The Complete India Compliance Guide for Global Founders (2025)

If you’re setting up a team in India, understanding compliance is non-negotiable. From the way you structure offers and deduct taxes, to how leave, benefits, and termination are handled, India has a layered legal framework that shapes every aspect of employee engagement.

Employment laws in India work at two levels. National rules set the baseline for things like retirement savings (PF), end-of-service payouts (gratuity), maternity leave, and anti-harassment protections.

But much of the operational detail, leave thresholds, office registration, work hours, and state holidays, is determined locally. These rules differ across states like Karnataka and Maharashtra, and they apply even if your team is remote.

This guide breaks down the core legal requirements, state-level differences, and what you need to have in place from day one to stay compliant.

Leaves policy

Paid leave rules in India are defined by each state under what’s called the Shops and Establishments Act, a law that applies to most private companies, even if your team is fully remote. Most states mandate three types of leave:

Earned leave (EL)

This is paid time off that employees earn over time, usually 1 day for every 20 days worked.

Examples:

• Karnataka: 18 days/year
• Maharashtra: 21 days/year (after 240 days of continuous service)
• Delhi: 15 days/year
• Telangana: 15 days/year
• Tamil Nadu: 12 days/year

Note: Most states require between 12 and 21 days of earned leave annually.

Casual and Sick leave (CL + SL)

States handle these differently:

• Karnataka: 12 days combined CL + SL
• Maharashtra: 8 days CL; Sick Leave is not specified in the 2017 Act
• Delhi: 12 days combined CL + SL
• Telangana: 12 days combined
• Tamil Nadu: Not mandated under SEA, usually offered by contract

Most companies provide 6–12 days of sick leave to stay competitive, even if not explicitly required by law. These leave types are separate from public holidays or company-wide office closures.

Most states mandate 8–12 paid public holidays annually, which are not counted against EL, CL, or SL. Depending on the state, you may be required to maintain digital or physical records of employee leave.

Leave carry-forward and encashment

• Employees can usually carry forward unused earned leave, often up to 45 or 60 days, depending on the state
• In some cases, if someone builds up more than 30 days of earned leave, the company may be required to pay it out annually.
• At the time of exit, all recorded EL must be paid out, unless the company has a clearly defined unlimited leave policy that explicitly excludes accrual and encashment.

If you’re offering unlimited leave, your policy must clearly state that no leave is accrued or paid out. If that’s not documented properly, you could still be liable to pay out earned leave at exit.

Maternity and paternity leave

India’s maternity law applies if your company has 10 or more employees.

Key entitlements:

• 26 weeks of paid leave for the first two children
• 12 weeks for any additional children, or in cases of adoption or surrogacy
• Applies only if the employee has been with the company for at least 80 working days in the past year

If your company has 50+ employees, you must also provide:

• Access to a crèche (childcare facility)
• Two nursing breaks per day during the first year after returning to work

India does not have a statutory paternity leave mandate. Most of the companies choose to offer 1–2 weeks as a policy inclusion.ost of the companies choose to offer 1–2 weeks as a policy inclusion.

Unlimited leave policies

Indian law doesn’t prohibit unlimited leave, but your policy must be clearly structured to avoid legal ambiguity.

To avoid confusion or liability:

• Make sure it’s clear whether earned leave requirements are being met or waived.
• State that leave doesn’t accrue and won’t be paid out at exit.

Without this documentation, companies are still liable for leave encashment, even under an “unlimited” model.

Retiral benefits

Most full-time employees in India are legally entitled to retirement-linked benefits under national labor law.

Provident Fund (PF) and Gratuity are the two primary components. Employers may also choose to offer additional schemes like the National Pension System (NPS) or Superannuation, but these are optional.

Provident Fund (PF)

Provident Fund (PF) is similar to a 401(k), a government-managed retirement savings plan that requires both employer and employee contributions.

It’s mandatory if you employ 20 or more people in India and applies to all full-time salaried employees.

Key obligations:

• Both employer and employee contribute 12% of the employee’s basic salary each month.
• By default, this contribution is capped at ₹15,000/month of salary (~$180/month), but many companies contribute on full salary to stay competitive, especially in tech.

Opt-out caveat: Employees earning over ₹15,000/month can opt out of PF, but only if they’ve never been enrolled before, and they submit a formal declaration (Form 11) when they join. Once someone is in the system, they stay in for all future jobs.

Once someone has been enrolled in the PF system (even at a previous job), they’re automatically required to continue, and cannot opt out.

