Employer of Record (EOR) India
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An Employer of Record (EOR) in India serves as the official employer for a worker. This entity manages crucial employment functions, ensuring adherence to local labor laws and regulations. Responsibilities include overseeing payroll, handling tax filings, providing legally mandated benefits, and drafting employment contracts.
The Employer of Record (EOR) is tasked with:
- Ensuring compliance with Indian labor laws.
- Managing the payroll system locally.
- Filing employment-related taxes and handling necessary documentation.
- Issuing payslips to employees.
- Processing salary payments.
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Employment Contracts in India
Employment contracts in India are essential legal documents that outline the terms and conditions governing the relationship between employers and employees. These contracts play a critical role in clarifying the rights, responsibilities, and expectations of both parties, providing a framework for a successful working relationship.
A well-drafted employment contract helps employees understand their roles and the company’s expectations, while also protecting the interests of the employer. Key elements typically covered include job responsibilities, salary, benefits, notice periods, and adherence to company policies. Given the diversity of employment situations, it’s crucial for individuals to review their contracts thoroughly before signing to ensure clarity and mutual understanding.
Types of Employment Contracts
In India, various types of employment contracts are used to cater to different employment arrangements:
13th Month Salary
In India, the 13th salary, also known as the bonus or ex gratia, is mandatory for certain employees. This payment must be disbursed within eight months following the end of the financial year. It serves as an additional financial benefit, enhancing employee compensation and morale.
Working Hours and Overtime
- Maximum Working Hours: Generally, employees cannot work more than 9 hours a day or 48 hours a week without overtime compensation. Certain states may have modified these limits under specific conditions, especially in response to economic changes like the COVID-19 pandemic.
- Overtime: Employees working beyond these limits are entitled to overtime pay, typically at double their regular wage rate, and may receive compensatory time off as well.
- Breaks and Amenities: The laws also mandate intervals for rest and the provision of basic amenities such as clean drinking water, sanitation facilities, and safety measures in workplaces, particularly in manufacturing sectors.
- Special Provisions: For women working night shifts, employers must ensure adequate safety and transport facilities.
Probation Period
The probation period, which lasts between 3 months to 6 months, is a trial phase for new employees, allowing organizations to assess fit with the role and company culture.
Key Points
- Evaluation: Organizations can gauge skills and cultural alignment.
- Training: New hires receive orientation and training for better integration.
- Cost Savings: Helps avoid the high costs of bad hires.
Termination, Severance Pay and Notice Period
Grounds for Termination
In India, employment termination can occur through various means, including:
- Expiry of a fixed-term contract or mutual separation.
- Employee resignation.
- Retirement.
- Layoffs or organizational restructuring.
- Termination for cause, which may include:
- Breach of contract or policies.
- Criminal offenses.
- Poor performance or misconduct.
- Abandonment of employment.
Individual Dismissals
Individual dismissals are considered retrenchment under the Industrial Disputes Act (IDA). Depending on the number of employees, a notice period of 1 to 3 months is required, along with retrenchment compensation of 15 days’ wages for every completed year of service. Dismissals for misconduct may not require prior notice if an internal inquiry has been conducted.
Is Severance Pay Required?
Yes, severance pay is mandated, with specifics varying based on circumstances:
- Voluntary Resignation: Employees receive accrued wages, payment for earned leave, and gratuity.
- Employer-Initiated Termination: Employees dismissed for misconduct receive accrued wages and leave payment, but gratuity may be withheld under certain conditions.
Also note, Gratuity is calculated in accordance with the Payment of Gratuity Act, which stipulates 15 days’ wages for every completed year of service. The total amount is subject to a maximum cap of INR 2 million (~USD 27,270).
Employees vs Independent Contractors
In India, distinguishing between an employee and an independent contractor is crucial for determining legal rights and obligations. The courts apply various tests, primarily the control and integration tests, to assess the nature of the relationship. This classification affects taxation, benefits, and regulatory compliance.
Comparison Table: Employee vs. Independent Contractor
| Factor | Employee | Independent Contractor |
|---|---|---|
| Control Test | Employer directs both the work and how it is done. | Contractor controls the manner of completing work. |
| Integration Test | Integrated into the employer's business. | Operates independently of the employer's business. |
| Payment | Salary plus benefits and allowances. | Paid as professional fees, no salary structure. |
| Tax Treatment | Employer withholds tax from salary payments. | Tax withheld on fees; contractor files tax returns. |
| Benefit Entitlement | Statutory benefits (PF, gratuity, etc.) apply. | No statutory benefits; terms defined by contract. |
| Contractual Relationship | Governed by an employment agreement. | Governed by a service agreement. |
| Use of Equipment | Employer provides equipment. | Contractor typically uses their own equipment. |
| Local Limitations | Subject to labor laws regarding termination and benefits. | Limited restrictions on use; contract labor may be prohibited in specific sectors. |
| Deputation | Remains an employee of the original company. | Control remains with the original employer; may have a lien. |
Social Security in India
India’s social security system encompasses various schemes designed to provide financial protection and benefits to employees. However, it primarily serves a limited segment of the population, as many schemes are applicable only to specific industries or establishments.
