- Indian payroll for full-time employees carries three core statutory obligations: Provident Fund (PF), Employees' State Insurance (ESI), and gratuity. Each has its own threshold and trigger, and all three sit on top of the salary you advertise.
- PF costs employers 12% of basic wages plus a small insurance and admin charge, ESI adds 3.25% for employees earning up to 21,000 rupees a month, and gratuity becomes payable once an employee completes five years of continuous service.
- India's four new Labour Codes took effect on 21 November 2025, standardizing the definition of wages and expanding social security coverage. Final rules are still being notified, so most existing contribution mechanics continue during the transition.
- US startups usually cannot run compliant India payroll without a local entity or an Employer of Record, because PF and ESI registration, monthly filings, and tax withholding all require an Indian legal presence.
- The most expensive mistakes are paying engineers as contractors to skip these contributions and triggering permanent establishment exposure. Both can cost far more than the contributions themselves.
If you are a US startup hiring your first employees in India, payroll is rarely as simple as converting a salary into rupees. On top of take-home pay, you are responsible for statutory contributions like Provident Fund, Employees' State Insurance, and gratuity, plus monthly tax withholding and filings. These are not optional perks. They are legal obligations tied to running payroll for an Indian employee, and most startups handle them through a local entity or an Employer of Record (EOR). This guide breaks down what each obligation is, what it costs, who it applies to, and how to manage all of it cleanly.
What payroll obligations do US startups face when hiring in India?
The short answer is three statutory pillars plus income tax withholding. When you put someone on full-time Indian payroll, you take on:
- Provident Fund (PF): a mandatory retirement savings contribution.
- Employees' State Insurance (ESI): health and social insurance for lower-wage employees.
- Gratuity: a lump-sum payment for long service.
- TDS: monthly income tax deducted at source from each salary.
- Professional Tax: a small state-level tax that applies in some states.
From our experience helping foreign companies set up in India, the surprise is rarely the contribution rates. It is that every one of these requires an Indian entity registered with the relevant authority before you can legally remit a single payment.
What is Provident Fund (PF) and how much does it cost?
PF is India's mandatory retirement fund, and the employer matches the employee's 12% contribution. It is governed by the EPF Act and managed by the Employees' Provident Fund Organisation (EPFO). Both sides contribute 12% of basic wages plus dearness allowance.
The employer's 12% splits in two:
- 8.33% goes to the Employee Pension Scheme (EPS), capped on a wage of 15,000 rupees.
- 3.67% goes to the EPF account itself.
On top of that, employers pay a small insurance contribution (0.50% EDLI) and administrative charges. The EPF interest rate for FY 2025-26 is 8.25%. PF registration is mandatory once you reach 20 employees, but in practice most startups apply it to salaried staff from the first hire.
What is ESI and who needs to be covered?
ESI is health and social insurance for employees earning up to 21,000 rupees a month. It is funded jointly: the employer pays 3.25% of gross wages and the employee pays 0.75%, for a total of 4%.
The wage ceiling is 21,000 rupees per month, or 25,000 for employees with disabilities, and it applies to establishments with 10 or more employees. If someone's salary crosses the ceiling mid-period, coverage continues until the end of the current contribution cycle, which runs April to September or October to March.
Most engineering hires earn well above the ceiling and fall outside ESI. Support, operations, and junior roles often qualify, which catches founders off guard when they assume ESI never applies to their team.
How does gratuity work in India?
Gratuity is a lump sum paid for long service, calculated from the last drawn salary. Under the Payment of Gratuity Act, an employee becomes eligible after five years of continuous service, and earlier in cases of death or disability. The standard formula is:
Gratuity = (Last drawn basic + DA) x 15 x years of service / 26
The amount is capped at 20 lakh rupees for tax-free treatment, and it is funded entirely by the employer; employees do not contribute. Under the new Labour Codes, fixed-term employees can qualify on a pro-rata basis after just one year, which matters for project-based hiring. Companies often underestimate gratuity because it never shows up in monthly payroll. It accrues quietly and becomes a real liability as your India team matures.
What do the statutory contributions look like side by side?
