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Compliance & Legal

Complete Guide to Paying Remote Workers in India (2025 Update)

Navigate India's complex payroll requirements with our comprehensive guide based on managing 1,800+ employees across Bangalore, Mumbai, and Pune. Covers compliance, tax implications, and payment methods.

David Kim, Chief Legal Officer
January 8, 2025
12 min read

Executive Summary

After managing payroll for 1,800+ employees across India and processing over $24M in payments, we've learned the critical importance of getting India payroll compliance right from day one.

Key Requirements:

  • • Payments must be in INR
  • • TDS compliance mandatory
  • • ESI & PF contributions required
  • • Local entity or EOR needed

Our Recommendation:

  • • Use EOR for <50 employees
  • • Establish entity for 50+ employees
  • • Budget 23% above base salary for compliance
  • • Partner with local tax advisors

India represents our largest global operation with 1,800+ employees across Bangalore, Mumbai, and Pune. During our expansion, we learned that paying workers in India isn't just about transferring money—it's about navigating one of the world's most complex employment law systems.

Critical Warning

Non-compliance with India's payroll laws can result in penalties up to ₹25,000 per violation, imprisonment up to 1 year, and potential business license revocation. We've seen companies face ₹50L+ in back taxes and penalties for incorrect payroll setup.

Why India Payroll Compliance Matters

India's employment laws are state-specific, complex, and strictly enforced. The Ministry of Labour & Employment actively audits foreign companies, and we've witnessed first-hand the consequences of non-compliance during our expansion.

Real Impact: Our India Compliance Journey

₹2.4L
Saved in penalties through proper setup
18 months
To achieve full compliance
23%
Additional cost above base salary

Payment Structure Options for India

Based on our experience and legal requirements, there are three viable approaches to paying workers in India. Each has different compliance requirements, costs, and operational implications.

1. Establish Local Entity

Best for: Companies planning 50+ employees in India

How It Works

  • Incorporate Private Limited Company or establish branch office
  • Open local bank account and obtain necessary registrations
  • Process payroll locally with full compliance
  • Handle TDS, ESI, PF, and other statutory contributions

Requirements & Costs

Initial Setup Cost:₹3-8L
Monthly Compliance:₹50-80K
Setup Timeline:3-6 months

Requires local director, registered office, and ongoing compliance management. Full control but highest administrative burden.

2. Employer of Record (EOR)

Best for: Companies with <50 employees or quick market entry

How It Works

  • EOR becomes legal employer, you manage day-to-day work
  • EOR handles all payroll, compliance, and statutory obligations
  • You pay EOR fees + employee costs monthly
  • Full compliance without local entity setup

Requirements & Costs

EOR Fee:8-15% of salary
Setup Cost:₹0-25K
Setup Timeline:1-2 weeks

Fastest market entry with full compliance. Higher per-employee cost but eliminates administrative burden and compliance risks.

3. Independent Contractor

Best for: Project-based work with strict compliance to contractor definitions

High Risk Warning

Indian authorities strictly scrutinize contractor relationships. Misclassification can result in back taxes, penalties, and legal issues. Use only for genuine project-based work with clear independence.

Requirements

  • Clear contractor agreement with project scope
  • Contractor maintains their own GST registration
  • TDS deduction @ 10% (individuals) or 2% (companies)
  • Form 16A issuance for TDS compliance

Compliance Tests

Indian courts use multiple factors to determine true contractor status:

  • • Independence in work execution
  • • Own equipment and workspace
  • • Multiple clients/projects
  • • Project-based payment terms
  • • No supervision over daily activities

India Tax and Compliance Requirements

Tax Deduction at Source (TDS)

TDS is mandatory for all salary payments in India. Here are the current rates and requirements:

Income Range (Annual)Tax RateCessEffective Rate
Up to ₹3,00,000Nil-0%
₹3,00,001 - ₹7,00,0005%4%5.2%
₹7,00,001 - ₹10,00,00010%4%10.4%
₹10,00,001 - ₹12,00,00015%4%15.6%
₹12,00,001 - ₹15,00,00020%4%20.8%
Above ₹15,00,00030%4%31.2%

