India at a Glance

Probation

Not mandatory. Common practice for multinationals is 3-6 months, depending on the seniority of the employee.

During a probation period, an employer can release its employee with notice as per EA clause, without assigning any reasons.

Overtime

In MNCs, generally, if employees work beyond normal working hours, they are paid a reimbursement of food and conveyance. Or, companies have policy to pay shift allowance, on call allowance, etc. if employees work on odd hours or on holidays. Mainly those below managerial grade are applicable for overtime.

Generally, if the termination is for a reason other than a justifiable cause, such as non-performance or misconduct, then there should be a mutual agreement to terminate, and the terms of the agreement should be documented. In such cases, there may also be a payment made on account of the termination, like redundancy pay.

It is not very uncommon to terminate employees in service sectors.

An employer must give a 30-day notice (or payment in lieu), as per the Industrial Disputes Act. Senior employees may be required to give a 60-day or 90-day notice. The notice period is driven by the terms and conditions in the employment agreement.

Once the legal entity is established, the next step is opening a local bank account. Typically, it takes between one to three weeks to complete this process. Indian banks require in-person verification, where you will need to provide documents such as proof of identity, proof of address, and a PAN card (tax ID). In some cases, a local reference may also be needed.

Businesses in India are required to maintain proper accounting records. These records must accurately reflect the company’s financial transactions and must be available for scrutiny by relevant authorities.

To file corporate taxes in India, businesses must first create an account at the time of incorporation. Corporate taxes are filed online, with the corporate tax rate generally being 30%. However, a surcharge of 7% to 10% applies depending on the company’s income. Domestic companies enjoy a lower tax rate compared to foreign companies, which are subject to higher tax rates.

The deadline for filing corporate tax returns in India is September 30th for companies without transfer pricing arrangements. Companies engaged in transfer pricing must file by November 30th.

India has a Goods and Services Tax (GST) system, which is applicable to the sale of goods and services within the country. Businesses must be registered for GST if they meet the required turnover thresholds.

For businesses with a wholly owned subsidiary in India, profits can be repatriated in several ways. Common methods include dividends, share buybacks, reduction of share capital, or surplus funds when the subsidiary is closed or wound up. Additionally, fees for technical services, consultancy services, business support services, and royalties may also be repatriated.

India follows the OECD guidelines for transfer pricing. There are six prescribed methods for transfer pricing, and businesses must choose the most appropriate one based on their specific circumstances.

Electronic invoicing (e-invoicing) is mandatory for businesses in India with an annual turnover exceeding 10 crore INR. This system helps reduce tax evasion and ensures better compliance with the Goods and Services Tax (GST).

The fiscal year in India runs from April 1st to March 31st of the following year, which is important when preparing annual financial statements and filing taxes.

Companies in India are subject to Tax Deducted at Source (TDS) on payments made to contractors, employees, and other vendors. TDS must be deducted at the prescribed rates and paid to the government.

It is not obligatory for foreign companies to appoint a tax representative in India. However, due to the complexity of Indian tax regulations, foreign businesses often hire tax consultants to ensure compliance with local tax laws and to navigate any complexities related to withholding taxes and other corporate tax matters.

Taxation of individuals in India is primarily based on their residential status in the relevant tax year. The residential status of individuals is determined independently of each tax year and is ascertained based on their physical presence in India during the relevant tax year and past years.

The following types of residential status are envisaged for an individual:

• Resident in India, which is further divided into the following two categories:
  • Resident and ordinarily resident (ROR).
  • Resident but not ordinarily resident (RNOR).
• Non-resident in India (NR).

Under Indian tax laws, the scope of taxation differs as per the residential status of an individual:

• RORs are subject to tax in India on their worldwide income, wherever received.
• RNORs are subject to tax in India only in respect to income that accrues/arises or is deemed to accrue/arise in India, is received, is deemed to be received in India, or is from a business controlled in or a profession set up in India.
• NRs are subject to tax in India only in respect to income that accrues/arises or is deemed to accrue/arise or is received or deemed to be received in India.
• RNOR and NR individuals are not subject to tax in respect to their income earned and received outside of India.

Employees will need a Personal Account Number for both withholding and annual filing of an Indian tax return.

In India, there are two tax systems: the Old Tax Regime and the New Tax Regime. By default, employees are taxed under the New Tax Regime, but they have the option to switch to the Old Tax Regime once in a financial year through the Employee Self-service Portal.

The following income tax slab rates are applicable for Year of Assessment 2025/26.

New Tax Regime:

Old Tax Regime:

Surcharge

In addition to the income tax, a surcharge is to be levied at the following rates.

