Hiring in India 2026: Complete Employer Guide | Knit

Overview

Employment law in India is set by both the central government and individual states. Your obligations depend on where the employee works, what your establishment does, and headcount.

The biggest change for employers: India's four consolidated Labour Codes took effect November 21, 2025, replacing 29 legacy laws:

• Code on Wages, 2019: minimum wages, payment of wages, bonus, and a new uniform definition of "wages"

• Industrial Relations Code, 2020: employment terms, disputes, layoffs, retrenchment, and trade unions

• Code on Social Security, 2020: provident fund, state insurance, gratuity, maternity benefits, and gig worker coverage

• OSH Code, 2020: working hours, leave, safety, and welfare

Implementation is phased. Central rules were finalized in 2026, but each state must notify its own rules, and states are at different stages. The substantive rules are live; some procedural frameworks are still rolling out.

‍

Employment Contracts

India doesn't universally require written contracts, but they're standard practice and strongly recommended.  

Some states (like Karnataka and Delhi) require written appointment letters, and the OSH Code requires them for covered workers.

A solid Indian employment contract covers:

• Job title, duties, and reporting lines

• Work location and transfer clauses

• Compensation structure (basic salary, allowances, benefits)

• Working hours and leave

• Probation period and confirmation terms

• Notice periods and termination grounds

• Confidentiality and IP assignment
  

Types of employment

• Permanent (indefinite-term) is the default.

• Fixed-term employment is now recognized nationally. Fixed-term employees get the same pay, hours, and benefits as comparable permanent staff, plus pro-rata gratuity after one year (down from the old five-year rule).

• Probation isn't capped by statute for most private-sector roles. Three to six months is typical.
  

The new "wages" definition  

Under the Labour Codes, basic pay plus dearness and retaining allowances must generally make up at least 50% of total pay. If allowances like HRA and conveyance exceed 50% of the package, the excess counts as "wages" anyway when calculating benefits like PF and gratuity.

Many employers kept basic pay low to minimize contributions. Those structures need review now, because the new rule raises the wage base and can increase employer costs.

Restrictive Covenants: NDAs Yes, Non-Competes Mostly No

Foreign employers routinely copy non-compete clauses from home-country templates into Indian contracts. Be aware that under Section 27 of the Indian Contract Act, 1872, agreements in restraint of trade are void. Indian courts have consistently applied this to post-employment restrictions:

• During employment: non-compete and exclusivity obligations are generally enforceable.

• After employment ends: non-compete clauses are almost always unenforceable, regardless of how narrowly they're drafted or whether the employee was compensated. Courts treat them as a restraint on the right to earn a livelihood.

• What does hold up: confidentiality and non-disclosure obligations protecting genuine trade secrets, IP assignment clauses, and, in many cases, reasonably scoped non-solicitation of clients and employees.

Protect your interests through strong confidentiality, IP assignment, and non-solicitation clauses plus notice periods, rather than relying on a post-termination non-compete you likely can't enforce.

Background Checks and Onboarding Verification

Pre-employment screening is standard practice in India, but it's now a regulated data-processing activity, not an administrative formality.  

The Digital Personal Data Protection Act, 2023 (DPDP Act) and its implementing rules, notified in November 2025 and rolling out in phases, treat the employer as the responsible "data fiduciary" for every check it runs, even when the work is outsourced to a screening vendor.

What the DPDP framework requires

• Specific written consent before screening. A one-line clause buried in the offer letter no longer suffices. Best practice is a standalone consent document, in plain language, that states which checks will run, who will conduct them, how long the data is kept, and the candidate's rights.

• Purpose limitation. Collect only what's relevant to the role. Credit checks, for example, are defensible for finance and cash-handling roles but hard to justify elsewhere.

• Candidate rights. Candidates can access their report, request correction of inaccurate findings, and withdraw consent. Data collected for screening should be deleted once it's no longer needed.

• Real penalties. Non-compliance can attract fines of up to ₹250 crore for significant breaches, so screening vendors and consent forms drafted before the 2025 rules should be reviewed.

What employers typically verify

• Identity: PAN card, passport, voter ID, or Aadhaar-based verification (Aadhaar use is consent-driven and restricted).

• Education: degree verification through the issuing university or the National Academic Depository.

• Employment history: prior roles, tenure, and reason for leaving; salary history is often cross-checked against the employee's Form 26AS tax statement.