Key Components of Social Security
- Employer Contribution: 12% of basic salary.
- Employee Contribution: 12% of basic salary (mandatory for salaries up to INR 15,000; voluntary above this).
- Tax Benefit: Contributions qualify for deductions under Section 80C of the Income Tax Act.
- Governed by the Employees’ State Insurance (ESI) Act.
- Coverage for medical care and cash benefits for sickness, maternity, and disability for employees earning up to INR 21,000 per month.
- Employers must compensate employees for work-related injuries or occupational diseases.
- Compensation is calculated based on the employee’s wage, with specific rates for death and total permanent disablement.
- Women in organized sectors are entitled to 26 weeks of paid maternity leave (12 weeks for third child).
- Includes provisions for crèche facilities for companies with more than 50 employees.
- Payment of 15 days’ wages for each year of service, applicable after five years of employment.
- Tax-exempt up to a maximum amount, subject to specific calculations.
- India has entered into SSAs with several countries to facilitate the transfer and withdrawal of social security benefits for international workers.
Compliance and Registration
- Companies are required to register for EPF and ESI based on employee count and compliance with relevant laws.
- Registration processes typically take 10-15 days and require specific documentation.
Payroll in India
Payroll Essentials for India
Government Requirements
- Permanent Account Number (PAN): Under the Income-tax Act, 1961, obtaining a PAN is mandatory for companies, serving as a unique identification number for corporate income tax purposes. It is issued during the incorporation process and must be referenced in all tax filings and communications.
- Tax Deduction Account Number (TAN): Companies must register for a TAN to facilitate tax withholding from salaries and vendor payments. This unique number is essential for filing withholding tax returns and can be registered at multiple locations or as a single entity.
- Tax Compliance: Employers are responsible for withholding applicable taxes from employee salaries based on the prescribed slab rates and depositing these into the Indian Government Treasury. The tax year in India runs from April 1 to March 31, and taxes must be remitted within specified deadlines, with particular rules for the new tax regime introduced in April 2020.
- Quarterly Withholding Returns (Form 24Q): Companies are required to file electronic quarterly tax returns by specific deadlines, with dates subject to change by the Central Board of Direct Taxes.
Social Security and Pension Requirements
- Provident Fund Registration: Under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, companies with 20 or more employees must register for a provident fund, which includes social security and retirement benefits. Different rules apply for domestic and international workers.
- Provident and Pension Fund Contributions: Employers must contribute 12% of base wages to the provident fund, with specific allocations to the pension fund based on employee declarations. Payments must be deposited by the 15th of each month.
Employment Obligations
- Employee State Insurance Registration (ESI): This mandatory health insurance registration applies to companies with 10 or more employees, covering hospitalization and health benefits for eligible employees. Compliance varies by state, and contributions must be remitted monthly.
- Profession Tax (PT) Registration: State-specific registration is required based on local laws. Companies must deduct profession tax from employees and remit payments according to the regulations of the specific state.
- Shops and Establishment Act: Companies may need to register under this act depending on their operational location. Contributions to the Labour Welfare Fund may also be required based on state-specific rules.
Payroll Requirements
Companies must establish a structured compensation plan for employees, ensuring that salaries are paid monthly after statutory deductions such as income tax and social security contributions. Employees receive a pay slip detailing their earnings and deductions, and annual tax calculation sheets are provided for transparency.
Banking Requirements Related to Payroll
Payments to employees are made in Indian Rupees, with expatriate payments subject to the Foreign Exchange Management Act, 1999. Payments are typically processed through corporate banks via electronic transfer methods, adhering to the regulations set forth by the Reserve Bank of India.
Minimum Wages
India offers one of the most competitive labor costs in Asia, with a national-level minimum daily wage set at approximately INR 178 (around US$2.13). This translates to a monthly wage of about INR 5,340 (approximately US$63.97). However, it is essential to recognize that this minimum wage acts as a baseline and may vary depending on geographical location and other specific factors, ensuring that wages are adjusted to meet local economic conditions.
Payroll Cycle
In India, the payroll cycle typically operates on a monthly basis. Employees receive their wages on or after the 28th of each month, aligning with standard practices in many organizations. This regular payment schedule helps ensure timely compensation for work performed, contributing to better financial planning for employees.
