The Complete Guide to India HR Compliance for US Companies

Why India Compliance Matters for US Companies

India has become one of the most important talent markets in the world. Today, more than 1,700 Global Capability Centers (GCCs) operate out of India, employing over 1.9 million professionals in roles spanning engineering, finance, legal, customer support, and operations. For US companies building distributed teams, India is often the first international hire destination — and for good reason: the talent pool is deep, English-language proficiency is high, and the cost-to-quality ratio is unmatched.

But hiring in India comes with a non-trivial compliance burden that catches many US founders and HR teams off guard.

Unlike in the US where federal employment law provides a single framework, India's labor law is a patchwork of central and state legislation — some dating back to the 1940s. The government is in the process of consolidating these into four Labor Codes (on wages, social security, industrial relations, and occupational safety), but implementation has been phased and varies by state. In the meantime, companies must navigate the existing Acts alongside any newly enacted Code provisions.

The stakes for non-compliance are high:

• Monetary penalties range from INR 5,000 to INR 1,00,000 per violation, depending on the Act
• Repeated or willful violations under the Employees' Provident Funds Act can result in up to 3 years imprisonment
• Directors and officers of foreign companies with Indian subsidiaries can be held personally liable
• EPFO (Employees' Provident Fund Organisation) and ESIC authorities conduct periodic inspections and audits

Getting this right from day one is not just about avoiding fines — it signals to your Indian team that you take their statutory benefits seriously. That matters for retention in a competitive hiring market.

This guide covers the six pillars of India HR compliance that every US company must understand: Provident Fund, ESIC, TDS, Professional Tax, Mandatory Leave, and Gratuity.

---

Provident Fund (PF / EPF)

The Employees' Provident Fund (EPF) is India's equivalent of a mandatory retirement savings scheme, governed by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and administered by the Employees' Provident Fund Organisation (EPFO), a statutory body under the Ministry of Labour and Employment.

Who Must Register

PF registration is mandatory for any establishment employing 20 or more employees. Once you cross this threshold, the obligation is permanent — even if your headcount drops below 20 afterward. Smaller establishments can voluntarily register, and in some industries the threshold is lower (10 employees for certain categories).

Contribution Rates

Both employer and employee contribute 12% of the employee's basic salary plus Dearness Allowance (DA):

• Employee contribution: 12% goes entirely into the EPF account
• Employer contribution: 12% is split as follows:
  • 8.33% goes to the Employees' Pension Scheme (EPS)
  • 3.67% goes to the EPF account

Additionally, employers pay 0.50% toward EDLI (Employees' Deposit-Linked Insurance Scheme), which provides life insurance coverage to EPF members, and a small administrative charge.

The current EPF interest rate is approximately 8.15% per annum, declared annually by the government. This makes EPF one of the most attractive risk-free savings instruments available in India.

The INR 15,000/Month Threshold

If an employee's monthly basic salary exceeds INR 15,000, PF contributions are capped at INR 15,000 for the purpose of mandatory EPS contribution (the pension scheme). However, both employer and employee may choose to contribute on the actual higher salary for EPF — this is called voluntary higher contribution and must be elected jointly.

Compliance Steps

1. Register with EPFO within 30 days of reaching the 20-employee threshold using the Shram Suvidha portal (unified registration portal)
2. Deduct 12% from each employee's salary every month
3. Deposit contributions by the 15th of the following month — late deposits attract interest at 12% per annum plus damages
4. File the Electronic Challan-cum-Return (ECR) monthly, which details contributions for each employee
5. Issue a UAN (Universal Account Number) to every new employee — UAN is a unique identifier that stays with the employee across jobs
6. Maintain prescribed registers and produce them during EPFO inspections

Penalties for late/non-payment: Damages at 5% to 25% per annum on arrears, plus 12% interest. Criminal prosecution is possible for willful non-compliance.

---

Employee State Insurance (ESIC)

The Employees' State Insurance (ESI) scheme is India's social security and health insurance program, governed by the Employees' State Insurance Act, 1948 and administered by the Employees' State Insurance Corporation (ESIC).

