Understanding legal compliance with EOR in India
India is an ideal place to hire full-time or contract workers due to its large pool of skilled professionals, particularly in IT, and its competitive labor costs, which allow businesses to access top talent at a lower expense. Additionally, India’s strong English language proficiency and cultural adaptability make it easy for remote teams to integrate seamlessly with global businesses.
However, there are many considerations to be made when hiring workers in India, such as compliance with Indian labor laws. This could be challenging, especially if you are a startup, as you will need to keep up with multiple complex laws.
This is where you can seek the help of an Employer of Record (EOR) in India, which will ensure you hire talent and comply 100% with local labor laws.
So, what is an EOR?
An EOR is a third-party entity serving as your company’s legal employer for your employees. The EOR in India is responsible for hiring, onboarding, payroll processing, and guaranteeing adherence to regional labor laws and regulations.
One such EOR in India is Global Squirrels, a staffing platform that will handle the legal compliance of your hired talent in India and allow you to focus on your core business operations.
In this blog, we will discuss key components of legal compliance regarding payroll, benefits, taxes, leaves, and termination. The blog concludes with how Global Squirrels can act as your EOR in India and simplify talent recruitment.
Payroll administration in India
Hiring talent via an EOR in India will streamline your payroll administration as the entity will handle all the key components including paying employees on time, monitoring leave and attendance, and accurately processing payroll.
In addition to preserving legal compliance with EOR in India and fostering employee satisfaction and confidence, effective management of these elements will shield your company against future legal problems.
With an emphasis on legal compliance with EOR in India, let us discuss some fundamentals of payroll administration:
1. Pay structure
Generally, a pay structure comprises basic pay, statutory payments such as Employee State Insurance (ESI) and Provident Fund (PF), as well as allowances like medical, Leave Travel Allowance (LTA), and House Rent Allowance (HRA). Your business must ensure your employee’s pay plans adhere to industry norms.
2. Statutory deductions
The standard deductions from an employee’s salary include PF, ESI, Professional Tax, and Tax Deducted at Source (TDS), which you will have to pay to the Government of India. These deductions must be precisely computed and deposited with the appropriate authorities within the allotted time frames to avoid fines.
3. Payroll compliance
Your business must follow payroll laws and regulations, such as the Payment of Wages Act of 1936, the Minimum Wages Act of 1948, the Payment of Bonus Act of 1965, and the Payment of Gratuity Act of 1972. Non-compliance may result in financial fines and legal repercussions.
Employee benefits in India
Employee benefits are a vital component of the salary you will offer your employees in India. These perks support your employee satisfaction and well-being and aid in luring and keeping top talent. Statutory and supplemental benefits are the two main categories into which employee benefits in India can be divided.
Gratuity
Workers with a minimum of five years of service are eligible for a gratuity, which is equal to fifteen days’ salary for each year of service completed.
Employees’ state insurance (ESI)
This program offers health benefits to your employees whose income falls below a specific level. Your company will contribute 3.25% of the pay, and the employee will contribute 0.75%.
Maternity leave
Under the Maternity Benefit Act, female employees are entitled to 26 weeks of paid maternity leave.
Taxes in India
An essential component of the Indian financial system is taxes. You should be aware of income tax and Tax Deducted at Source (TDS). Complying with regulations and financial planning requires understanding these taxes and their corresponding brackets. This is where you can take the help of an EOR in India and avoid getting in trouble due to wrong tax calculations and payments.
Income tax
A direct tax imposed by the government on an individual’s income is known as income tax. The income tax rates in India for the 2023–24 fiscal year are determined by a progressive tax system, meaning that as taxable income rises, so does the tax rate.
Tax deducted at source (TDS)
TDS is a system in which the payer withholds taxes at the source of income and deposits the money with the government. You must withhold TDS from your employees’ salaries in accordance with the relevant tax slab rates. On behalf of your employee, the deducted money is subsequently sent to the government.
Deductions and exemptions
The Indian tax system provides your employees with a number of exclusions and deductions that can lower their taxable income and, in turn, their tax obligation. Typical exclusions and deductions include the following:
- Section 80C: Tax deductions of up to ₹1,50,000 or USD 1787.98 for life insurance premiums, investments made in the Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS) are available.