Statutory Contributions

Provident Fund (PF)

Employee: 12% | Employer: 12%

Mandatory for employees earning ≤₹15,000/month

Employee State Insurance (ESI)

Employee: 0.75% | Employer: 3.25%

Mandatory for employees earning ≤₹21,000/month

Professional Tax

₹150-300/month (varies by state)

State-specific labor tax

Additional Compliance

Gratuity

4.81% of annual salary

For employees with 5+ years service

Bonus

8.33% of annual salary

Minimum ₹7,000, Maximum ₹7,000

Labour Welfare Fund

₹20-40/year (varies by state)

State welfare contribution

Payment Methods and Currency

Currency Requirement

All salary payments in India must be made in Indian Rupees (INR). Foreign currency payments to residents are strictly prohibited under FEMA regulations, with penalties up to 3x the amount involved.

Bank Transfer (NEFT/RTGS)

Most common method for regular employees
  • Instant to same-day processing
  • Low fees (₹5-25 per transaction)
  • Full audit trail for compliance

UPI/Digital Wallets

Good for small amounts and contractors
  • Instant processing
  • ₹1L daily limit per transaction
  • Limited audit trail

International Wire

For USD to INR conversions
  • Handles currency conversion
  • Higher fees ($15-50 per transfer)
  • 2-5 business days processing

True Cost Calculator

Based on our analysis of 1,800+ employees, here's what you should budget beyond base salary:

Example: ₹50,000/month Software Engineer

Base Salary₹50,000
Employer PF (12%)₹6,000
ESI (3.25%)₹1,625
Gratuity Provision (4.81%)₹2,405
Bonus Provision (8.33%)₹583
Professional Tax₹200
Total Monthly Cost₹60,813
Additional Cost: 21.6% above base salary

Annual Compliance Costs

Payroll Processing₹12,000
TDS Filing & Returns₹8,000
PF/ESI Compliance₹15,000
Labour Law Compliance₹10,000
Legal & Advisory₹25,000
Annual Overhead₹70,000
Per employee per year

Common Mistakes to Avoid

Based on our experience and audits we've witnessed, here are the most expensive mistakes companies make with India payroll:

1. Treating Employees as Contractors

The Mistake: Classifying full-time workers as contractors to avoid compliance.

The Cost: One company faced ₹1.2Cr in back taxes plus 18% interest and penalties.

The Fix: Use proper employee classification and EOR services for compliant contractor relationships.

2. Ignoring State-Specific Laws

The Mistake: Assuming labour laws are uniform across India.

The Cost: Karnataka-specific violations resulted in ₹45L penalty for missing registrations.

The Fix: Understand state-specific requirements for Professional Tax, Shops & Establishments, etc.

3. Inadequate Documentation

The Mistake: Poor record-keeping and missing statutory forms.

The Cost: ₹25,000 per employee for missing Form 16 during labor department audit.

The Fix: Maintain complete digital records with proper backup and annual filings.

Our Recommendations

Based on 3+ Years of India Operations

For Small Teams (1-50 employees)

  • Use Employer of Record (EOR)

    Fastest compliance, predictable costs, minimal risk

  • Budget 25% above salary

    Covers EOR fees and statutory contributions

  • Focus on major cities

    Bangalore, Mumbai, Pune have best infrastructure

For Large Teams (50+ employees)

  • Establish local entity

    Better control and lower per-employee costs

  • Hire local HR and finance team

    Essential for ongoing compliance management

  • Invest in payroll systems

    Automated compliance and reporting critical at scale

Key Takeaways

Budget Reality

Plan for 23-25% additional costs above base salary for full compliance and statutory contributions.

Compliance First

India's labour laws are strictly enforced. Non-compliance costs far exceed proper setup investments.

Scale Strategy

Start with EOR for speed, transition to local entity at 50+ employees for cost efficiency.

Need Help with India Payroll?

Get personalized advice from our team that's managed 1,800+ employees across India. We can help you choose the right approach and avoid costly mistakes.