Who Must Register

ESIC registration applies to:

• Factories employing 10 or more workers
• Other establishments (offices, IT companies, shops) employing 20 or more workers

Some states have extended ESIC coverage to smaller establishments — always verify the current threshold for your state.

Wage Ceiling

ESIC covers employees earning up to INR 21,000 per month gross salary (INR 25,000 per month for persons with disabilities). Employees earning above this threshold are exempt from mandatory ESIC but may be covered under a company-provided group health insurance plan.

Contribution Rates

• Employer contribution: 3.25% of gross wages
• Employee contribution: 0.75% of gross wages
• Total: 4.00% of gross wages

Note that employees earning up to INR 137/day are exempt from the employee-side contribution but still receive full ESIC benefits.

Benefits Covered

ESIC provides a comprehensive social security net:

• Medical benefit: Full medical care for employees and their dependents at ESIC hospitals and dispensaries — no capping on expenditure
• Sickness benefit: Cash payment at 70% of average daily wages for up to 91 days per year during certified illness
• Enhanced sickness benefit: 100% of wages for up to 2 years for employees undergoing sterilization or certain long-term illnesses
• Maternity benefit: Full wages for 26 weeks (paid maternity leave), extended to 12 weeks for adoption
• Disablement benefit: 90% of wages for temporary disablement; life pension for permanent total disablement
• Dependent benefit: Monthly pension to dependents if an employee dies due to employment injury
• Funeral expenses: Lump sum of INR 15,000 to the dependents

Compliance Steps

1. Register on the ESIC portal within 15 days of becoming liable
2. Obtain a 17-digit employer code
3. Issue a ESIC identity card (Pehchaan card) to every covered employee and their dependents
4. Deduct 0.75% from employee wages monthly
5. Deposit total contribution (4.00%) by the 15th of the following month
6. File half-yearly returns (April–September and October–March)

---

Tax Deducted at Source (TDS) on Salaries

Under Section 192 of the Income Tax Act, 1961, every employer is required to deduct income tax at source from salaries paid to employees. This is the Indian equivalent of payroll withholding in the US.

How TDS on Salary Works

1. Estimate the employee's annual taxable income at the start of each financial year (April to March)
2. Apply the applicable tax regime — employees can choose between the Old Tax Regime (with deductions like HRA, 80C) or the New Tax Regime (lower rates, no deductions). Since FY 2023-24, the New Regime is the default unless the employee actively opts out
3. Calculate annual tax liability after applying exemptions, deductions, and rebates
4. Divide by 12 to arrive at the monthly TDS amount

Key Compliance Requirements

• Deposit TDS by the 7th of the following month (for taxes deducted in March, deposit by April 30)
• File Form 24Q quarterly — the quarterly TDS return for salaries
• Issue Form 16 to all employees by June 15 each year — this is the TDS certificate that employees use to file their income tax returns
• Failure to deduct or deposit TDS on time attracts interest at 1–1.5% per month and penalties up to the TDS amount not deducted

US companies often underestimate TDS obligations because US payroll systems are not configured for Indian tax regimes. Dedicated India payroll software or a local payroll partner is strongly recommended.

---

Professional Tax

Professional Tax (PT) is a state-level tax levied on individuals earning income through employment, profession, or trade. It is deducted from employees' salaries by the employer, who then deposits it with the respective state government.

States That Levy Professional Tax

Not all Indian states charge Professional Tax. As of 2026, states with Professional Tax include:

• Maharashtra
• Karnataka
• West Bengal
• Andhra Pradesh
• Telangana
• Tamil Nadu
• Gujarat
• Madhya Pradesh
• Kerala
• Assam
• Meghalaya
• Tripura
• Jharkhand
• Odisha
• Bihar
• Sikkim
• Chhattisgarh

States like Delhi, Rajasthan, Haryana, and Uttar Pradesh do not levy Professional Tax.