• Criminal records: court-record and police-database searches. For roles involving children (schools, childcare) or regulated financial services, criminal screening is effectively mandatory under sector rules.

• Work authorization: for foreign hires, validity of the Employment Visa and FRRO registration (see the foreign nationals section).
  

What employers must NOT do

Screening cannot stray into caste, religion, political views, or unrelated family background, and hiring decisions cannot discriminate on gender, disability, or health conditions unrelated to the job.  

Requiring blanket police clearance certificates for ordinary roles is also discouraged; reserve criminal checks for positions where they're job-relevant or legally required.

‍

Working Hours and Overtime

Under the OSH Code framework:

1. Standard hours: 8 per day, 48 per week. States may allow longer daily hours within the 48-hour weekly cap, often with employee consent.

• Rest: work should be scheduled so that no employee works more than about five hours continuously without a rest break of at least 30 minutes, and the total daily spread-over (working time plus breaks) is capped, typically at 12 hours.

1. Overtime: Under the OSH Code framework, overtime is generally capped at 125 hours per employee per quarter (up from the old 50–75 hour limits under legacy law). Some central rules and state notifications set different figures, so confirm the cap for each work location.

1. Night work for women: now permitted across sectors, with the employee's consent and proper safety, security, and transport arrangements.

‍

Managerial and supervisory roles are often exempt from hours and overtime rules under state Shops and Establishments Acts, but exemptions vary by state. Check local rules before assuming one applies.

‍

Minimum Wage

The central government sets a National Floor Level Minimum Wage, currently ₹178 per day. No state can set rates below it. It's a baseline, not a market rate. Each state sets its own minimum wages, varying by skill category (unskilled to highly skilled), industry, and zone.  

‍

As of 2026, monthly minimums for unskilled workers range from roughly ₹11,000 to ₹12,000 in lower-wage states to nearly ₹20,000 in Delhi. Skilled rates in metro areas can exceed ₹25,000.

‍

Rates are revised twice a year (typically April and October) through Variable Dearness Allowance (VDA) adjustments tied to inflation.

⚠️  Multi-state employers need to track each state's revision schedule separately. Underpaying triggers back-pay claims plus steep penalties. Professional salaries sit far above minimum wage, but compliance still matters for support and entry-level roles.

‍

Payroll and Taxes

Payroll frequency and timing

Employees are paid monthly, almost without exception. Under the Code on Wages, monthly wages are due by the 7th of the following month. Payslips are mandatory.

Income tax (TDS)

Employers withhold income tax from salaries each month, file quarterly TDS returns (Form 24Q), and issue an annual Form 16 to each employee. A new Income Tax Act, 2025 has replaced the 1961 Act, but the slab rates and two-regime structure carry over.

The new regime is the default. For FY 2026-27:

A rebate makes taxable income up to ₹12 lakh effectively tax-free, and salaried employees get a ₹75,000 standard deduction, so salary income up to about ₹12.75 lakh attracts zero tax.  

A 4% health and education cess applies to the tax amount, and high earners pay a surcharge. Employees can still opt into the old regime, which has higher rates but more deductions (like Section 80C).

Professional tax

Some states (including Maharashtra, Karnataka, West Bengal, and Telangana) levy a professional tax that employers deduct and remit. It's capped at ₹2,500 per employee per year. Not every state imposes it; Delhi doesn't.

Statutory bonus

Employees earning up to the prescribed wage threshold get an annual bonus of 8.33% to 20% of wages, now governed by the Code on Wages. Verify current eligibility ceilings, as these are set by notification.

‍

Social Security Contributions

India's two main schemes are the Employees' Provident Fund (EPF) and Employees' State Insurance (ESI), both now under the Code on Social Security.

EPF  

Retirement savings, generally mandatory for establishments with 20+ employees

A revision of the ₹15,000 ceiling has been under active consideration in 2026, so confirm the current figure with the EPFO before finalizing cost models.

ESI  

Medical and cash benefits, mandatory for covered establishments, generally 10+ employees, for staff earning up to ₹21,000 gross per month, or ₹25,000 for employees with disabilities)

Both are deposited monthly, by the 15th of the following month. Most professional salaries exceed the ESI ceiling, so ESI mainly affects lower-wage roles. EPF applies broadly.

Gratuity and maternity benefits are employer-funded rather than contribution-based. The code also extends coverage to gig and platform workers through aggregator-funded schemes, which mainly matters for platform businesses.

