Hiring in India: What Global Companies Need to Know

With close to 590 million working-age individuals proficient in IT and English, India stands out as one of the leading global destinations for offshoring in IT, manufacturing and several key industries.

However, hiring in India comes with a quagmire of legal and regulatory challenges. From labor classifications to tax compliance and regional labor laws that change from state to state, employers must navigate a range of legal compliances.

Whether you choose to establish your own legal entity or take the Employer of Record (EOR) route, understanding the Indian employment landscape is the first step.

In this guide, we will break down everything you need to know about hiring in India. From employment contracts and tax responsibilities to outsourcing strategies and best practices in HR.

Hiring in India Through a Legal Entity

When it comes to hiring talent in India, global employers typically choose between two primary approaches: 

1. Setting up their own legal entity, or 
2. Partnering with an EOR

Each approach has its share of requirements, advantages, and trade-offs. Let’s take a closer look at them.

Employing through your own legal entity

Establishing a local entity in India gives companies end-to-end control over hiring, payroll, compliance, and HR operations. This approach is considered best for businesses that are planning long-term expansion or want to land and build large in-country teams.

However, to legally hire employees under your own entity, you must serve the following prerequisites:

• Incorporate a business in India as a private limited company or as a liaison office
• Register for key tax and labor identifiers like PAN (Permanent Account Number), TAN (Tax Deduction and Collection Account Number), and GST (Goods and Services Tax)
• Register the entity in statutory social security schemes, including the Employees’ Provident Fund (EPF) and Employee State Insurance (ESI)
• Ensure compliance with central and state-level labor laws related to employee administration and management

The trade-off

The legal entity offers complete operational freedom, however, it comes at the cost of heavy administrative burden. You are solely responsible for complying with local labor laws, payroll management, statutory filings, and compliance.

Leveraging an employer of record (EOR) in India

Compared to setting up your own legal entity, an EOR provides a faster, more flexible alternative to your own entity setup. With an EOR, you can legally hire and onboard employees in India or anywhere in the world without forming a local entity. 

The EOR becomes the legal employer on paper, managing all compliance, payroll, and tax responsibilities, while you retain control over day-to-day work and performance management.

Other key benefits of using an EOR include:

• Faster market entry without the delay of setting up a local office
• Simplified compliance with Indian labor laws and tax regulations
• Reduced risk of permanent establishment and misclassification
• Scalable hiring that is ideal for pilot teams, short-term projects, or remote roles

However, the choice between setting up your own entity or using an EOR ultimately depends on business goals, team size, and budget. 

That’s why it’s essential to understand the regional employment contract landscape in India and know what  to include to stay compliant.

Various Employment Contracts Used in India

An employment contract lays down a strong foundation for a compliant and productive working relationship between the employer and employee. It clearly defines the terms of engagement, protects both parties’ interests, and ensures alignment with local labor laws.

Further, it provides clarity in several employment matters including:

• Employer and employee names and contact details
• Job title and responsibilities
• Date of commencement of employment
• Work location and working hours
• Compensation and benefits
• Statutory benefits
• Termination and notice period
• Confidentiality and IP clauses
• Non-compete and non-solicitation

There are specific clauses in an Indian employment contract that would define these employment matters, such as:

Please Note: The following are general sample clauses sourced from a variety of agreements. They should be tailored to align with your specific business needs and context. We strongly recommend having these clauses reviewed by a qualified legal professional before including them in your employment contracts.

Probation period clause

“The Employee shall be on probation for a period of [three/six] months from the date of joining. During the probation period, either party may terminate the employment by providing [15/30] days’ written notice or salary in lieu thereof. Upon satisfactory completion of the probation period, the Employee shall be confirmed in writing as a permanent employee of the Company.”

Termination and notice period clause

“Post-confirmation, either party may terminate this Agreement by providing [30/60/90] days’ written notice or payment in lieu thereof. The Company reserves the right to terminate employment without notice in cases of gross misconduct, willful disobedience, or breach of confidentiality. Upon termination, the Employee shall return all Company property and settle any outstanding obligations.”

Non-compete, confidentiality, and intellectual property clause

“For a period of [six/twelve] months following the termination of employment, the Employee shall not, directly or indirectly, engage with any business that competes with the Company’s core business in any capacity that involves use of proprietary knowledge or confidential information acquired during their tenure.”

Confidentiality clause

“The Employee shall not, during or after the term of employment, disclose or use any confidential information or trade secrets related to the Company’s operations, clients, or strategies, except as required in the ordinary course of duties or as authorized in writing by the Company.”