Here is a quick reference for the three core obligations plus tax withholding.
| Obligation | Employer cost | Employee cost | Applies when |
|---|---|---|---|
| Provident Fund (PF) | 12% of basic + DA, plus EDLI and admin charges | 12% of basic + DA | Standard for salaried staff; mandatory at 20+ employees |
| Employees' State Insurance (ESI) | 3.25% of gross wages | 0.75% of gross wages | Employee earns up to 21,000 rupees/month; 10+ employees |
| Gratuity | (Last basic + DA x 15 x years) / 26, employer-funded | None | After 5 years of service; 1 year pro-rata for fixed-term |
| TDS (income tax) | Withhold and remit monthly | Based on income slab | All taxable salaries |
What changed under the new Labour Codes?
India consolidated 29 older labour laws into four codes, effective 21 November 2025. For payroll, the most important change is a uniform definition of wages that requires allowances to stay within set limits relative to basic pay. When companies use a low-basic, high-allowance structure to reduce PF and gratuity costs, the new definition can pull more pay into the contribution base. You can read the full picture in our overview of the new Labour Code in India. Central and state rules are still being notified, so the existing mechanics largely continue during the transition. The practical takeaway is to revisit your salary structures now rather than after the rules are finalized.
Can a US startup run India payroll without an entity?
Usually not directly, but an Employer of Record solves it cleanly. PF, ESI, and TDS all require registration with Indian authorities, which means an Indian legal presence. Setting up a private limited company is one route, but it brings incorporation, ongoing filings, and accounting overhead that rarely makes sense for your first few hires. The common alternative is an EOR that already holds the entity, the PF and ESI registrations, and the payroll infrastructure. It employs your team member on paper and handles every statutory contribution while you direct the day-to-day work. This is how most US startups hire employees in India before they reach the scale that justifies their own entity.
For a sense of the all-in numbers, our breakdown of the cost of an EOR in India walks through the typical fees that sit on top of salary.
What are the most expensive compliance mistakes?
Two patterns cause the most damage, and both are more costly than simply running compliant payroll from day one.
- Misclassifying employees as contractors. If the relationship looks like employment, with fixed hours, your tools, and your direction, Indian authorities can reclassify the person and leave you owing back contributions, interest, and penalties. Our guide on contractor misclassification risk in India covers the warning signs.
- Permanent establishment exposure. If your US company directs Indian staff in a way that creates a taxable presence, you can face corporate tax on attributed profits. See our explainer on permanent establishment risk in India.
Based on our extensive experience supporting international teams, founders who treat compliance as a day-one design choice rather than a cleanup project almost always come out ahead.
How Wisemonk helps US startups stay compliant
Setting up compliant India payroll from the US has more moving parts than most founders expect, and the cost of getting PF, ESI, or gratuity wrong adds up quickly. Wisemonk acts as your Employer of Record in India, handling the entity, payroll, statutory contributions, tax withholding, and onboarding so your team is hired correctly from the first paycheck. That keeps your attention on the product while compliance runs quietly in the background.
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Talk to our team about running fully compliant India payroll through an Employer of Record, with PF, ESI, gratuity, and tax handled for you.
Frequently asked questions
Do US startups have to pay PF and ESI for Indian employees?
Yes. Once you employ staff in India, PF applies to salaried employees and ESI applies to those earning up to 21,000 rupees a month. Both require registration with Indian authorities, which is why most startups hire through an entity or an Employer of Record.
How much does PF cost the employer?
The employer contributes 12% of basic wages plus dearness allowance, split between the pension scheme and the PF account, plus a small insurance and administrative charge on top.
Who needs ESI coverage?
Employees earning up to 21,000 rupees per month, or 25,000 if they have a disability, in establishments with 10 or more employees. Higher-paid staff are generally outside ESI.
When does gratuity become payable?
After five years of continuous service, or earlier in cases of death or disability. Under the new Labour Codes, fixed-term employees can qualify after one year on a pro-rata basis.
Can we just pay Indian hires as contractors to avoid these contributions?
It is risky. If the relationship functions like employment, Indian authorities can reclassify the contractor as an employee, leaving you liable for back contributions, interest, and penalties.
What changed with the new Labour Codes in 2025?
The four codes took effect on 21 November 2025 and introduced a uniform definition of wages that can increase the base used for PF and gratuity. Detailed central and state rules are still being notified.
Do we need an Indian entity to run payroll?
To run payroll directly, yes. An Employer of Record is the common alternative; it uses its own Indian entity and registrations to employ your team compliantly without you incorporating.
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