Budgeting rule of thumb: on top of gross salary, plan for roughly 12-13% of the PF wage base for EPF, EDLI, and admin charges, plus 3.25% ESI where applicable, plus gratuity accrual (about 4.8% of basic) and statutory bonus where applicable.

‍

Leave Entitlements

Leave comes from a mix of the Labor Codes, the maternity benefit framework, and state Shops and Establishments Acts, so exact entitlements vary by state. The core framework:

‍

Employee Benefits

Statutory benefits set the minimum standard, including EPF, ESI (where applicable), gratuity, statutory bonus (where applicable), maternity benefits, paid leave, and public holidays.  

Many employers offer additional benefits to remain competitive in the market. Common market-practice benefits include:

• Group health insurance covering the employee and often spouse, children, and parents. This is effectively expected for professional roles.

• Group term life and personal accident insurance

• Flexible benefits like meal cards and telecom reimbursements structured within the salary

• NPS employer contributions, which are tax-advantaged (up to 14% of basic is deductible for the employee under the new regime)

• Wellness programs, learning stipends, and home-office allowances for remote roles

A note on CTC: Indian offers are framed as annual Cost to Company, a figure that bundles gross salary, employer PF, gratuity accrual, insurance premiums, and sometimes variable pay.  

Be explicit in offer letters about fixed versus variable pay and expected take-home. CTC-versus-net confusion is a leading cause of candidate disputes.

‍

Termination Requirements

India is not an at-will jurisdiction, and the rules differ for "workmen" (broadly, non-managerial employees as defined under the Industrial Relations Code) versus managerial staff.

Notice periods

• Workmen with at least one year of service get a minimum of 30 days' written notice (or pay in lieu) for retrenchment, with reasons stated.

• For managerial and professional employees, notice follows the contract and state law. Market practice is 30 to 90 days, with senior roles commonly at 60 to 90.
  

Retrenchment compensation (severance)  

15 days' average wages per completed year of service for retrenched workmen. Employers must also contribute 15 days' wages per retrenched worker to a re-skilling fund. The expanded wages definition raises the base for both.

Government permission

Industrial establishments (factories, mines, plantations) with 300 or more workers need prior government approval for layoffs, retrenchment, or closure. The threshold was raised from 100, which gives mid-sized employers more flexibility. Last-in-first-out and rehiring preference rules apply to workmen.

Misconduct terminations  

Require a fair domestic inquiry: a charge sheet, a chance to respond, and an impartial process. Skipping due process is the most common reason terminations get overturned in court, even when the misconduct is real.

Gratuity  

An employer-funded benefit paid on separation to employees with five or more years of service. The five-year rule is waived on death or disablement, and fixed-term employees now qualify pro-rata after one year.  

Formula: last drawn wages × 15/26 × years of service. It must be paid within 30 days of falling due, or interest applies.

Final settlement

Unpaid salary, leave encashment, bonus, and gratuity should be settled fast. Under the Code on Wages, final wages are often due within two days of termination, so build quick settlement into offboarding.

Resignation

Employees resign per their contractual notice. Notice buyouts are common and should be addressed in the contract.

‍

Hiring Foreign Nationals

India generally reserves work authorization for skilled professionals, senior managers, and specialists whose expertise isn't readily available locally. Every work visa is tied to a specific sponsoring employer.

Employment Visa Requirements

• Minimum salary: Gross annual compensation must generally exceed US$25,000 (about ₹16.25 lakh), including salary and benefits. Limited exemptions apply. Proposed rule changes may replace this with a fixed rupee threshold, so verify the current requirement before applying.

• Skills requirement: The role must require expertise not readily available in the local labor market; routine or clerical positions generally don't qualify.

• Sponsorship: Only an India-registered entity can sponsor an Employment Visa. Companies without a local entity typically hire through an Employer of Record (EOR) or local partner.

• Employer-specific: The visa is tied to the sponsoring employer. Changing employers usually requires leaving India and submitting a new visa application.

• Validity: Issued for one year (or the contract term) and renewable annually for up to five years.

Employer Responsibilities

• FRRO registration: Employees staying more than 180 days must register with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival. Employers typically assist with the process.

• Payroll and tax: Foreign employees must be paid through Indian payroll and are subject to Indian tax withholding (TDS).

• Departure: When employment ends, notify the FRRO, settle tax obligations, and ensure the employee departs unless they obtain a new sponsored visa. Dependents' Entry Visas expire with the primary visa.