Intellectual property clause

“Any inventions, processes, work product, or intellectual property developed by the Employee during the course of employment, and related to the Company’s business, shall be the sole property of the Company. The Employee agrees to execute any documents necessary to assign such rights to the Company.”

Compensation structure and variable pay clause

“The Employee shall receive a gross annual compensation of INR [amount], payable in accordance with the Company’s payroll schedule. This includes basic salary, house rent allowance, provident fund contributions, and other applicable allowances. In addition, the Employee shall be eligible for a performance-based variable pay of up to INR [amount/% of CTC] per annum, subject to the Company’s performance review policies and individual targets as communicated periodically.”

Of course, these are clauses usually forming part of an employment contract. However, there are different types of employment contracts, based on which even these terms and the employer-employee relationship would change. 

This table summarizes the key employment contractual types and the aspects that distinguish them.

Aspect	Permanent Contract	Fixed-Term Contract	Temporary/Project-Based Contract
Nature of employment	Ongoing, indefinite	Time-bound, with a specified end date	Task-specific or short-term engagement
Employment benefits	Full statutory benefits (PF, ESI, gratuity, etc.)	Eligible for statutory benefits if term exceeds threshold	May be excluded from full statutory benefits
Termination requirements	Requires notice period as per contract or law	Auto-terminates at contract end; early termination may require notice	Typically ends upon project completion or duration lapse
Probation period	Usually includes probation at start	Rarely includes a probation period	Not applicable
Renewal possibility	Not applicable (open-ended)	Can be renewed or converted to permanent	May be extended based on project or operational needs
Job security	High	Moderate	Low
Use case	Long-term roles, core team members	Short- to mid-term roles, limited-duration needs	Freelancers, consultants, or seasonal work

Other Types of Employment Contracts in India

The above-discussed permanent, fixed-term, and temporary contracts are the most commonly used ones in India. However, global companies have started exploring flexible hiring models like zero-hours contracts and consultancy agreements to meet their staffing requirements. 

1. Zero-hours worker contracts

A zero-hours contract is an agreement where the employer is not obligated to provide a fixed number of working hours. Further, the worker is not obligated to accept all work that is assigned or offered to them. As a result, this model offers maximum flexibility, particularly for seasonal or demand-based roles.

Legality in India

As of April 2025, zero-hours contracts do not have formal legal recognition under Indian labor law. Indian employment regulations favor more structured contracts that ensure minimum wages, social security contributions, and worker protections. 

Here are the pros and cons of zero-hour worker contracts:

Pros	Cons
– Flexibility for businesses with unpredictable workloads – No long-term commitment or overheads – Scalable staffing based on demand	– Not legally recognized – May attract scrutiny from labor authorities – Workers lack job security, benefits, and protections. – There is an increased risk of being classified as disguised employment

2. Consultancy agreements

A consultancy agreement is used when engaging independent contractors or freelancers. They work on a specific deliverable or for a fixed duration, as defined in the contract. Like any other contractors, consultants do not form part of the employer’s formal workforce during the contract tenure. Under the legal lens, these individuals are sole proprietors or registered business entities working independently.

When to use

• For project-based work requiring niche expertise
• When there is no long-term employment intent
• For roles that do not need employer supervision or integration into core operations

Although consultancy agreements seem an easy solution for staffing requirements, they carry the heavy risk of misclassification.

Risk of misclassification in consultancy agreements

The key compliance risk lies in misclassifying an employee as a contractor. If a contractor works under direct supervision, follows company policies, and uses company resources like an employee, labor authorities may treat them as a “deemed employee.” This could lead to penalties, back pay for benefits, and even taxation issues.

How an Employer of Record (EOR) Can Help

Compared to zero hour employees or consultants, an EOR can help mitigate risks through:

• Correct classification of worker type based on role
• Drafting compliant agreements, whether employment or consultancy
• Handling payroll, taxation, and statutory contributions
• Protecting the foreign company from permanent establishment and labor law violations

Decoding Tax Compliance When Hiring in India

Navigating India’s tax framework is a shared responsibility between employers and employees. Here’s a checklist of key obligations for both employers and employees:

Employer Tax Compliance Checklist

• Obtain a Tax Deduction and Collection Account Number (TAN)
• Deduct Tax at Source (TDS) on employee salaries
• Make monthly TDS deposits to the government
• Deduct and deposit Provident Fund (PF) and Employees’ State Insurance (ESI) contributions
• File quarterly TDS returns on time
• Issue Form 16 to employees at the end of the financial year

Employee Tax Compliance Checklist

• Register for a Permanent Account Number (PAN)
• File annual income tax returns accurately and on time
• Make advance tax payments if required (e.g., for freelance or additional income)
• Retain and review Form 16 for tax filing and recordkeeping

Wages and Compensation Regulations in India

The wages and compensation regulations in India can be understood as follows;

Work hours and overtime pay

India’s labor laws define clear boundaries around working hours and overtime compensation to ensure employee well-being and legal compliance.