Rates and Limits

The maximum Professional Tax that can be levied is INR 2,500 per year, as capped by the Constitution of India. Rates vary by state and are typically slab-based — for example, in Maharashtra, employees earning over INR 10,000/month pay INR 200/month (INR 300 in February, totaling INR 2,500/year).

Key Points

• Employer must register with the State PT authority separately from central registrations
• PT is deductible under Section 16(iii) of the Income Tax Act — employees can claim it as a deduction from their taxable income
• Filing frequency varies by state: monthly, quarterly, or annually depending on the number of employees and state rules

---

Leave Policies in India

India's leave laws are primarily governed by the Factories Act, 1948, the Shops and Establishments Acts of each state, and various state-specific labor laws. Unlike the US (which has no federal paid leave mandate for private sector employees), India mandates multiple types of paid leave.

Earned Leave (EL) / Privilege Leave (PL)

Earned Leave is accrued based on days worked during the year:

• Entitlement: 15 to 18 days per year, depending on the applicable Act and state
• Under the Factories Act: employees earn 1 day of leave per 20 days worked
• Under many Shops & Establishments Acts: 1 day per 20 days or a fixed quantum of 18 days/year
• Carry forward is permitted — typically up to 30 or 45 days depending on the Act
• Encashment on termination: Unutilized earned leave must generally be paid out at the time of resignation, retirement, or termination
• Minimum service: Employees must complete 240 days of service in a calendar year to be eligible for Earned Leave in most establishments

Earned Leave is the most valuable leave entitlement for employees, as it accumulates over time and can represent a significant payout upon separation.

Casual Leave (CL)

Casual Leave covers unplanned, short-duration absences:

• Entitlement: 7 to 12 days per year, depending on state and establishment type
• Typically cannot be carried forward to the next year — lapse if unused
• Generally not encashable on termination (unlike Earned Leave)
• Usually limited to a maximum of 3 consecutive days per instance
• Some states combine Casual Leave and Sick Leave into a single "Other Leave" bucket

Sick Leave (SL)

Sick Leave is available for illness and medical needs:

• Entitlement: 7 to 12 days per year, depending on applicable law
• Employers may require a medical certificate for absences of 2-3 or more consecutive days
• Typically not carried forward and not encashable
• Some progressive employers voluntarily offer more sick leave than the statutory minimum

Maternity Leave

The Maternity Benefit Act, 1961 (as amended in 2017) is one of the most generous maternity leave laws in the world:

• 26 weeks of fully paid maternity leave for the first two children
• 12 weeks of paid maternity leave for the third and subsequent children
• 12 weeks of paid maternity leave for mothers adopting a child under 3 months or commissioning mothers (surrogacy)
• Eligibility: Employee must have worked for at least 80 days in the 12 months preceding the expected date of delivery
• Applies to all establishments with 10 or more employees
• Employers with 50 or more employees must also provide crèche (daycare) facilities within a prescribed distance

Important for US companies: US-based founders often assume India's maternity leave would mirror the US (which has no federal paid maternity leave mandate). In reality, Indian law is far more employee-protective. Failing to honor maternity benefits is a criminal offense under the Maternity Benefit Act.

---

Gratuity

Gratuity is a one-time payment made by an employer to an employee as a token of gratitude for long service. It is governed by the Payment of Gratuity Act, 1972.

Applicability

The Act applies to establishments with 10 or more employees. Once covered, the obligation continues even if headcount drops below 10.

Eligibility

An employee becomes eligible for gratuity after completing 5 years of continuous service with the same employer. The 5-year requirement is waived in cases of death or total disablement due to accident or disease — in these cases, gratuity is payable even with less than 5 years of service.

