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India Compliance
Everything US companies need to know about PF, ESIC, leave policies, and labor laws when hiring employees in India.
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:
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.
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.
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).
Both employer and employee contribute 12% of the employee's basic salary plus Dearness Allowance (DA):
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.
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.
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.
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).
ESIC registration applies to:
Some states have extended ESIC coverage to smaller establishments — always verify the current threshold for your state.
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.
Note that employees earning up to INR 137/day are exempt from the employee-side contribution but still receive full ESIC benefits.
ESIC provides a comprehensive social security net:
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.
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 (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.
Not all Indian states charge Professional Tax. As of 2026, states with Professional Tax include:
States like Delhi, Rajasthan, Haryana, and Uttar Pradesh do not levy Professional Tax.
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).
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 is accrued based on days worked during the year:
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 covers unplanned, short-duration absences:
Sick Leave is available for illness and medical needs:
The Maternity Benefit Act, 1961 (as amended in 2017) is one of the most generous maternity leave laws in the world:
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 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.
The Act applies to establishments with 10 or more employees. Once covered, the obligation continues even if headcount drops below 10.
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 = (Last drawn salary × 15 × Years of service) / 26
Where:
Example: An employee with a last drawn basic salary of INR 60,000/month and 7 years of service would receive:
Companies can either:
Provisioning for gratuity from the employee's first day is a sound financial practice, as the liability grows with tenure and salary.
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.
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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.
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.
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.
PF registration is mandatory within 30 days of your establishment reaching 20 employees. Once registered, the obligation is permanent regardless of future headcount.
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.
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.
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.
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