Please Note: The details provided below are based on online research and data gathered from legal publications as on the date of this post went live. They are meant to change with time, business context, and regional regulations. We highly recommend vetting the particulates by a legal professional before use in your employment contracts. 

Standard work hours

• The legal limit for most industries is 8–9 hours per day and 48 hours per week
• A typical workweek consists of 6 working days, though many companies follow a 5-day week for white-collar roles

Overtime rules

• Employees are entitled to overtime pay if they work beyond the legal daily or weekly limits
• Overtime is generally paid at twice the employee’s regular wage rate, as mandated by the Factories Act and Shops and Establishments Acts (state-specific)
• Employers must track and record all overtime hours to stay compliant

Key Compliance Tip: Overtime policies can vary by state, industry, and employee classification. Always consult local labor laws or partner with an Employer of Record (EOR) like Tarmack to ensure proper compliance.

HR Policies in India: 10 Guidelines for Employers

Building a compliant and employee-friendly workplace in India requires HR policies that align with local labor laws and evolving workplace expectations. 

Here are ten guidelines to help you scale hiring in India while ensuring compliance:

1. Execute clearly defined employment contracts outlining roles, compensation, and terms
2. Implement transparent wages and compensation policies that meet or exceed statutory standards
3. Ensure legally adhering termination and exit processes including notice periods and final settlements
4. Set up inclusive maternity and paternity leave provisions as per legal requirements
5. Ensure strict adherence to Prevention of Sexual Harassment (PoSH) compliance policies
6. Observe adherence to public holidays and weekly work schedules as per state-specific rules
7. Use restrictive clauses like non-compete and non-solicit, with enforceability in mind
8. Include timely Gratuity and Provident Fund contributions as part of statutory benefits
9. Leverage digital tools to streamline HR operations and maintain compliance
10. Promote an adaptive and inclusive work culture that supports diversity and flexibility

Choose Tarmack for Hiring in India 

India offers global employers a unique blend of skilled talent, cost efficiency, and strategic advantages. But hiring in India also comes with a complex regulatory landscape that demands careful navigation. 

Whether you choose to establish a local entity or partner with an EOR, understanding local laws, contract structures, tax obligations, and HR best practices is key to building a compliant and successful team. With the right EOR by your side, your HR team will grow and thrive in India and also globally. 

Tarmack simplifies hiring in India by acting as your trusted Employer of Record (EOR), eliminating the need to set up a local legal entity. With Tarmack, you can onboard talent quickly, stay compliant with India’s complex labor laws, and manage payroll, tax filings, and statutory benefits without the administrative burden.

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Frequently Asked Questions (FAQs)

How can I legally hire an employee in India?

You can hire employees in India through two main approaches:

• Set up your own legal entity in India, which involves company registration, obtaining tax IDs (TAN, PAN, GST), opening a local bank account, and complying with employment and labor laws.

• Partner with an Employer of Record (EOR), which allows you to legally employ workers in India without setting up an entity. The EOR handles HR, payroll, tax compliance, and statutory benefits on your behalf.

Each approach has different cost, time, and compliance considerations.

Can a US company hire an employee in India?

Yes, a US company can hire Indian talent by either establishing a local subsidiary or working with an EOR. An EOR is considered a faster and more compliant route, especially for companies testing new markets or hiring remote teams. 

What is the recruitment process in India?

The typical recruitment process in India includes:

• Job analysis and role definition
• Sourcing candidates through job portals, agencies, or referrals
• Resume screening and shortlisting
• Interviews and assessments (often multi-round)
• Background verification
• Offer roll-out and negotiation
• Onboarding and orientation

Cultural fit, cost-to-company (CTC) structure, and notice periods are also key considerations during hiring.

Can a US employee work in India?

Yes, a US citizen can work in India, but they must obtain a valid employment visa sponsored by an Indian employer or entity.