Overview

Employment in India is governed by a complex and layered legal framework combining central (federal) and state-level legislation. Historically, India had over 40 central labor laws and 100+ state-level laws. Beginning in 2020, the Indian government undertook a major labor reform consolidating these into four Labor Codes:

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• The Code on Wages, 2019

• The Industrial Relations Code, 2020

• The Code on Social Security, 2020

• The Occupational Safety, Health and Working Conditions Code, 2020

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Note: As of early 2026, the four Labor Codes have been enacted but are not yet fully in force across all states. Many legacy labor laws remain operative until state governments issue implementing rules. Employers should verify applicable law with local legal counsel, particularly regarding state-specific requirements.

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India's employment law applies differently depending on the size of the establishment, the nature of the industry, and the state in which the employee works. International employers must navigate both central and state obligations.  

Key regulators include the Ministry of Labour and Employment, the Employees' Provident Fund Organisation (EPFO), and the Employees' State Insurance Corporation (ESIC).

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Employment Contracts

India does not have a single codified requirement mandating written employment contracts for all employees. However, written contracts are strongly recommended as best practice and are often required by specific sector regulations, state shops and establishments acts, or when employing foreign nationals.

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What to Include in an Employment Contract

A well-drafted employment contract for India should address:

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• Job title, role description, and place of work

• Compensation: Base salary, allowances (HRA, special allowances, etc.), and performance-related pay

• Working hours and weekly rest day

• Probation period (typically 3–6 months; can extend to 12 months for managerial roles)

• Leave entitlements: Earned leave, sick leave, casual leave, and public holidays

• Notice period for resignation and termination

• Confidentiality, intellectual property assignment, and non-compete provisions (enforceability of non-competes is limited under Indian contract law)

• Governing law and dispute resolution mechanism

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Types of Employment

Indian employment law recognizes several categories of workers:

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Note: India's Classification Warning: Engaging workers as independent contractors when they function as employees can trigger reclassification risk, back-payment of statutory contributions, and penalties. Contractor arrangements should be structured carefully.

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Working Hours and Overtime

Standard Working Hours

Under the Factories Act, 1948 (and its replacement under the Occupational Safety Code once implemented), adult workers may not work more than:

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• 9 hours per day

• 48 hours per week

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Most professional and IT sector employees follow a 9-hour workday / 5-day workweek (Monday–Friday) as standard market practice, often based on individual employment contracts or company policy rather than specific legislation.

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Overtime

Overtime work is subject to the following rules under the Factories Act:

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• Overtime rate: Twice the ordinary rate of wages for hours worked beyond the daily or weekly limit

• Maximum overtime: Workers may not be required to work overtime for more than 50 hours per quarter (some state rules vary)

• Overtime register: Employers must maintain a register of overtime hours worked

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Note: Overtime rules differ between factories (governed by the Factories Act) and commercial establishments (governed by state Shops and Establishments Acts). IT companies and BPOs in many states are classified as commercial establishments and follow different rules.

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Rest Periods

• Workers must receive at least one rest day per week

• A 30-minute rest interval is required after every 5 hours of continuous work (factories)

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Minimum Wage

India does not have a single national minimum wage. The Minimum Wages Act, 1948 (consolidated into the Code on Wages, 2019) requires both central and state governments to set minimum wages by industry and skill level.

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National Floor Wage

The central government periodically revises a national floor wage, which serves as a baseline below which states cannot set their minimum wages. As of 2024, the national floor wage was INR 178 per day (approximately INR 4,600 per month). However, this figure is subject to revision and varies significantly across states.

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State-Specific Minimum Wages

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Note: Minimum wages are revised periodically — typically twice a year — and vary by industry category (scheduled employment), skill level (unskilled, semi-skilled, skilled, highly skilled), and geographic zone. Always verify current rates with the relevant state labor department before setting employee compensation.

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In practice, professional and technology sector salaries in India significantly exceed minimum wage levels. Employers in IT, finance, and manufacturing typically benchmark against market rates rather than statutory minimums.

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Payroll and Taxes

Payroll Frequency

Wages are generally paid monthly in India for professional and salaried employees. The Code on Wages, 2019 specifies maximum wage payment timelines:

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• Monthly wage employees: Wages must be paid by the 7th of the following month

• For establishments employing more than 1,000 workers: Payment by the 10th of the following month

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Salary Structure

Indian payroll typically involves a structured salary package with multiple components, each with different tax and social security treatment:

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Income Tax: Overview

India operates a source-based personal income tax system. Employers are required to deduct Tax Deducted at Source (TDS) from employee salaries under Section 192 of the Income Tax Act, 1961, and remit it to the government monthly.