Gratuity Formula

Gratuity = (Last drawn salary × 15 × Years of service) / 26

Where:

• Last drawn salary = Basic salary + Dearness Allowance (DA)
• 15 = 15 days of wages per completed year of service
• 26 = Working days in a month (excluding Sundays)
• Years of service is rounded to the nearest half year for the final year

Example: An employee with a last drawn basic salary of INR 60,000/month and 7 years of service would receive:

• Gratuity = (60,000 × 15 × 7) / 26 = INR 2,42,307

Tax Exemption

• The maximum tax-exempt gratuity is INR 25 lakh (for private sector employees covered under the Act, updated from INR 20 lakh)
• Gratuity received above INR 25 lakh is taxable as "Income from Salaries"

Gratuity Funding

Companies can either:

1. Self-fund gratuity (maintain a provision in the books)
2. Purchase a group gratuity plan from an insurance company like LIC — this provides actuarial funding and is common among larger organizations

Provisioning for gratuity from the employee's first day is a sound financial practice, as the liability grows with tenure and salary.

---

How Birch Helps US Companies Stay Compliant in India

Managing India HR compliance manually is error-prone — especially when your HR team sits in the US, operates in a different timezone, and is unfamiliar with Indian statutory requirements. Birch is built to handle exactly this complexity.

Here's what Birch provides out of the box for companies with US and India teams:

• Region-specific leave policies: Configure separate leave rules for your US and India employees. Birch enforces Indian leave entitlements (Earned Leave, Casual Leave, Sick Leave, Maternity Leave) automatically based on employee location
• Multi-country holiday calendars: India and US holiday calendars are built in, with state-level Indian holidays supported. No manual configuration needed
• Timezone-aware time tracking: Clock-in/clock-out and timesheet management works seamlessly across IST, EST, and PST — your managers in San Francisco see accurate hours logged by your Bangalore team
• Compliance resources: Birch surfaces relevant compliance information in-context, so your HR team doesn't need to be an expert in Indian labor law to stay compliant
• Unified employee directory: All your employees — US and India — in one system, with region-specific fields (PAN, Aadhar, PF UAN for India; SSN for US) stored securely

Building an HR stack that works for both jurisdictions doesn't require stitching together five different tools. Birch is designed for exactly the kind of distributed, cross-border team that US companies are building today.

Book a demo to see Birch in action.

---

Frequently Asked Questions

Do US companies need to comply with Indian labor laws?

Yes. If you employ workers in India — whether through a subsidiary, GCC, or directly — you must comply with Indian labor laws including PF, ESIC, TDS, professional tax, gratuity, and leave regulations. The specific obligations depend on your legal structure in India.

What is the difference between PF and ESIC?

PF (Provident Fund) is a mandatory retirement savings scheme where employer and employee each contribute 12% of basic salary. ESIC (Employee State Insurance) is a health insurance and social security program where employers contribute 3.25% and employees contribute 0.75% of gross salary.

How many types of leave are mandatory in India?

India mandates three main types of leave: Earned Leave (15-18 days/year), Casual Leave (7-12 days/year, varies by state), and Sick Leave (7-12 days/year, varies by state). Additionally, women employees are entitled to 26 weeks of paid maternity leave.

When does PF registration become mandatory?

PF registration is mandatory within 30 days of your establishment reaching 20 employees. Once registered, the obligation is permanent regardless of future headcount.

Can US companies hire Indian employees directly without a local entity?

US companies can hire Indian workers as contractors without a local entity, but this approach has significant risks — misclassification penalties, loss of employer-employee rights for workers, and potential "permanent establishment" tax risks. Most companies use an Employer of Record (EOR) or set up a private limited company in India. Either way, the statutory benefits (PF, ESIC, TDS) must be honored.

What happens if we miss PF deposit deadlines?

Late PF deposits attract interest at 12% per annum on the overdue amount. Additionally, EPFO can levy damages ranging from 5% to 25% per annum depending on the delay period. Persistent non-compliance can result in criminal prosecution of company directors and officers.

Is gratuity applicable from day one of employment?

Gratuity begins accruing from the employee's first day, but becomes payable only after 5 years of continuous service (waived for death or total disablement). It is good practice to provision for gratuity from day one rather than treating it as a future obligation.