Payroll and Statutory Compliance for a Foreign Employer in India: PF, ESI, Gratuity, Labour Codes and TDS

A foreign business can hire in India only through an entity that is legally the employer: its own subsidiary or branch, or a third-party employer of record (EOR). Each route brings the same statutory payroll obligations.

Statutory payroll components

Rates and ceilings below are indicative; check the current figures before restructuring salary.

The labour codes

The four labour codes were brought into force from 21 November 2025. Points payroll teams should check: the uniform definition of wages (where specified allowances above 50% of total remuneration are added back to wages for PF and gratuity purposes), gratuity eligibility for fixed-term employees after one year of service, and updated rules on overtime, leave and working hours. Central and state rules were still being finalised in parts, so confirm what has been notified in each state before restructuring salary.

Income-tax on salary

Salary TDS is deducted under the salary provisions (old section 192, renumbered under the Income-tax Act, 2025; confirm the new section). Foreign nationals on assignment should have residential status assessed early because it decides whether foreign income is taxed in India. Social security totalisation agreements may exempt detached workers from Indian PF in some cases.

EOR vs subsidiary

An EOR can onboard staff quickly and run payroll without incorporation, but the arrangement should not be described as removing permanent establishment risk; the facts and who directs the employee's work still matter. For teams that will grow, a subsidiary is usually the better base.

Checklist

• Employment contracts reflect the codes' wage definition.
• PF and ESI registered before the first payroll.
• Offer letters mention notice, gratuity and leave policy.
• Salary TDS projections reviewed mid-year.
• Contractor vs employee classification checked.