Additional employer costs: In addition to the 12% contribution, employers also need to:

• Pay ~0.5%–1.1% extra for admin and insurance
• Register employees, deduct monthly, and file on time

Gratuity

Gratuity is a lump-sum payment owed to any employee who completes 5 continuous years with the same company in India. 

What this means in practice:

• Once an employee crosses the 5-year mark, they are entitled to a one-time lump sum payout from the employer when they leave the company.
• It’s fully employer-funded – there are no monthly deductions from the employee’s salary.

Gratuity Formula: (15 / 26) × last drawn basic salary × total years of service

This works out to 15 days of base pay for every completed year of service, assuming a 26-day working month.

Key things to know:

• The legal limit is ₹20 lakh (~$24,000). Any amount above this is taxed as regular income.
• For long-tenured or senior engineers, this liability adds up quickly, especially if salaries are high or retention is strong.

You don’t need to pre-fund gratuity, but it becomes due in full once someone hits 5 years, so it’s important to include it in long-term financial planning.

See also: The cost of building a long-term team in India (and the options you actually have)

Optional retirement schemes

Some companies also offer optional retirement schemes to attract senior talent. These aren’t required by law, but they’re often part of senior compensation.

• National Pension System (NPS): A government-backed pension option. Companies can contribute up to 10% of base salary. More common in structured or large orgs.
• Superannuation: An older corporate retirement plan that allows employer contributions up to 15% of basic. Withdrawals are taxed as per annuity rules. Less common in startups, but still seen in structured CTCs offered by larger employers.

Severance norms

When someone exits, companies in India are required to process what’s called a full-and-final settlement, covering unpaid salary, taxes, any leave balance, and all exit paperwork.

If the employee falls under India’s “workman” category, usually blue-collar or non-managerial roles, statutory severance rules apply. But most engineering and tech roles don’t fall into that category.

For engineers and managerial hires, Indian companies are still expected to follow these exit practices:

• Leave encashment: Any unused paid leave must be paid out, unless your policy explicitly states that leave doesn’t accrue.
• Gratuity: Needs to be paid if the employee has completed 5 years. In some cases, like death or disability, it’s due even earlier.
• Exit documentation: You’ll need to give the employee a complete record of what was paid (salary, taxes, gratuity, and leave) for compliance and future proof.

Founders don’t need to navigate this line-by-line, but someone must track and process each piece at exit to avoid compliance gaps.

Labor laws

India’s labor law framework includes central statutes and state-level rules that apply even to white-collar employment. Key laws that founders must account for include: 

Law / requirement	What founders need to know
Industrial Disputes Act, 1947	Applies mostly to blue-collar roles (“workmen”). For engineers and managers, it doesn’t apply directly, but companies often follow similar exit steps, like notice and final payouts, to stay consistent.
Payment of Gratuity Act, 1972	Kicks in once someone completes 5 years with your company. You’re required to pay a lump sum (gratuity), and the full cost is on the employer, there’s no employee deduction.
Employees’ Provident Fund Act, 1952	Requires you to offer retirement savings (PF) if you have 20+ employees. You’ll need to match employee contributions monthly and file with the PF authority.
Maternity Benefit Act, 1961	Covers 26 weeks of paid maternity leave if the employee meets tenure criteria. If your team has 50+ people, you’ll also need to provide childcare access and nursing breaks post-return.
POSH Act, or the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013	If you have 10 or more employees, you’re legally required to: – “Create a sexual harassment prevention policy” – “Form an Internal Committee (with at least one external expert)” – “Conduct yearly awareness training and maintain records”
Shops & Establishments (S&E) Acts	Each state has its own version of this law. Covers things like working hours, state holidays, and whether a local office needs to be registered.
Register Maintenance (Labor Compliance)	You’ll need to keep records of attendance, leave, and wages, either digitally or in print, depending on state rules. These can be reviewed during labor inspections, even if your team is remote.

Payroll and tax deductions

Once someone’s onboarded, you’ll need to make sure payroll is set up to handle all required taxes and deductions under Indian law.

This includes income tax withholding, state-level payroll taxes, and how salary is structured to stay compliant with PF and gratuity rules.

Income tax (TDS or Tax Deducted at Source)

You’re required to deduct income tax from each salary, this is known as TDS (tax deducted at source).

