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.
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
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
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
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 Rate | Cess | Effective Rate |
|---|---|---|---|
| Up to ₹3,00,000 | Nil | - | 0% |
| ₹3,00,001 - ₹7,00,000 | 5% | 4% | 5.2% |
| ₹7,00,001 - ₹10,00,000 | 10% | 4% | 10.4% |
| ₹10,00,001 - ₹12,00,000 | 15% | 4% | 15.6% |
| ₹12,00,001 - ₹15,00,000 | 20% | 4% | 20.8% |
| Above ₹15,00,000 | 30% | 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)
- Instant to same-day processing
- Low fees (₹5-25 per transaction)
- Full audit trail for compliance
UPI/Digital Wallets
- Instant processing
- ₹1L daily limit per transaction
- Limited audit trail
International Wire
- 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
Annual Compliance Costs
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.