Overtime Pay
In India, overtime pay is governed by several labor laws, primarily outlined in the Shops and Establishments (S&E) Acts, the Factories Act (FA), the Industrial Employment (Standing Orders) Act (IESO), and the Contract Labour (Regulation and Abolition) Act (CLRA). These laws establish minimum working conditions, including stipulations for working hours, rest intervals, and necessary employee amenities.
Maximum Working Hours
Generally, employees are limited to working a maximum of 9 hours a day or 48 hours a week. If an employee exceeds these limits, they are entitled to overtime compensation. Specific states may have different stipulations based on their S&E Acts, especially for shops and commercial establishments.
Overtime Compensation
Employees required to work beyond the standard hours are typically compensated at a rate of twice their ordinary wage for overtime hours. Additionally, some states may allow compensatory time off instead of overtime pay, although regulations may vary. Certain states also impose restrictions on overtime work, permitting it only under limited circumstances.
Employer Obligations
Employers are mandated to provide a healthy and safe workplace environment, particularly in manufacturing and high-risk sectors. This includes maintaining cleanliness, providing adequate safety measures, and ensuring access to basic facilities like clean drinking water and sanitation.
Grievance Redressal
Employers are required to establish grievance redressal mechanisms under the IESO Act and the FA for addressing employee complaints, including those related to overtime disputes.
Mercans’ payroll capabilities
Payroll Cycle in India
Experience a seamless payroll cycle with Mercans, ensuring timely payments to employees and contractors in the local currency. Our efficient processes are tailored to your business needs, providing a localized payroll experience.
Payroll Setup, Processing, and Administration
Mercans offers comprehensive payroll services, including setup, precise processing, and ongoing administration. Our expert team ensures compliance with all regulations, allowing you to focus on your core business functions.
Statutory Filings and Payments
Navigate India’s regulatory landscape effortlessly with Mercans. We handle all statutory filings and payments, ensuring timely and accurate submissions, so you can operate your business with confidence.
Pay Employees and Contractors in the Local Currency
Mercans guarantees that all payroll disbursements are made in the local currency, facilitating smooth transactions for both employees and contractors. Enjoy the convenience and reliability of localized payroll management tailored to your needs.
Personal Income Tax in India
Taxation for individuals in India is primarily determined by their residential status, assessed annually based on physical presence. The residential statuses include:
- Resident and Ordinarily Resident (ROR): Taxed on worldwide income.
- Resident but Not Ordinarily Resident (RNOR): Taxed on income sourced in India or received in India.
- Non-Resident (NR): Taxed only on income accrued or received in India.
Personal Income Tax Rates
- Up to ₹300,000: 0%
- ₹300,001 to ₹600,000: 5%
- ₹600,001 to ₹900,000: 10% (plus ₹15,000)
- ₹900,001 to ₹1,200,000: 15% (plus ₹45,000)
- ₹1,200,001 to ₹1,500,000: 20% (plus ₹90,000)
- Above ₹1,500,000: 30% (plus ₹150,000)
Under the APTR, specific deductions and exemptions are not permitted.
Old Tax Regime
For the fiscal year 2022/23, the rates were:
- Up to ₹250,000: 0%
- ₹250,001 to ₹500,000: 5%
- ₹500,001 to ₹1,000,000: 20% (plus ₹12,500)
- Above ₹1,000,000: 30% (plus ₹112,500)
Under the APTR, specific deductions and exemptions are not permitted.
Residents aged 60 and above benefit from a higher basic exemption limit.
- Surcharge and Cess: A surcharge applies when total income exceeds ₹5 million, with varying rates. Additionally, a health and education cess of 4% on income tax and surcharge is applicable.
- Tax Rebate: Residents with total income not exceeding ₹500,000 can receive a rebate, with differing limits based on the tax regime chosen.
- COVID-19 Reliefs: Payments for COVID-19 medical treatment and ex-gratia payments to families of deceased employees are tax-exempt under certain conditions.
- Alternative Minimum Tax (AMT): AMT applies to individuals with business income, computed at 18.5% on adjusted total income, with specific exemptions for lower income brackets.
- Local Taxes: Profession taxes may be imposed by some states, which are deductible from taxable income.
Employee Benefits in India
In India, employers are required to provide several statutory benefits to employees, which include:
- Employees’ Provident Fund (EPF): Mandated under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, it comprises contributions from both the employer and employee to a retirement savings scheme.
- Employees’ Pension Scheme (EPS): Also part of the EPF, EPS provides pensions to employees post-retirement based on their service duration and salary.
- Employees’ Deposit Linked Insurance (EDLI): This scheme provides life insurance benefits to the nominees of employees who pass away while in service.
- Employee State Insurance (ESI): For employees earning up to INR 21,000 per month (INR 25,000 for disabled), ESI covers medical expenses, disability compensation, and pensions for dependents, funded by employer and employee contributions.
