 20% of qualifying wages to eligible employees.
Payment of Wages Act, 1936
The Payment of Wages Act, 1936 governs the timing of wage payment, permissible deductions, and wage period limits for Indian workers. It is now subsumed into the Code on Wages, 2019.
Payroll Tax
The collective employer-side taxes and statutory contributions deducted or contributed alongside salary payments in India, including PF, ESI, professional tax, and TDS.
Permanent Establishment
Permanent Establishment (PE) is the tax-treaty concept that creates corporate income tax liability for a foreign enterprise in a host country when the enterprise carries on business there through a fixed place of business or a dependent agent who habitually concludes contracts on its behalf.
Permanent Establishment (India)
A fixed place of business in India that triggers Indian corporate tax liability for the foreign parent entity under tax treaty provisions and the Income Tax Act.
POSH Act (Sexual Harassment of Women at Workplace Act, 2013)
The POSH Act, 2013 mandates every Indian workplace with 10+ employees to prevent and redress sexual harassment of women through an Internal Complaints Committee, written policy, training, and annual reporting.
Presumption Rules
Presumption rules are the IRS default rules a withholding agent must apply when it does not hold valid documentation for a payee, such as a Form W-8 or Form W-9. They tell the agent whether to treat the payee as US or foreign and which withholding applies, often 30 percent NRA withholding on US-source income or 24 percent backup withholding.
Probation Period
A probation period is a trial employment phase during which an employer assesses a new employee's suitability for the role before confirming them as a permanent employee.
Professional Employer Organization (PEO)
A Professional Employer Organization (PEO) is a firm that provides HR services through a co-employment arrangement where both the PEO and client company share employer responsibilities.
Professional Tax
Professional tax is a state-level employment tax in India deducted from employee salaries, with rates varying by state up to a constitutional maximum of ₹2,500 per year.
Provident Fund (PF)
PF is a mandatory retirement savings scheme in India where both employer and employee contribute 12% of basic salary plus dearness allowance each month.
R
Remittance
In the general payments sense, a remittance is a sum of money sent from one party to another, often across borders, to settle an obligation such as an invoice or a contractor payment. In the narrower sense used by the World Bank and economists, remittances are cross-border funds that migrant workers send home to their families. The two meanings are distinct, and a business payment to an international contractor is the first, not the second.
Restricted Stock Unit (RSU)
An RSU is a compensation grant where an Indian employee receives company shares automatically upon vesting — without paying an exercise price — common in late-stage and listed companies and at India-based employees of US tech firms.
Retainer Agreement
A retainer agreement is a contract under which a customer pays a recurring fee to a service provider in exchange for either a defined block of hours per period (hours-bank retainer) or guaranteed availability during the period (availability retainer), typically structured as evergreen with rolling auto-renewal or as a fixed term with stated end date, and commonly used for ongoing legal, consulting, design, or development services.
Reverse Charge (VAT)
The reverse charge is a VAT mechanism under which the business customer, rather than the supplier, accounts for the VAT on a cross-border B2B supply of services. It shifts the obligation to report and self-assess the tax from the seller to the buyer.
S
Sanctioned Country List
The sanctioned country list refers to the jurisdictions under comprehensive US embargoes (Cuba, Iran, North Korea, Syria, and the occupied Crimea, Donetsk, and Luhansk regions of Ukraine) plus the broader set of countries that are subject to targeted or sectoral OFAC sanctions programs.
Saving Clause
A saving clause is a provision in a US income tax treaty that lets the United States tax its own citizens and residents as if the treaty had not come into effect, subject to a short list of stated exceptions in the treaty. It is the reason a US citizen abroad usually cannot use a treaty to reduce US tax, while a foreign resident still can.
Schedule C (Form 1040)
Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), is the IRS form a sole proprietor or single-member LLC owner uses to report income and expenses from a business they operated or a profession they practiced. The net profit flows to Form 1040 and is also the base for self-employment tax figured on Schedule SE.
Section 10(13A) HRA Exemption
Section 10(13A) of the Income Tax Act provides an exemption on House Rent Allowance (HRA) received from employer, calculated as the least of three specified amounts.