• For full-time employees, TDS is calculated monthly based on their estimated annual income (including exemptions or deductions). At year-end, you’ll need to issue a document called Form 16, which summarizes salary paid and tax withheld.
• For independent contractors or consultants, the deduction is: 10% for professional services and 2% for technical services. These apply only if you’ve signed a consulting agreement and the total payout crosses ₹30,000 (₹50,000 starting FY 2025–26).
• Misclassifying a full-time hire as a contractor to avoid benefits like PF or gratuity can trigger penalties and compliance issues during audits.

Professional Tax (PT)

Some states charge a small payroll tax called Professional Tax (PT). You’ll need to deduct this from employee pay and deposit it with the state. PT registration is required in every state where you have employees, even if they work remotely from that location.

State	Professional Tax slab
Karnataka	₹200/month for salaries > ₹25,000
Maharashtra	₹200/month for salaries > ₹10,000
Tamil Nadu	Semi-annual filing; max ₹1,250/year
Delhi	No professional tax

Salary structure and statutory deductions

How you structure salary impacts both employee take-home and your statutory obligations as the employer. Here’s how it typically works in India:

Common salary components

• Basic Salary: This is the fixed monthly amount used to calculate PF and gratuity. It’s usually 40–50% of total compensation (called “CTC” in India). The higher it is, the more you pay in retirement-linked contributions.
• House Rent Allowance (HRA): A portion of salary that can be tax-exempt if the employee rents a home and provides receipts. Often set at 40–50% of basic.
• Special Allowance/Bonuses: Fully taxable. Used to adjust the total CTC and offer flexibility in structuring take-home.
• Performance-linked Pay: Usually paid quarterly or annually, depending on company policy. Taxable when paid.
• Flexible Benefit Plan (FBP) Components (Optional): These are flexible, tax-saving perks that employees can opt into. Common examples include:
  • Meal or fuel vouchers
  • Internet or phone bill reimbursements
  • Learning and upskilling claims
  • Voluntary Provident Fund (VPF) contributions

Employees have to choose these benefits each year and submit receipts to claim tax exemptions. Limits apply based on the benefit type.

See also: Does your offer letter mention stock options? Here’s what it means.

Key compliance triggers

• The two Indian income tax regimes are – old and new. Employees must choose one so TDS can be calculated correctly.
• PF: Calculated on basic salary. If the basic is structured higher, employer PF contributions rise. (See PF section for opt-out conditions.)
• Gratuity: Also linked to basic salary. Higher basic means higher long-term gratuity liability.
• PT and TDS: Must be deducted monthly and filed as per local/state law.

GST, invoicing, and cross-border considerations

If you’re using an EOR, Goods and Services Tax (GST) usually doesn’t apply, since the person is employed in India and you’re paying the EOR.

But if you’re contracting directly with individuals or vendors in India, you may need to register for GST, issue compliant invoices, or handle overseas payments properly.

Where GST shows up

GST applies on most India-based expenses if you’re paying vendors or setting up through your own entity. Common examples:

• Laptops, phones, peripherals: Charged at purchase if procured locally.
• Coworking or office rentals: Workspace providers apply GST on rent and service fees.
• Vendor and contractor payments: Indian consultants, recruiters, and other vendors charge GST by default.
• Software and tools: Most domestic SaaS and platform subscriptions include GST

If these expenses run through your Indian entity, GST will be included on most invoices.

Can your Entity claim Input Credit?

Yes, if your India entity is GST-registered and the expense qualifies as business use, you can recover GST paid via input tax credit.

To claim input credit:

• Your entity’s GSTIN must appear on the invoice.
• The purchase must be for legitimate business purposes.
• Vendor invoices have to reconcile with your filings (GSTR-2B match).
• Records must be stored for at least 6 years.

Note: If you’re working through an EOR, you won’t be able to claim input credit. The EOR or vendor holds the tax registration, not your company.

Billing your parent company? Transfer Pricing applies.

If your India entity is billing your U.S. parent (or any group company) for salaries, R&D work, or internal services, Indian transfer pricing rules apply.

These apply even if:

• You’re not generating profit
• The work is entirely internal
• The other party is part of your own company group

To stay compliant, you’ll need to:

• Price intercompany transactions using fair market benchmarks
• Maintain documentation explaining your pricing
• File Form 3CEB annually, certified by a Chartered Accountant
• Comply if your cross-border transaction value exceeds ₹10M (or ₹200M for domestic group companies)

If not handled properly, this can trigger audits, penalties, and retrospective compliance costs.

Even if you’re billing without a profit margin, expect 15–20% overhead, including legal agreements, CA filings, pricing documentation, and potential backdated cleanups if payments have already started.