Timing: Allow three to four months for the overall process. Embassy processing typically takes two to four weeks. There are no visa quotas; approval depends primarily on meeting eligibility requirements and providing complete documentation.

‍

Hiring Through an Employer of Record (EOR)

Every company hiring in India faces the same threshold decision: set up a local entity or hire through an Employer of Record.

Setting up an entity (typically a private limited company) makes sense for a large, long-term presence. It involves incorporation, tax registrations (PAN, TAN, GST where applicable), EPF and ESI registration, Shops and Establishments registration per location, professional tax registration where applicable, and ongoing filings. Plan for one to three months plus ongoing local accounting support.

📌 Note that every Indian company must have at least one director who has been resident in India for at least 182 days in the year.

Hiring through an EOR lets you employ people in India without an entity. The EOR is the legal employer. It issues compliant contracts, runs payroll, withholds TDS, administers EPF, ESI, gratuity, and leave, and handles filings, while you direct the day-to-day work. An EOR is usually the practical route when you're:

• Testing the market or hiring a first small team

• Hiring quickly (days instead of months)

• Employing remote staff across multiple states with different rules

• Avoiding entity setup and permanent-establishment overhead before the business case is proven

The Labor Codes transition makes this especially relevant right now, since compliance requirements can differ state to state across your own team. Global employment providers such as Knit handle that state-level compliance, payroll, and benefits administration on your behalf while the new framework settles.

If you already have an Indian entity but lack local HR and payroll capacity, global payroll or PEO-style services are an alternative to a full EOR.

‍

Frequently Asked Questions

Do I need a local entity to hire employees in India?  

No. You can hire through an Employer of Record, which legally employs the worker on your behalf. An entity only makes sense if you want to employ staff directly, invoice locally, or build a substantial long-term operation.

Are India's new Labour Codes in force?  

Yes. All four codes took effect November 21, 2025, with central rules finalized in 2026. Implementation is phased, though: states must notify their own rules and progress varies. Follow the codes' substantive requirements while verifying state-level rules for each work location.

What does the 50% wages rule mean for my payroll costs?  

Basic pay plus dearness and retaining allowances must generally be at least 50% of total pay for statutory calculations. If you use low basic pay and high allowances, your PF and gratuity base rises, and so does your cost. Most employers are restructuring CTC to comply.

How much should I budget above gross salary?  

Roughly 13% of the PF wage base for EPF, EDLI, and admin charges; 3.25% of gross for ESI (only for employees earning up to ₹21,000/month); about 4.8% of basic for gratuity accrual; plus statutory bonus where applicable and market benefits like health insurance.

Can I hire someone on a fixed-term contract?  

Yes. Fixed-term employment is nationally recognized. Fixed-term employees get pay and benefit parity with comparable permanent staff, plus pro-rata gratuity after one year, so fixed-term hiring no longer avoids gratuity liability.

What are typical notice periods?  

The statutory minimum for retrenching workmen is 30 days. For professional roles, contracts set 30 to 90 days, with senior roles commonly at 60 to 90. Notice buyouts are common.

Is 26 weeks of maternity leave really employer-paid?  

Yes, for eligible employees not covered by ESI. For ESI-covered employees, the ESI scheme pays the benefit. Employers with 50+ employees must also provide creche facilities.

Can employees work night shifts and overtime?  

Yes. Overtime requires consent and is paid at double the ordinary rate, subject to hour caps. Women may work night shifts in all sectors with consent and proper safety and transport arrangements.

‍

Your checklist for 2026:

• Confirm Labour Code implementation status in each state where you employ staff.

• Structure salaries so wages (basic + DA) meet the 50% rule, and model the PF and gratuity cost impact.

• Issue written contracts covering pay structure, hours, leave, notice, confidentiality, and IP.

• Register for and remit EPF (and ESI where applicable) monthly, and withhold TDS under the employee's chosen regime.

• Verify state minimum wages, professional tax, and Shops and Establishments requirements per location, and re-check after each VDA revision.

• Budget for gratuity, statutory bonus, maternity obligations, and expected benefits like group health insurance.

• Follow due process on every termination: notice, retrenchment compensation, inquiry for misconduct, and prompt full-and-final settlement.

Several figures are transitional in 2026, including the EPF wage ceiling, bonus eligibility limits, and state-level Labor Code rules.  

Knit helps global employers navigate local regulations, manage payroll and statutory obligations, and build compliant teams across the globe. Find out how we can help.  

‍

‍

‍