- Statutory Leaves: Governed by state-specific Shops & Establishments Acts or the Factories Act, these include sick leave, casual leave, and national holidays.
- Gratuity: A payment due after 4 years and 8 months of continuous service, applicable on termination, resignation, or retirement, with new rules in Karnataka for compulsory gratuity insurance.
- Maternity Leave: Mandated paid leave of 26 weeks for women, with additional provisions for creche facilities for larger employers.
Supplementary Benefits
Beyond mandatory provisions, many employers offer supplementary benefits such as:
- Group Medical Insurance: Coverage typically includes hospitalization, maternity, and preventive care for employees and their families.
- Group Personal Accident Insurance: Provides coverage for accidental death and disability, typically offered as a multiple of salary.
- Retirement Benefits: Includes contributions to the Employees’ Pension Fund and options like the National Pension Scheme (NPS) for voluntary retirement savings.
- Short-Term Disability Insurance: Covers income loss due to medical contingencies, introduced recently by some providers.
Employee Perks
Employers often provide additional perks to enhance job satisfaction, particularly in competitive sectors:
- Transportation: Subsidized transport or company cars for senior employees.
- Meal Subsidies: Cafeterias or meal vouchers.
- Educational Reimbursement: Support for further education related to work.
- Flexible Work Arrangements: Options for remote work and flexible hours.
- Wellness Programs: Including mental health support, gym memberships, and health check-ups.
Employers also recognize performance through awards and may offer unique benefits like relocation assistance, daycare facilities, and special leave for significant life events.
Employee Hiring Cost
| India | |
|---|---|
| Gross annual salary | INR 20,000,000.00 |
| Annual employer costs | INR 1,000,900.00 |
| 1) Employees' Deposit Linked Insurance (EDLI) | INR 900.00 |
| 2) Employee's Provident Fund (EPF) | INR 960,000.00 |
| 3) Provident Fund Office EPF Admin Fee | INR 40,000.00 |
| Total annual cost | INR 21,000,900.00 |
Based on the provided figures:
- Base Salary: ₹100,000.00
- Mandatory Employer Costs: ₹7,149.96 (this typically includes contributions like Provident Fund and Gratuity)
Total Monthly Cost: ₹107,149.96
This total reflects the monthly expenditure to employ someone in India, including both the salary and the mandatory contributions. For annual budgeting, simply multiply the total monthly cost by 12, which would be approximately ₹1,285,799.52.
This gives you a clear view of the financial commitment involved in hiring an employee in India.
Work Permit in India
The Employment Visa is designed for skilled foreign nationals looking to work in India. This visa is suitable for roles requiring specialized skills, such as technical support, project execution, and consultancy.
- Letter of Invitation: From the host Indian company.
- Covering Letter: From the foreign company.
- Employment Contract: Detailing job role and salary.
- Certificate of Incorporation: From the Indian host company.
- Educational and Professional Certificates: Relevant qualifications of the applicant.
- Valid Passport: With two blank pages and at least six months of validity.
- Completed Visa Application Form.
- Valid Passport: Must have six months validity.
- Passport-Sized Photographs: Recent photos.
- Proof of Address: Such as a utility bill or driver’s license.
- Resume/Curriculum Vitae: Detailing work experience and qualifications.
- Permission Letter: Requesting approval for the applicant’s visa.
- Sponsorship Letter: Assuming responsibility for the applicant’s activities in India.
- Tax Liability Letter: Covering income tax obligations.
- Justification Letter: Explaining why a qualified Indian candidate was not available.
- Appointment Letter: Outlining the job role and salary.
- Comprehensive Employment Contract.
- Company’s PAN Card: Tax identification.
- Company’s Incorporation Certificate.
- Duration: Employment visas can be issued for up to two years, depending on the term of the contract.
- Registration: If valid for more than 180 days, registration with the Foreigners Regional Registration Office (FRRO) is required within 14 days of arrival.
- Extensions: Employment visas can be extended up to a total of five years on a year-to-year basis, contingent upon:
- Good conduct during the stay.
- Submission of required documentation for extension.
- Proper filing of income tax returns.
- No adverse security issues.
EOR Solutions in India
Mercans delivers comprehensive Employer of Record (EOR) solutions customized for businesses operating in India. Whether you’ve found your ideal candidates or require support in talent acquisition, our services encompass every phase of the employee lifecycle, ensuring full compliance with India’s labor laws and regulations.
Best Employer of Record India
Conclusion
Discover Mercans’ all-encompassing Employer of Record (EOR) solutions in India, crafted to facilitate global expansion. From ensuring payroll precision and compliance to supporting seamless workforce integration, Mercans provides unmatched assistance and expertise for businesses entering the Indian market, ensuring a successful and smooth transition.