Section 16 Deductions
Section 16 of the Income Tax Act provides three salaried-income deductions: Standard Deduction (₹50,000 old / ₹75,000 new), Entertainment Allowance (govt only), and Professional Tax.
Section 17(2) Perquisites
Section 17(2) of the Income Tax Act defines perquisites — non-cash employer benefits like rent-free housing, ESOPs, sweat equity and interest-free loans — that are taxable as salary.
Section 24(b) — Home Loan Interest
Section 24(b) allows a deduction for interest paid on a home loan, capped at ₹2,00,000 per year for self-occupied property under the old tax regime, with no equivalent deduction available for self-occupied property under the new tax regime.
Section 530 Safe Harbor
Section 530 Safe Harbor is relief from the federal employment tax consequences of treating a worker as an independent contractor, even if the worker should have been an employee. A business qualifies if it had a reasonable basis for the treatment, was substantively consistent, and was reporting consistent by filing all required information returns.
Section 80C
Section 80C of the Income Tax Act allows individual taxpayers to claim deductions up to ₹1.5 lakh per year on specified investments and expenses, available only under the old tax regime.
Section 80CCD(2)
Section 80CCD(2) allows an additional deduction for the employer's contribution to an employee's NPS Tier I account, capped at 10% of salary (14% for central government), and is available under both old and new tax regimes.
Section 80D
Section 80D allows tax deductions on health insurance premiums paid for self, family, and parents — up to ₹25,000 (or ₹50,000 for senior citizens), available only under the old tax regime.
Section 80E
Section 80E allows a deduction for interest paid on an education loan taken for higher studies of self, spouse, children or a legal ward, with no upper monetary limit, for up to 8 consecutive years from the start of repayment.
Section 80G
Section 80G allows a deduction for donations made to specified charitable trusts and government relief funds, with the deduction set at either 50% or 100% of the donation, with or without an income-linked qualifying limit.
Section 89(1) Relief
Section 89(1) provides relief from the higher tax incidence that arises when an employee receives salary in arrears or in advance for an earlier or later year, computed by spreading the lump sum back to the years it relates to.
Self-Employment Tax
Self-employment tax is the Social Security and Medicare tax that people who work for themselves pay on their net earnings, at a combined rate of 15.3 percent that splits into 12.4 percent for Social Security up to the annual wage base and 2.9 percent for Medicare with no cap, figured on Schedule SE of Form 1040.
SEPA (Single Euro Payments Area)
SEPA, the Single Euro Payments Area, is a payment-integration initiative that lets people and businesses make euro-denominated cashless payments across the euro area and a number of other European countries and territories under common standards, so a cross-border euro payment works much like a domestic one.
Severability Clause
A severability clause is a contractual provision stating that if any single term of the contract is held invalid or unenforceable, the remaining terms continue in full force and effect, and in many states the unenforceable term is either struck out (blue-pencil approach) or judicially reformed to the maximum extent legally permissible.
Severance Pay
Severance pay in India is the compensation paid to an employee on involuntary termination, retrenchment, or layoff — combining statutory retrenchment compensation, gratuity, leave encashment, and ex-gratia.
Sham Contracting
Sham contracting is the practice of presenting an employment relationship as an independent contractor relationship in order to avoid employer obligations. The term originated in Australian labor law. The closest US analog is intentional worker misclassification under the IRS Common Law Test and the DOL Economic Reality Test.
Sham Contracting (India)
Sham contracting is a disguised employment arrangement in which an employer engages a worker as a contractor while the substance of the relationship is employment. Indian courts pierce such arrangements using a multi-factor test.
Shops and Establishments Act
The Shops and Establishments Act is a state-level labor law governing working conditions, hours, leave, and wages for all commercial establishments in India.
Sign-On Bonus
A sign-on bonus is a one-time cash payment offered to an Indian employee upon joining a company — typically tied to a 1–2 year retention/clawback clause if the employee resigns early.
Source of Income Rules
The source of income rules are the US tax rules that assign income to a US or foreign source by income type, and they are decisive for foreign payees because personal services income is sourced to where the services are physically performed, not where the payer or the contract sits.