Onboarding and compliance requirements 

Indian employment law sets the baseline, but compliance gaps often show up in how teams are onboarded, supported, and managed day to day. Most statutory obligations don’t get enforced automatically.

Founders still need to ensure key processes are in place, especially when operating remotely or via a third-party platform.

Use legally compliant offer letters and employment contracts

Offer letters and employment agreements in India must include specific clauses to meet statutory and enforcement requirements:

• Notice period and probation terms
• Leave entitlements (in line with state laws)
• PF and gratuity applicability
• Confidentiality, IP ownership, and invention assignment
• Non-solicitation and moonlighting restrictions (if required)
• Termination process and F&F settlement terms

Collect statutory and KYC documentation at onboarding

Founders should ensure that certain documents are collected and verified at the time of joining:

• PAN Card (for income tax deduction)
• Aadhaar or government-issued ID (for background verification)
• Bank account details (for salary credit)

Some companies also collect address proof, prior employment documents, and educational verification for audit-readiness.

POSH setup 

As covered earlier, Indian law mandates POSH implementation for any team with 10 or more employees. As a founder, you’re expected to:

• Constitute a compliant ICC
• Conduct annual employee training
• Maintain documentation of meetings and awareness campaigns

Design benefits that go beyond the statutory minimum

Founders hiring senior engineers or competitive talent in India often go beyond PF and gratuity. Common additions include:

• Private health insurance (group mediclaim) for employees and dependents
• Accident insurance 
• Term life cover
• Outpatient medical reimbursements
• Flexible benefits (learning, internet, travel) under a declared Flexible Benefits Plan (FBP)

These are not legally required but are standard in most tech companies and help reduce attrition.

See also: 6 employee benefits you must offer to your remote teams

Run periodic compliance audits

At a minimum, founders should review the following on a quarterly basis:

• PF, PT, and TDS filings are accurate and up to date
• Gratuity eligibility is tracked and provisioned
• Leave records align with local law
• Salary slips and Form 16s are generated on time 
• POSH training and ICC composition are maintained

These checks are often missed in remote-first setups or when working with distributed payroll vendors.

Maintain centralized and secure employment records

All contracts, revisions, appraisals, promotions, and exits must be securely stored and retrievable for at least 3–7 years, depending on the applicable law. 

Digital recordkeeping is accepted, but founders must be able to produce records during audit or dispute.

Key documents to maintain:

• Offer letters and employment agreements
• Proof of onboarding (forms, ID)
• Salary slips and tax filings
• Exit and F&F documentation
• POSH committee meeting minutes and training records

Work with local legal and tax advisors

Even with an EOR or managed payroll provider, founders are responsible for ensuring their policies and contracts are compliant. It’s inevitable to engage a local labor law advisor and a qualified chartered accountant or company secretary (CS) to review key decisions, especially in terminations, contract language, or disputed settlements.

Conclusion

Expanding to India can be one of the best moves for a global startup, granting access to skilled talent in a competitive market. Success lies in marrying that innovation with sound compliance. And deal with all the moving parts that come along.

If you’re setting up an entity, you’ll need to build that system from the ground up: register in every state where you employ, stay updated on wage and leave thresholds, manage PF and gratuity filings monthly, and prepare for inspections and labor notices.

If you’re using an EOR, some of this may be handled, but isn’t completely hands-off. You’ll still need visibility into contracts, documentation, benefits, tax structure, and whether the setup holds up under audit.

TeemGenie was built to be more than standard payroll and statutory compliance EOR. We take complete ownership of every part of your Indian expansion, including, but not limited to compliance, onboarding, and local setup.

Here’s what that looks like:

• Offer release, background checks, and onboarding managed end-to-end, with updates across the notice period
• Workspace and hardware setup handled locally, including co-working arrangements, home-office delivery, and asset tracking
• ₹30L medical, term, and accident insurance included by default
• POSH policy, committee setup, and annual training managed proactively, including registers and audits
• Payroll cost structuring optimized for take-home salary 
• 18% GST savings on rentals and purchases
• A single TeemGenie point of contact handles escalations and day-to-day coordination.
• Full visibility from offer to onboarding and ongoing support. You’re never guessing what’s stuck or who’s responsible.
• Built-in audits and compliance checks on registers, labor filings, and onboarding documentation.

If you’re building a serious engineering team in India, let’s talk! Book a 15-minute call with our India expansion experts today. 

FAQs