Complete Resource on How to Hire and Pay in India Without an Entity

Key Takeaways

• You can sign contracts in India without opening a local company. But India has a unique risk called a permanent establishment, which you don't usually see in other countries.
• There are three main ways to hire: sign an independent contractor agreement, use an Employer of Record, or work with a local staffing or IT services provider.
• India’s Labor Codes started on November 21, 2025, and central regulations came in May 2026. These changes affect how wages and contributions are calculated.
• A new rule requires basic pay plus dearness allowance to be at least half of total pay. This raises EPF, gratuity, and bonus costs for most salary setups.
• A foreign company without a presence in India usually does not deduct TDS when paying contractors. But the contractor still has to handle their own GST and income tax.
• Foreign employers often run into problems with permanent establishment rules. This risk depends on the kind of work the person does in India, not just how they get paid.

India is the biggest talent market for many companies. The main question when hiring for the first time is whether you need to set up a company there.

India doesn't need more attention than other markets, but a contractor setup that is easy elsewhere can create a corporate tax problem here. Labor laws and income tax rules have also changed recently.

This guide covers the three ways to hire, the changes in 2025 and 2026, the real cost of hiring, and how to send money to India while staying compliant.

Why Setting Up an Entity Is the Default Assumption

When you hire people directly in India, you usually need a legal presence in the country. This can be a wholly owned subsidiary, a branch office, or a liaison office. Each has a different tax status and approval process.

What Incorporating Actually Involves

A private limited company must register with the Ministry of Corporate Affairs, obtain a PAN and TAN from the tax authorities, get GST registration where applicable, and register with both the EPFO and ESIC when the number of employees reaches the prescribed thresholds. It also needs to secure state-level registrations under the relevant Shops and Establishments Act, register for professional tax in states where it is collected, and submit annual audited accounts.

In practice, setting up takes two to four months, and you will need to keep paying for secretarial, accounting, and payroll services. You must also regularly report foreign direct investment to the Reserve Bank of India.

Why Companies Look for Another Route

For your first hire or a small team, setting up an entity is often the most costly step. Many companies want speed and flexibility, so they treat India as a trial market before committing to something bigger.

What You Genuinely Cannot Do Without an Entity

You cannot run Indian payroll, register as an employer with EPFO or ESIC, deduct and pay TDS with your own TAN, or give employees Form 16 unless you are a registered Indian employer. The main question is whether you need to be that employer yourself.

The Three Ways to Hire in India Without an Entity

Option 1: Engage an Independent Contractor

If you sign a services agreement with an independent professional, they will send you invoices, and you pay them in foreign currency. The professional handles their own income tax and GST. You do not need to run Indian payroll, make statutory contributions, or file anything locally.

This setup works well for truly independent work. But it becomes the riskiest option if the person is really working as a full-time employee.

Option 2: Hire Through an Employer of Record

An Employer of Record is an Indian company that becomes the legal employer for your hire. They issue the appointment letter, run payroll in rupees, enroll the employee with EPFO and ESIC if needed, deduct TDS and professional tax, handle gratuity, and file all required documents on time. You still manage the employee’s work.

Onboarding usually takes one to three weeks. The Labor Codes now require a written appointment letter, so it is helpful to have someone who knows the current format prepare it.

Option 3: Contract a Local Services or Staffing Provider

With this option, you buy a service instead of hiring someone yourself. The provider hires the staff and charges you one rate. This is the usual India IT services and BPO model, and it works well for clear, repeatable tasks.

This approach gives you less control. The contract labor system, now covered by the Occupational Safety, Health and Working Conditions Code, limits what you can do. If you direct the work instead of just buying the result, it might not count as a real contracting setup.

Comparing the Three at a Glance

The Two Risks That Are Specific to India

Most country guides focus on misclassification. In India, a payroll issue can also turn into a corporate tax problem.

Risk One: Misclassification

There is no single legal test provided by Indian law; instead, the courts use some tests that overlap, including the control test, which inquires whether one not only determines what is produced but also how it is produced; the integration test, which looks at whether the person is an integral part of your organization; the test of economic dependence, which examines whether they actually assume any business risk; and the mutuality of obligation test, which considers whether there is a continuing obligation to provide and to accept work.

Control is the main factor, but courts look at the whole relationship, not just one detail. The contract wording does not decide the outcome.

The signs that can lead to reclassification are familiar: fixed hours you set, a company email address and a place in the organization chart, exclusivity or a workload that keeps them from having other clients, your equipment, performance reviews, leave that works like regular leave, and an open-ended engagement with no clear scope.

If reclassification happens, all obligations apply from day one. This includes backdated EPF and ESI with interest and penalties, gratuity if eligible, statutory bonus, leave entitlements, and related tax exposure.