New Tax Regime:

Old Tax Regime:

Health and Education Cess

Health and education Cess at the rate of 4% of the income tax and surcharge (if applicable) will be levied to compute the final tax liability of individuals.

Tax rebate

The rebate is available to a resident individual:

under the Old Tax Regime if his total income does not exceed INR 500,000 – max rebate available is INR 12,500

under the New Tax Regime it is available if his total income does not exceed INR 700,000– max rebate available is INR 25,000

Personal income tax deductions

For the purpose of Income computation “under the old tax regime only”, the total taxable income under all heads, after deductions under Chapter VI-A and Section 80C, would be considered. Some examples of deduction allowed under Chapter VI-A & Section 80C at the time of filing of income tax returns are as follows:

• PPF Account
• Tax Saving Fixed Deposit
• Tax Saving Mutual Funds
• Senior Citizen Savings Scheme
• National Savings Certificate
• Contribution to National Pension Scheme
• Contribution to Pension Funds
• Payment of Medical Insurance Premium
• Payment for treatment of specified disease
• Donations

Employer requirements

Employers are responsible for withholding tax every month as applicable from employee’s salary and deposit the same amount with the government by the 7th day of the following month.

Employers also need to submit quarterly tax statement (Employee-wise salary and tax statement) at the end of each quarter.

Based on the quarterly tax statement, employers issue Form 16 (yearly salary and tax statement) to employees at the end of the year.

Employees need to submit individual tax returns based on the Form 16 issued by the employer.

Form 16 is a yearly salary tax statement issued by employers to employees and consists of part A and part B.

Part A is extracted from income tax site (TRACES), and it is a summary of quarterly tax statements submitted by employers.

Part B provides all the salary details, taxable perquisites, exemptions and deductions availed by employee, total tax liability and tax deducted by the employer.

Form 16 is issued by June 15th every year.

Company may give options to opt other various tax saving elements as per individual employee’s tax planning.

At least PARTIALLY tax-exempt components include:

• Standard deduction: INR 75,000 per year under new regime and INR 50,000 per year under old regime

Tax saving allowances, specified under section 10 of Income Tax Act of India. Some of the examples are as below:

• HRA
• Leave Travel Allowance

House Rent Allowance (HRA): the amount of rental allowance will be exempted from income tax at the lower of the following:

• Actual HRA received
• Rent paid over 10% of Basic salary
• 50% or 40% of Basic salary (50% in case of Metro and 40% in case of Non-metro cities).

Notably, per diem allowances are not taxable in India if they are reasonable and justifiable, and have supporting documents for the expenses incurred. This applies to business expenses incurred by the employee.

Some tax-free perquisites:

• Car/driver expenses reimbursement
• Telephone expenses reimbursement
• Meal coupons
• Employer contribution to provident fund is tax free up to 12% of Basic salary.

Common items for MNCs to give to their expats are telephone reimbursement, leave travel allowance, meal coupons, and children education/hostel allowance.

Profession taxes imposed by certain states on individuals are minimal and are first added to the total income and then deductible while calculating taxable income.

India has a robust framework for social security contributions, which employers must comply with. The mandatory contributions are as follows:

• Employee Deposit Linked Insurance (EDLI): A life insurance benefit for employees covered under the EPF scheme.
• Worker’s Compensation Insurance: Provides financial compensation to employees in case of work-related injuries.
• EPF Administration Charges: Administrative costs associated with managing the Employee Provident Fund.
• Employees’ Provident Fund (EPF): A retirement savings scheme where both the employee and employer contribute a percentage of the basic salary.

Employee Provident Fund (EPF) is implemented by the Employees Provident Fund Organization (EPFO) of India. An establishment with 20 or more workers in any industry should register with the EPFO. The actual amount of EPF contribution is calculated based on the employee’s basic salary and dearness allowance. For most employees, the EPF contribution is 12% of the basic salary.

• Employees’ Pension Scheme (EPS): A pension scheme that provides financial security to employees after retirement.

Employee Provident Fund (EPF) is one of the main platforms of savings in India for nearly all people working in Private sector Organizations. A provident fund is created with a purpose of providing financial security and stability to employees. Generally, one starts contributing to these funds as soon as they get employed. The contributions are made on a monthly basis. Its purpose is to help employees save a fraction of their salary every month, to be used in an event that the employee is temporarily unfit/no longer fit to work or at retirement.

Provident fund department has provided three options to opt for PF Contribution from employer perspective:

• Restricts Employee & Employer PF contribution to maximum 12% of INR 15,000
• Restricts Employer PF Contribution maximum to INR 15,000 and deducts Employee PF at Actual
• No Restriction, 12% of Basic + DA will be contributed by both Employee & Employer.