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As of FY 2024–25, India operates two tax regimes. Employees can choose between them:

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New Tax Regime (Default from FY 2024-25)

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Under the new regime, most exemptions and deductions (including HRA, LTA, and standard deductions except INR 75,000 standard deduction) are not available. It became the default regime from FY 2023–24 onwards.

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Old Tax Regime

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The old regime allows deductions under Sections 80C (up to INR 1.5L), 80D (health insurance), HRA exemption, LTA, and others. Employees with significant deductions may benefit from this regime.

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Note: Surcharge applies on income tax for income above INR 50 lakhs. A 4% health and education cess applies to all taxpayers on the computed income tax and surcharge. Employers must deduct TDS based on the regime the employee declares at the start of the financial year.

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Tax Filing and Compliance

• Employers must remit TDS monthly by the 7th of the following month

• Quarterly TDS returns must be filed (Form 24Q)

• Annual TDS certificates must be issued to employees (Form 16) by June 15 following the financial year end

• India's financial year runs April 1 to March 31

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Professional Tax

Professional Tax is a state-level tax levied on employment income. It is applicable in states such as Maharashtra, Karnataka, West Bengal, Tamil Nadu, Andhra Pradesh, and Telangana. Rates vary by state but are capped at INR 2,500 per year under the Constitution. Employers are responsible for deducting professional tax from employee salaries and remitting it to the state government.

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Social Security Contributions

India's social security framework for employees is primarily administered through two main schemes:

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Employees' Provident Fund (EPF)

The Employees' Provident Fund and Miscellaneous Provisions Act, 1952 mandates EPF contributions for establishments employing 20 or more workers.

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Note: While only employees with basic salary up to INR 15,000 are mandatorily covered, employers commonly extend EPF to higher-earning employees as best practice and employee expectation. Contributions are made on the full basic salary in these cases, unless capped by agreement.

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Employees' State Insurance (ESI)

The Employees' State Insurance Act, 1948 provides health, maternity, disability, and dependent benefit coverage.

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Gratuity

Under the Payment of Gratuity Act, 1972, employees who have completed 5 or more years of continuous service are entitled to a gratuity payment upon separation (resignation, retirement, death, or disability — the 5-year threshold does not apply to death or disability).

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• Calculation: 15 days of last drawn salary for each completed year of service

• Formula: (Last drawn basic salary + DA) x 15/26 x number of years of service

• Maximum gratuity: INR 20,00,000 (INR 20 lakhs) — exempt from income tax up to this ceiling

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Summary of Employer Social Security Obligations

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Leave Entitlements

Leave entitlements in India are governed by a combination of central legislation, state Shops and Establishments Acts, and sector-specific rules. The following are the primary leave types applicable to professional employees.

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Earned Leave / Privilege Leave

• Factory workers: 1 day of earned leave for every 20 days worked (18 days/year after one year of service) under the Factories Act

• Commercial establishment employees: Typically 1 day per 20 days of work; state acts vary (e.g., Maharashtra Shops Act provides 21 days after 12 months)

• Carry-forward: Most state acts allow carry-forward, typically capped at 30–45 days

• Leave encashment: Employees may encash accumulated leave on separation; this is taxable but eligible for exemption under Section 10(10AA) up to specified limits

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Sick Leave

Sick leave entitlement varies by state and sector. Common statutory provisions:

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• Factories: 1 day per 18 days worked (approximately equivalent)

• Commercial establishments: Typically 7–12 days per year depending on state

• Sick leave may require medical certification for extended absence

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Casual Leave

Casual leave of approximately 7–12 days per year is commonly provided under state Shops and Establishments Acts. In some states, sick and casual leave are combined. Casual leave typically cannot be carried forward.

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Maternity Leave

The Maternity Benefit (Amendment) Act, 2017 provides significant maternity protections:

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• Duration: 26 weeks of paid maternity leave for the first two children; 12 weeks for the third child and beyond

• Adoption/Surrogacy: 12 weeks of maternity leave for mothers who adopt a child below 3 months, or for commissioning mothers using surrogacy

• Work from Home: After returning from maternity leave, employers with 50 or more employees must allow work from home arrangements where the nature of work permits

• Creche: Employers with 50 or more employees are required to provide or arrange creche (daycare) facilities within a prescribed distance

• Eligibility: Employee must have worked for at least 80 days in the 12 months preceding the expected delivery date

• Pay: Full wages during maternity leave, paid by the employer

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Paternity Leave

There is no statutory paternity leave under central law for private sector employees. However, many employers offer 5–15 days as a company policy benefit, and some state governments provide paternity leave for government employees.