Risk Two: Permanent Establishment

Many foreign employers do not realize that a permanent establishment is what allows India to tax a foreign company’s business profits. If you cross this line, India may tax part of your global income, and you may face extra filing and possible penalties.

Three types of PE are relevant to hiring. A fixed-place PE occurs when you have a place in India where you carry on your business. A service PE arises when your personnel provide services in India that exceed the treaty thresholds. And a dependent agent PE happens when a person in India regularly exercises authority to conclude contracts on your behalf.

The third option can be risky. For example, a salesperson in Bengaluru who closes deals for your company, works only for you, and gets all their income from you is basically a dependent agent.

An independent agent doing their usual work usually does not create a permanent establishment. Misclassification increases PE risk because the same factors that make someone a contractor also make them less independent.

How the Two Interact

Sales and business development roles face the most risk. Engineering, design, and back-office jobs that don't handle customer contracts carry much less risk. Keep this difference in mind when planning your hiring before setting up your organization.

This is not a reason to avoid India. Instead, set up roles that involve customers or contract signing so they do not expose your foreign parent company. Get a tax opinion before making these hires.

What Changed: The Labor Codes and the New Tax Act

Two major changes happened close together, so anything written before late 2025 is now outdated.

The Four Labor Codes

On November 21, 2025, the Indian Government brought all four Labor Codes into force, replacing the 29 central labor laws. These codes are the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020, and the Occupational Safety, Health and Working Conditions Code 2020. The central government enacted the rules on May 8 and 9, 2026.

State rules are different. Each state and union territory sets its own labor rules, and progress varies by region. Until a state issues new rules, employers follow both the central rules and the old state rules. Always check the rules for the specific state where you are hiring, not just the national summary.

The 50% Wage Rule

The biggest change to the budget is that, under the Code on Wages, allowances not counted as wages cannot exceed 50% of total pay. If they are, the extra amount is added back to wages.

Earlier, Indian salaries often had low basic pay and high special allowances to keep contributions low. This approach no longer works. Now, many packages have a higher wage base for EPF, gratuity, and bonus, which raises employer costs without increasing the total CTC.

When planning your first hire in India in 2026, use the new rates instead of the old salary numbers from before 2025.

The New Income-tax Act

The Income-tax Act of 2025 came into effect on April 1, 2026, replacing the Income-tax Act of 1961 and applying to the financial year 2026–27. The main scheme and the rates were carried over, but the law was reorganized from 819 sections to 536, and almost every section number was changed. The TDS provisions were consolidated into a single structured chapter.

In practice, two things matter: references to the 1961 Act may still be correct even if the section numbers have changed, and income earned up to March 31, 2026 is still covered by the old Act. Both systems will be in use for a while.

Gig and Platform Workers

The Code on Social Security now covers gig and platform workers, with rules about aggregator contributions to welfare schemes. But this area is still unclear. If your situation is like an aggregator platform, get specific advice.

What You Owe When the Worker Is an Employee

The amount that an employer contributes is the same whether the employer is your own company or one that acts on your behalf.

Provident Fund

The EPF scheme applies to businesses that have 20 or more employees; the employee pays 12% of their wages, and the employer also pays 12%, part of which goes to the pension fund. The legal limit on wages for compulsory coverage stays at ₹15,000 per month, although some employers contribute based on actual wages as a benefit. When you factor in EDLI and administrative charges, the total cost to the employer is only slightly more than 12%.

An employee who was already a member continues to contribute even after their wages cross the ceiling, unless a specific exemption applies. New joiners above the ceiling can be treated as excluded employees, though most companies enroll them anyway for simplicity.

Employees' State Insurance

In most states, ESI applies to businesses with 10 or more employees and includes workers who earn gross wages of up to ₹21,000 per month, or ₹25,000 for employees with disabilities. The employer pays 3.25%, and the employee contributes 0.75%. Coverage stays in force until the end of the current contribution period even if wages cross the ceiling mid-period.

ESI does not apply to most foreign companies hiring senior technical personnel; it applies only to support, operations, and junior positions.

Gratuity

Gratuity is due when a person retires, resigns, dies, or becomes disabled after completing five years of continuous service; however, the five-year requirement does not apply in cases of death or disability. The calculation is based on 15 days' wages for each full year of service; under the Labor Codes, employees on fixed-term contracts become eligible on a pro-rata basis after one year, which is a significant change from the previous situation.

You should provide gratuity each month instead of waiting until later, even if no one on your team has finished five years.