Thresholds:

• Social security (Provident Fund) is applicable when the employee count is 20 or more. If the employee count is less than 20, company can opt for voluntary PF registration if majority of the employees give consent for such registration.

Table below gives the rates of contribution of EPF, EPS, EDLI, and Admin charges in India.

*The above table serves as a broad guideline. Actual rates charged will differ.

Payment of contributions:

• There is a monthly deduction of employee’s contribution from employee’s salary. The amount deducted needs to be remitted to PF authority along with employer’s contribution and admin charges, by the 15th of the following month. Online payment facility is provided by PF authority. The payment needs to be made online as per guidelines given by PF authority.

The Employees’ Pension Scheme is a social security initiative offered by the Employees’ Provident Fund Organization (EPFO). This scheme aims to help employees in the organized sector, providing a pension post-retirement at 58. To avail benefits, an employee must have completed at least 10 years of service.

The financial contribution of the employee to the Employees’ Pension Scheme (EPS) is 12% of their basic salary. The employer contributes 8.33% of the employee’s salary towards the EPS, and the remaining 3.67% goes towards the Employees’ Provident Fund (EPF).

The purpose of the scheme is to provide for:

• Superannuation Pension: Member who has rendered eligible service of 20 years and retires on attaining the age of 58 years,
• Retiring Pension: Member who has rendered eligible service of 20 years and retires or otherwise ceases to be in employment before attaining the age of 58 years,
• Permanent Total Disablement Pension, and
• Short Service Pension: Member has to render eligible service of more than 10 years but less than 20 years.

An employee can start receiving the pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58/50 years. However, no pension is payable before the age of 50 years. Early pension after 50 years but before the age of 58 years is subject to discounting factor at 4% (w.e.f. 26.09.2008) for every year falling short of 58 years. In case of death/disablement, the above restrictions do not apply.

Under the EDLIS, life insurance cover is provided to the PF members. The cost of the scheme is borne by the employer, but as the amount of life coverage under this statutory scheme is very low, employers usually opt out of the EDLIS by going for group insurance scheme, which provides higher coverage to employees without any increase in cost to the employer. Premium for the EDLI is entirely funded by the employer, which contributes 0.5% of monthly basic pay (capped at a maximum of INR 15,000) as premium for life cover in case the organization does not have a group insurance scheme for its employees.

The claim amount of the EDLI is decided by the last drawn salary of the employee. The claim amount would be:

• 30 times the salary. For this calculation, salary is basic pay plus DA, or Dearness Allowance. The upper limit of wage for the EDLI is INR 15,000.
• Along with this, the bonus of INR 150,000 is also given.
• Thus, the maximum EDLI claim amount would be INR 600,000 [(30 x 15,000) + 150,000].
• There is no condition of continuous employment (of one year under current employer) to be eligible for the insurance benefit.

Statutory bonus is payable as per the Payment of Bonus Act, 1965 and is applicable to establishments employing 20 or more persons. Every employee receiving salary or wages up to INR 21,000/month and who has worked for at least 30 working days in the year is eligible to receive statutory bonus. Minimum bonus payable is at 8.33%, and maximum bonus payable is at 20% of eligible amount and payable within eight months of the end of the accounting year, i.e., before November of every year.

Performance bonus is paid at the discretion of the company. There is no mandatory 13th or 14th month bonus.

Gratuity and Leave encashment are payable at the time of termination, irrespective of reason (e.g. termination on retirement, resignation, etc.) Gratuity is applicable only for the employees who serve for more than five continuous years. Payment of Gratuity Act becomes applicable to establishments having 10 employees or more.Retrenchment compensation is mandatory under Industrial Disputes Act (applicable for industrial workers). In other cases, it is paid on mutually agreed terms.

Severance pay, apart from the above, is not mandatory. Company may pay additional amount on compassionate grounds. Also, contractual terms needs to be considered.

Severance payment is required to be paid by the employer. Severance pay procedure is different in each of the circumstances noted below:

Voluntary resignation: If the employee voluntarily resigns (as in the cases of retirement/resignation/absconding/failure to report to work without notice for three consecutive days), then the resignation must be accepted by the employer. Upon the acceptance of the resignation by the employer, the employee must serve a notice period as specified in the employment contract (usually 30 days minimum), unless the same is waived by the employer.

Termination initiated by employer: For terminations initiated by the employer for misconduct by the employee, the scope of misconduct should be set out in the employment handbook, policies or employment contract.

An employee is entitled to a payment of gratuity on termination of his/her employment, provided he/she has rendered continuous service for no less than five years (except in the case of death or disability), under certain circumstances. The gratuity payable to an employee is calculated as 15 days’ last drawn basic salary, multiplied by the number of years of service (with part of a year in excess of six months counted as one year). The maximum amount of gratuity that an employee is entitled to under the PGA Act is INR 2,000,000. However, there is no restriction on any employer to pay over and above the statutory limit.