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Public Holidays

India has three national public holidays mandated by law:

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• Republic Day — January 26

• Independence Day — August 15

• Gandhi Jayanti — October 2

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In addition, employers typically observe 7–14 optional or restricted holidays under state legislation or by company policy, including major religious and regional festivals (Diwali, Holi, Eid, Christmas, Dussehra, Pongal, etc.). The specific list varies by state and establishment.

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Note: Most professional employers in India provide a total of 10–14 public holidays per year, combining the three mandatory national holidays with a selection of festival and state holidays. The exact list is published annually by the employer.

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Employee Benefits

Statutory Benefits

The following benefits are legally required for eligible employees:

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Common Market Practice Benefits

In addition to statutory minimums, competitive employers in India commonly provide:

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• Group medical insurance covering employee and family (hospitalisation cover of INR 3–10 lakhs is typical)

• Group term life insurance and personal accident cover

• Annual performance bonus or variable pay (10–30% of CTC for professional roles)

• Food coupons or meal allowances (tax-advantaged up to INR 50 per meal)

• Mobile phone and internet allowances

• Annual leave travel allowance (LTA) — twice in a 4-year block

• Employee wellness programs and telemedicine

• Employer-sponsored higher education or skill development support

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Note: India's IT and startup sectors are known for comprehensive benefits packages including ESOPs (Employee Stock Option Plans), flexible working arrangements, and substantial annual variable pay. These have become key talent retention tools in competitive hiring markets.

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Termination Requirements

India's employment termination rules are among the more complex in the region, particularly for industrial workers. Rules differ significantly between manufacturing/industrial workers and professional/white-collar employees.

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Probationary Period Termination

During probation, employment is typically at-will or subject to shorter notice periods (often 0–30 days), as specified in the employment contract. However, employers should ensure termination is documented and does not constitute wrongful or discriminatory dismissal.

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Notice Period

For permanent employees, the notice period is governed by the employment contract and applicable state Shops and Establishments Acts. Typical market practice:

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Pay in lieu of notice is standard practice and legally permissible under most applicable laws.

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Industrial Workers — Additional Protections

For workers employed in industrial establishments (factories, mines, plantations, and similar industries) under the Industrial Disputes Act, 1947 (until superseded by the Industrial Relations Code):

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• Establishments with 100 or more workers: Prior government approval is required before retrenching (laying off) workers

• Establishments with fewer than 100 workers: No government approval required, but statutory retrenchment compensation must be paid

• Retrenchment compensation: 15 days of average pay for each completed year of continuous service (or any part thereof exceeding 6 months)

• Last-in, first-out: The last employee hired in a category must generally be the first to be retrenched

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Note: The threshold for mandatory government approval for retrenchment has been proposed for increase to 300 workers under the Industrial Relations Code, 2020, but this provision has not yet been implemented uniformly across states. Always verify current thresholds.

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Termination for Cause

Termination for misconduct must follow a domestic inquiry process under most Indian labor laws and applicable standing orders:

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• Issue a charge sheet detailing the alleged misconduct

• Conduct a domestic inquiry (internal disciplinary hearing) with an opportunity for the employee to respond

• Issue findings and, if warranted, terminate employment with a dismissal order

• Document all proceedings carefully

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Failure to follow due process exposes the employer to reinstatement orders and back-wage liability under the Industrial Disputes Act.

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Separation Payments Due on Termination

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Hiring Through an Employer of Record (EOR)

Hiring in India as a foreign employer comes with significant administrative and compliance requirements. Setting up a wholly-owned subsidiary (Private Limited Company) is the most common route for long-term establishment, but it typically takes 4–8 weeks and requires ongoing corporate compliance obligations including annual audits, board filings, and GST registration.