Other Statutory Costs

Some states collect professional tax; others do not. The rate is set, and eligible employees receive a monthly bonus if their wages fall within the prescribed limits. Maternity benefit extends for 26 weeks for eligible employees in accordance with the current maternity provisions contained in the Code on Social Security. Leave entitlements and working hours follow the OSH Code and relevant state regulations; where limits are exceeded, overtime is paid at twice the normal rate.

Each state sets minimum wages based on the type of work, not at the national level. Do not use a national figure unless it is for a specific state.

Tax and Withholding: Who Files What

Contractors File for Themselves

An Indian freelancer will report their business or professional income, pay advance tax whenever their liability goes above the threshold, and file an annual return. Eligible professionals and small businesses can use a presumptive taxation method, but they must decide whether to use it in consultation with their chartered accountant.

GST is the area foreign clients most frequently fail to understand; services provided to a client outside India are usually considered exports of services and are therefore zero-rated rather than exempt. Mandatory registration takes effect when total turnover reaches ₹20 lakh, or ₹10 lakh in special category states, and includes income from both Indian and foreign clients.

A registered exporter can file a Letter of Undertaking in Form RFD-11 to invoice at the zero rate without paying IGST in advance. Importantly, zero-rating relies on documentary evidence showing that payment has been received in convertible foreign exchange; the relevant proof is the Foreign Inward Remittance Certificate or its electronic version.

As the payer, this matters to you, even if the responsibility is theirs. If you pay using a method that cannot create a FIRC, your contractor may have trouble proving their export status. Ask about this during onboarding, not at the end of the financial year.

Your Withholding Position

The Indian TDS rules that apply to payments for professional and technical services cover certain types of payers, generally meaning individuals and organizations within the scope of the Indian tax system. A foreign company with no presence in India, no PAN, and no TAN is normally not in a position to deduct Indian TDS, and in practice foreign clients pay Indian freelancers the full amount stated on the invoice. The freelancer then meets their obligation by paying advance tax and filing their annual return.

The situation is entirely different if you use an Indian company or employ an EOR. The registered employer then handles salary TDS, professional tax, and all other statutory deductions, and issues compliant payslips along with a Form 16.

The direction of travel also changes when an Indian entity pays a foreign vendor. The system for withholding tax on payments to non-residents is separate. It has its own record-keeping requirements, such as a certificate confirming tax residency and a declaration stating there is no permanent establishment. It is a different issue, yet it involves the same advisor.

How to Actually Pay Someone in India

The Rails and What They Cost

The Documentation Question Nobody Asks Early Enough

Payments made across borders into India are handled through the foreign exchange system, and inward remittances are assigned a code based on their purpose. To support their claim for export of services and any GST refund application, your contractor needs proof of receipt in convertible foreign exchange.

Some rails generate documentation smoothly, while others make the process awkward. UPI and domestic wallets are meant for the final stage, after the money has reached India, not for receiving international payments.

Two practical habits deal with most of the problem. When onboarding a contractor, find out how they will get their FIRC or eFIRA so they can receive payments. Also keep your own record of the transactions: a signed agreement, an invoice for each payment, and proof of the transfer.

Currency and Cadence

Employees should be paid in rupees. Contractors usually prefer payment in USD, EUR, or GBP, and their export status depends on getting foreign currency. It is better to pay them in your own currency. Make sure to agree in writing who will pay the transfer fee and the FX cost.

Indian payroll is processed once a month, usually at the end of the month, and statutory deposits are due by the 15th of the next month. This matches the usual schedule and makes things easier for everyone.

Choosing Your Route

Engage a Contractor When

The work is project-based, the person has other clients, they decide their own methods, use their own equipment, and the scope of the work is clearly defined. Make sure they don't have authority to sign contracts for you.

Use an Employer of Record When

If you need someone who works your hours, is part of your team, and reports to your manager, that is employment. An EOR gives you this setup legally and quickly, handles Labor Code duties like issuing the required appointment letter, and keeps the employment relationship off your foreign parent’s balance sheet. It also removes the retroactive liability that can build up if a contractor is misclassified.

Using an EOR for everyone does not solve the permanent establishment issue. Even though it separates the employment relationship from your parent company, you still need to consider if the person is negotiating and signing contracts for you in India.

Set Up Your Own Entity When

When you have about twenty to thirty employees, you should have a physical office, especially if you are marketing your products in India or if India is becoming an operations hub instead of just a source of talent. At that point, fixed costs per person are low, and a subsidiary gives you a clearer split between your Indian operations and your foreign parent company.

Converting an Existing Contractor Team

Review each role for control, integration, economic dependence, and mutuality, and move those that do not meet the criteria to compliant employment. The change is more than just a new contract: pay must shift from an invoice-based system to a CTC one that follows the 50% wage rule, plus EPF, ESI (if needed), gratuity, and professional tax. Let the total cost go up, and see this as the cost of removing a liability, not just a new expense.