SOW Amendment
An SOW amendment is a written, signed instrument that modifies the terms of an existing Statement of Work (typically scope, deliverables, fees, schedule, or assumptions), recites the original SOW it modifies, states the effective date, and ratifies all unchanged terms of the original SOW and parent Master Service Agreement.
Special Allowance
Special Allowance is the residual, fully-taxable salary component in Indian CTC structures used to balance the package after fixing Basic, HRA and other allowances.
Standard Contractual Clauses (SCCs)
Standard Contractual Clauses are EU-approved data-transfer contracts under GDPR Article 46, used to lawfully transfer personal data from the EU to third countries such as India that are not on the European Commission's adequacy list.
Statement of Work (SOW)
A Statement of Work (SOW) is a project-level contract document that defines the scope, deliverables, milestones, acceptance criteria, fees, and timeline for a specific engagement, typically executed under a Master Service Agreement that supplies the legal framework.
Statutory Employee
A statutory employee is a worker in one of four specific categories the IRS treats as an employee for Social Security and Medicare tax, even though the worker may otherwise be an independent contractor. The categories are certain drivers, full-time life insurance sales agents, home workers, and full-time traveling or city salespeople.
Substantial Presence Test
The substantial presence test is the IRS day-count rule that determines whether a foreign individual is a US resident alien for tax purposes. An individual meets it if present in the US at least 31 days in the current year and at least 183 days over a three-year weighted count: all current-year days, one-third of prior-year days, and one-sixth of days two years prior.
Superannuation
Superannuation is an employer-sponsored retirement benefit in India where the employer contributes to an approved fund that pays a pension or lump sum to the employee at retirement.
Supplemental Wages
Supplemental wages are payments an employer makes to an employee in addition to regular wages, such as bonuses, commissions, overtime pay, and severance, and they carry their own federal income tax withholding methods under IRS Publication 15. The optional flat rate is 22 percent, rising to a mandatory 37 percent on supplemental wages over 1 million dollars paid to an employee in a calendar year.
Surcharge and Health & Education Cess
Surcharge is an additional tax on high income (10%, 15%, 25% or 37% based on slabs), and Health & Education Cess is a flat 4% levy on tax plus surcharge — together they top up the basic income tax for individual taxpayers.
Sweat Equity Shares
Sweat equity shares are shares issued by an Indian company to its employees or directors at a discount, or for consideration other than cash, in recognition of know-how, IP, or value-additive services under Section 54 of the Companies Act, 2013.
SWIFT (Society for Worldwide Interbank Financial Telecommunication)
SWIFT is the global member-owned messaging cooperative that banks use to instruct cross-border payments, with cross-border interbank messaging migrated to the ISO 20022 MX format (pacs.008, pacs.009) on November 22, 2025 and legacy MT message formats retired.
SWIFT/BIC Code
A SWIFT/BIC code (Business Identifier Code) is an 8 or 11 character alphanumeric identifier defined by the ISO 9362 standard that uniquely identifies a financial institution, its country, location, and optionally a specific branch for routing cross-border payment messages over the SWIFT network.
T
Tax Deducted at Source (TDS)
TDS is the income tax an employer withholds from an employee's salary each month and deposits with the government on their behalf.
Tax Home
A person's tax home is, per the IRS, their regular place of business or post of duty, regardless of where they maintain their family home. The IRS uses it to decide whether travel expenses are deductible and, for individuals working abroad, whether the foreign earned income exclusion is available.
Tax Residency Certificate
A tax residency certificate (TRC) is an official document issued by a country's tax authority that certifies a person or company is a tax resident of that country, used to claim benefits under an income tax treaty. In the United States the IRS issues this certification on Form 6166, which a taxpayer requests by filing Form 8802.
Tax Residency Certificate (TRC)
A Tax Residency Certificate is an official document issued by a country's tax authority confirming a taxpayer's residency, used to claim relief under a Double Taxation Avoidance Agreement (DTAA).