- Section 80D: Deductions for parents, children, spouses, and self-paid health insurance premiums are available under Section 80D.
- House Rent Allowance (HRA): Subject to certain restrictions, an employer’s portion of the HRA is exempt.
- Leave Travel Allowance (LTA): Subject to certain restrictions, an exemption on travel costs for oneself and one’s family inside India.
- Standard Deduction: ₹50,000 or USD 595.99 deduction from the income that is subject to salary tax, which comes under Section 80CCD(1B).
Leaves in India
In India, vacation time is crucial for both work-life balance and employee welfare. To guarantee your employee’s welfare, the Indian labor regulations stipulate a variety of leaves.
Types of leaves under Indian employment laws
Earned leave (EL)
- Your employees are entitled to a minimum of 15 days of earned leave per year.
- ELs can be carried over to the next half-year.
Casual leaves
- Your employees typically have access to 7–12 days of casual leave (CL) annually.
- This leave cannot be carried over; it is intended for unanticipated events alone.
Sick leave (SL)
- In specific organizations, this type of leave can be accrued and is intended for brief medical conditions.
Maternity leave
- Female employees are entitled to 26 weeks of paid maternity leave under the terms of the Maternity Benefit (Amendment) Act, 2017.
- Eight weeks of prenatal and eighteen weeks of postnatal leave are included in this.
Paternity leave
- A paternity leave may be granted to a male employee if the employee has 2 surviving children within the last 6 months of childbirth.
- This leave can be given for a maximum of 15 days.
Bereavement leave
- Your employees are entitled to bereavement leave in the event that a family member passes away.
- Although such leave is not required by law, you may offer it out of sympathy.
Sabbatical leave
- Your employees may take a sabbatical leave to pursue further education, take professional pauses, or attend to personal or health emergencies.
- Sabbatical leave is awarded at your discretion and is not covered by the law.
Here are some steps involved in terminating employees in India
Notice period:
Typically, a one-month notice or one month’s salary is required for your employees hired for at least one year.
The notice period can be mutually agreed upon in the employment contract.
Termination for cause
- Immediate termination is possible for serious misconduct such as insubordination, fraud, or theft.
- In such cases, you must follow proper disciplinary procedures and have strong evidence to justify the termination.
Complete and final settlement
- You must provide your terminated employee with a complete and final settlement, including outstanding salary, unused leave encashment, reimbursements, and any other statutory dues.
- The settlement should be completed and paid out along with your employee’s last drawn salary.
- Your employees with at least five years of continuous service are eligible for gratuity upon termination, except in cases of serious misconduct.
Documentation
- You must issue a termination letter stating the reason for termination and the last working day.
- Other vital documents include a relieving letter, experience certificate, and a full and final settlement statement.
If your employee is hired through an EOR in India, the EOR will be responsible for ensuring compliance with Indian labor laws during the termination process. The EOR in India will also manage the notice period, calculate the final settlement, issue necessary documentation, and ensure your employee receives all statutory payments.
Setting up a local legal entity vs. working with Global Squirrels EOR solutions
Establishing your legal presence in India, registering the company, locating offices, and adhering to regional labor regulations are all part of creating a legal organization. Although this method gives you complete control, it may also be expensive, time-consuming, and complicated, especially if you are not familiar with Indian laws.
On the other hand, working with Global Squirrels will provide you with a streamlined procedure for legal compliance by acting as your EOR in India. Global Squirrels’ staffing platform manages:
- Hiring: Staffing the right workers based on your job description.
- Payroll: Ensuring on-time and accurate payments includes considerations like leaves and taxation.
- Compliance: By adhering to local labor laws in India, eliminating any employee misclassification, and providing analytics and assessments to compliance.
- Benefits administration: By providing competitive benefits, insights into varying employee benefits, and customization to supplementary benefits.
Are you ready to work with Global Squirrels to ensure legal compliance with EOR in India? Click here to request a demo of our platform.