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For companies looking to hire Indian talent quickly—without incorporating locally—an Employer of Record (EOR) provides a compliant alternative. Under an EOR arrangement:

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• The EOR acts as the legal employer of the worker in India

• The EOR handles employment contracts, payroll processing, TDS, EPF, ESI, and all statutory compliance

• The client company directs the day-to-day work of the employee

• The EOR assumes employer liability under Indian law

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This approach is particularly well-suited for:

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• Companies testing the Indian market before committing to a local entity

• Startups and scale-ups hiring individual engineers, developers, or business development professionals in India

• Multinationals requiring a fast and compliant hire for a specific project or contract

• Companies hiring fewer than 10–15 employees, where the cost of full incorporation may not be justified

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Note: EOR services in India cover compliance under central laws (EPF, ESI, Income Tax Act, Gratuity Act) as well as applicable state-level obligations (professional tax, state Shops and Establishments Act registration). When evaluating an EOR provider, confirm that they maintain their own local entity in India rather than operating through a third-party staffing agency structure.

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Knit People provides Employer of Record services in India, managing end-to-end payroll, tax, and employment compliance so that international employers can onboard Indian talent compliantly without establishing a local legal entity.

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Frequently Asked Questions

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Does a foreign company need a local entity to hire in India?

In most cases, yes — a foreign company cannot directly employ workers in India without a local legal presence (such as a subsidiary, branch office, or liaison office). An Employer of Record (EOR) is a common alternative that allows compliant hiring without first establishing a legal entity.

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Is a written employment contract mandatory in India?

A written employment contract is not universally mandated by central law for all categories of employees, but it is strongly recommended and often required by state Shops and Establishments Acts for commercial establishments.  

Written contracts provide clarity and protect both parties, particularly regarding notice periods, IP ownership, and confidentiality.

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When is EPF contribution mandatory?

EPF is mandatory for establishments employing 20 or more workers. Employees with basic salary up to INR 15,000 per month must be enrolled. Employees earning above INR 15,000 can be enrolled voluntarily. Once enrolled, contributions continue even if the salary later exceeds INR 15,000.

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What is the standard notice period in India?

Notice periods in India are primarily set by employment contracts and applicable state Shops and Establishments Acts.  

Market practice in the professional and IT sector ranges from 30 days for junior employees to 60–90 days for senior professionals. Three- and six-month notice periods are common for managerial roles, though pay in lieu of notice is standard.

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Is India's '100-day rule' for retrenchment still applicable?

Under the Industrial Disputes Act, 1947, establishments employing 100 or more workers require prior government permission before retrenchment. This rule applies to industrial workers in factories and specified establishments — it does not directly apply to IT companies and other commercial establishments, which are governed by state Shops and Establishments Acts.  

The Industrial Relations Code, 2020, proposed raising the threshold to 300 workers, but implementation varies by state.

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How is income tax withheld from employee salaries in India?

Employers are required to deduct Tax Deducted at Source (TDS) from employees' monthly salaries under Section 192 of the Income Tax Act, 1961. At the beginning of each financial year, employees declare their chosen tax regime and estimated deductions. Employers compute the likely annual tax liability and deduct a proportionate amount monthly. TDS must be remitted to the government by the 7th of the following month.

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What are the tax and compliance implications of hiring remote workers in India?

Hiring remote workers in India as employees (rather than freelancers) creates employer obligations including EPF, ESI (if applicable), TDS, professional tax, and gratuity. It may also create a taxable presence (Permanent Establishment) for the foreign employer in India depending on the nature of work and treaty provisions.  

Companies hiring multiple employees should seek advice on PE risk from a tax advisor.

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Looking Ahead

India offers tremendous hiring opportunities for international employers seeking skilled, English-proficient talent at competitive cost. Its layered regulatory framework, state-by-state variation in employment law, and mandatory social security obligations require careful planning.

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Key takeaways for international employers hiring in India:

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• Employment contracts should be written, comprehensive, and reflect both central and applicable state-level requirements

• Payroll must account for multiple components — basic salary, HRA, allowances — each with different tax treatment

• Mandatory contributions include EPF (12% employer) and ESI (3.25% employer) for eligible employees

• Maternity leave protections are significant (26 weeks) and include creche and work-from-home obligations for qualifying employers

• Termination — particularly of industrial workers — involves formal processes, government approvals (for retrenchment), and mandatory separation payments

• Tax deduction at source (TDS) is a monthly compliance obligation for all employers

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For companies that want to move quickly or are not ready to establish a local entity, an Employer of Record service provides a practical path to compliant hiring in India without the overhead of incorporation.

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Note: This guide is intended for informational purposes only and reflects the legal framework as of early 2026. India's labor laws are actively evolving — including the ongoing implementation of the four Labor Codes. This guide does not constitute legal or tax advice. Employers should consult qualified Indian legal counsel and tax advisors for matters specific to their situation.

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