What to Watch Through 2026 and 2027

The Labor Codes are still being released, and the situation in Karnataka may be different from Maharashtra or Telangana. Pay attention to the states where you actually employ people.

There has been ongoing pressure to raise the EPF wage ceiling, even though it has stayed at ₹15,000. If it rises, employer costs will increase for all covered employees. This is something to watch.

The first full filing period under the Income-tax Act of 2025 will be in 2027. Expect clarifications, and remember that some early guidance may change.

Frequently Asked Questions

1. Can I legally hire someone in India without registering a company? Yes, you can legally hire someone in India without registering a company. You can engage an independent contractor, hire through an Employer of Record that will act as the legal employer, or enter into a contract with a local staffing or services provider. The only situation that requires you to have an Indian entity is if you wish to employ someone directly on your own payroll.
2. What does the concept of permanent establishment risk entail and why is it important in India? A permanent establishment refers to the point at which India has the right to tax a foreign company's business profits; such a situation may result from having a fixed place at one's disposal, from providing services in India above the thresholds set out in the treaty, or from having a person who regularly exercises authority to conclude contracts on your behalf. This matters because it turns a hiring decision into a corporate tax liability.
3. Can using an Employer of Record remove the risk of permanent establishment? It greatly reduces that risk because the Indian EOR hires the employee, not your company; however, it does not eliminate it. The risk could still occur if the person enters into contracts on your behalf or if the arrangement is set up so that your company is effectively carrying out its operations in India. You should seek advice for customer-facing positions.
4. Do I need to deduct TDS when I pay an Indian contractor? No, generally, if your company does not have an Indian presence, a PAN or a TAN. TDS obligations relating to India apply only to persons who are within the Indian tax system. The contractor is responsible for paying advance tax and submitting their own return. You still have to comply with your home country's reporting requirements.
5. Does my Indian contractor have to charge me GST? Generally no. Services provided to a client outside India are usually considered to be exports of services and are therefore zero-rated. The contractor must be registered, have a Letter of Undertaking to issue invoices at the zero rate, and be able to prove that payment has been received in foreign currency. Registration is required when annual turnover exceeds ₹20 lakh, or ₹10 lakh in special category states.
6. What are the mandatory contributions made by employers in India? They consist of an EPF contribution at a rate of 12% of wages, this applying to enterprises which have 20 or more workers and with a statutory wage cap of ₹15,000; an ESI contribution at 3.25% from the employer for employees earning up to a gross amount of ₹21,000, in most states for establishments which have 10 or more employees; as well as gratuity provisions, a statutory bonus where it applies, and professional tax in those states which impose it.
7. What is the 50% wage rule under the new Labor Codes? Under the Code on Wages, allowances outside the statutory definition of wages cannot exceed 50% of total remuneration, and any excess is added back into wages. Because EPF, gratuity, and bonus are calculated on wages, this raises employer cost for salary structures built around a low basic and a large special allowance.
8. What was the actual start date of India's Labor Codes? The four Codes came into effect on November 21 2025, replacing the 29 central labor laws. The central government published the regulations in May 2026. State regulations are issued separately and differ by state, so the actual situation depends on the state where your employee is based.
9. What is the time taken to hire via an EOR in India? It usually takes one to three weeks from the time the offer is signed until work starts, depending on document collection and the completion of statutory registrations. If you are setting up your own business entity in India, it generally takes two to four months before you can legally employ somebody.
10. What happens if I have been paying contractors who should be employees? If you have been paying contractors who should have been employees, liability starts from the first day of the engagement. This can involve backdated EPF and ESI charges with interest and damages, plus gratuity where the length of service meets the required conditions, plus any statutory rights and tax outcomes; for foreign companies, it may also raise an argument about a permanent establishment. You should review the positions, convert those that do not satisfy the criteria, and halt the clock.

Final Thoughts

India rewards companies that take the structure seriously and penalizes those who treat it as just paperwork. This should not slow you down. Instead, it should help you see what you are really getting.

When an independent professional with their own clients is involved, the relationship is contractor-to-company. If someone joins your standups, uses your systems, and reports directly to your manager, then they are an employee. If someone negotiates deals for you in India, talk to your tax advisor before you talk to your recruiter.

If you set things up right, the rest is just administration. If you get it wrong, the bill will come later and will be counted from day one of the engagement.

If you want to hire in India without setting up a company, talk to us at Olamee. We handle contracts, payroll, statutory contributions, and compliance in over 150 countries, so you can focus on hiring, not paperwork.