Taxpayer Identification Number (TIN)
A Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service in the administration of US tax law. The five types are the SSN, ITIN, EIN, ATIN, and PTIN. An SSN is issued by the Social Security Administration, and all other TINs are issued by the IRS.
TIN (Taxpayer Identification Number)
A TIN is any nine-digit number the IRS or Social Security Administration uses to identify a taxpayer, including SSN, EIN, ITIN, ATIN and PTIN.
TIN Matching
TIN Matching is an IRS e-Services program that lets an authorized payer of income subject to backup withholding check whether a payee's name and taxpayer identification number combination matches IRS records before an information return is filed, which helps the payer avoid backup withholding, CP2100 notices, and B-notices.
Totalization Agreement
A totalization agreement is a bilateral Social Security agreement between the United States and another country that eliminates dual Social Security taxation on the same earnings and fills gaps in benefit protection for workers who divide their careers between the two countries. The Social Security Administration administers the US program.
U
UETA (Uniform Electronic Transactions Act)
The Uniform Electronic Transactions Act is a 1999 model law drafted by the Uniform Law Commission that gives electronic signatures and electronic records the same legal effect as paper, adopted in 49 US states, the District of Columbia, and the US Virgin Islands, with New York the only state that operates a separate electronic-signatures statute (NYESRA) instead.
Universal Account Number (UAN)
UAN is a unique 12-digit number assigned to every EPF member that remains the same throughout their career, linking all PF accounts across employers.
V
Value-Added Tax (VAT)
A value-added tax is a consumption tax assessed on the value added at each stage of production and distribution of a good or service, collected fractionally along the supply chain and ultimately borne by the final consumer. It is used in more than 170 jurisdictions worldwide and by every OECD country except the United States, which levies state and local sales taxes instead of a federal VAT.
Variable Pay
Variable pay is the performance-linked component of an Indian employee's compensation — typically 10–30% of CTC — paid as quarterly, half-yearly, or annual bonus tied to individual, team, or company performance.
Voluntary Classification Settlement Program (VCSP)
The Voluntary Classification Settlement Program (VCSP) is an IRS program that lets eligible taxpayers voluntarily reclassify workers as employees for future tax periods, with partial relief from federal employment taxes. Participants pay 10 percent of the employment tax liability that would have been due on the workers' compensation for the most recent tax year and owe no interest or penalties on that amount.
Voluntary Provident Fund (VPF)
VPF is a voluntary contribution employees can make above the mandatory 12% EPF contribution, earning the same EPF interest rate and qualifying for Section 80C tax benefits.
VPF Interest Rate
The VPF interest rate is the EPFO-declared annual rate that applies to Voluntary Provident Fund balances, currently 8.25% for FY 2024-25, identical to the EPF rate.
W
Withholding Agent
A withholding agent is any US or foreign person that has control, receipt, custody, disposal, or payment of US-source income to a foreign person, and is required to deduct, withhold, and pay over the tax under chapters 3 and 4 of the Internal Revenue Code, with personal liability for any tax not withheld.
Withholding Tax
Withholding tax is tax that the payer deducts from a payment at the source and remits to the government on the recipient's behalf, rather than the recipient paying it later. In the United States the main forms relevant to paying people are income-tax withholding from employee wages, NRA (chapter 3) withholding on US-source income paid to foreign persons at a 30 percent default rate, and backup withholding at 24 percent when payee documentation is missing or incorrect.
Work-for-Hire
Work-for-hire is a US copyright doctrine under 17 USC 101 in which the copyright in a work vests originally in the hiring party rather than the human author, but it applies only to works prepared by an employee within the scope of employment or to commissioned works in nine specifically enumerated categories agreed in writing.
Worker Misclassification
Worker misclassification is the treatment of a worker as an independent contractor when, under the applicable federal or state test, the worker should be classified as an employee.
Worker Misclassification (India)
Worker misclassification is the illegal practice of categorizing an employee as an independent contractor to avoid statutory obligations like PF, ESI, gratuity, and labor law protections.
Need help navigating India employment?
Omnivoo handles payroll, compliance, and taxes across all 28 Indian states.
Get started