In India, salary is broken down into various pay elements, as each pay element has specific tax implications. Some pay elements give tax-saving opportunities to employees with no additional cost or risk to the company.

Generally, the Basic Salary is fixed – at 50% of the Gross Salary. The retirement benefits, like provident fund, gratuity and leave encashment, are calculated based on basic salary. The company may give the option to opt for various other tax-saving elements.

Generally paid at the end of the month through bank transfer.

Online payslips via Employee Self Service (ESS) is the most common method to share payslips.

Commencement of leave period is the start of calendar year, i.e. January 1st to December 31st every year. Employment contracts generally detail the terms of leave.

As per the Shops and Establishment Act :

Every worker who has worked for a period of two hundred and forty days or more in an establishment during a calendar year shall be allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of one day for every twenty days of work performed by him during the previous calendar year.

Subject to the provision of clause above every worker, who has been employed for not less than three months in any year, shall for every sixty days on which he has worked during the year be allowed leave, consecutive or otherwise, for a period of not more than five days. (5) Every worker shall be permitted to accumulate earned leave up to a maximum of forty-five days.

Annual leave eligibility varies depending on location/state.

If the employment contract expires before a worker could take his/her annual leave, compensation for leave is made in proportion to the number of months and numbers of working hours in a week.

Employment contracts generally detail the terms of the leave. However, the Maharashtra Shop and Establishment Act allows 8 days of casual leave annually. Employees who work 240 days or more during a calendar year are given one day of leave the following year for every 20 days they worked in the previous calendar year. Each employee can carry forward up to 45 days of paid leaves.

Annual leave eligibility is dependent on location/state. It varies for each state.

Generally, 10 holidays are observed in a year, including three national holidays and others major festival holidays.

Public holidays differ from region to region and range from between four to ten days’ holiday each year.

Workers may be required to work on public holidays. There is no central level legislation in this respect. Different State-level Acts (National and Festival Holidays Act) provide that in circumstances where workers have to work on official holidays, they are entitled to receive wages at a premium rate of 200% of the normal hourly wage rate. Workers working on weekly rest days are entitled to premium pay at the rate of 200% of the normal wage rate. A worker may be provided with twice the wages for working on a public holiday or with a substitute holiday with pay. A worker who is required to work on a rest day must be paid wages at the overtime rates (twice the rate of wages).

Sick leave is the leave that an employee can avail when he/she is out of work due to illness and can be taken for minimum 0.5 to maximum 7 days (paid).

There is no sick leave carry-forwards or encashment. At the end of calendar year, any available sick leave will lapse automatically.

For all absences exceeding two or three days, depending on company policy, medical certificate usually needs to be enclosed.

Sick leave can be appended with earned leave; new joiners & resigned employees get prorated sick leave.

Different provisions could be located under different Acts:

• 15 days of sick leave is entitled under Apprentices Act, 1961
• 30 days of sick leave for 18 months of service under Working Journalist and Other Newspaper Employees (Conditions of Service) and Miscellaneous Provisions Act, 1955
• At least 1/18th of the period working under Sales Promotion Employees (Conditions of Service) Act, 1976. ()

Casual leave is granted for certain unforeseen situation, or when employee is required to go for one-day to two-day leave to attend to personal matters and not for vacation. In case of casual leave, normally, company’s strict policy is up to a maximum of three days in a month. In such cases, the person has to get the permission in advance.

Casual leave can be taken for minimum 0.5 to maximum three days. In case of more than three days leave, it should be taken as annual leave. If three leaves are taken together, employees need to apply for in advance.

As per the rules under The Shops and Establishment Act, an employee is entitled to 8 (eight) days of casual leave.

There are no casual leave carry-forwards. At the closing day of the year, any unused casual leaves will lapse automatically and are not encashable.

Casual leave cannot be appended with annual leave or sick leave.

The Maternity Leave Policy in India is applicable to all women working in private as well as public sector organizations. It means that female employees in private companies, government organizations, factories, plantations, etc., with more than 10 employees, are entitled to maternity leave.

Note that the Maternity Benefit Act does not apply to self-employed women and those working with a firm that has less than 10 employees.

In order to be eligible for maternity leave in a company, the woman must have worked for a minimum of 80 days in the period of 12 months before her expected date of child delivery.

Maternity leave is a type of long-term paid leave granted to a pregnant employee in an organization. It is a mandatory leave that a company or employer must provide to their eligible female employee before or after their delivery.

All pregnant female employees are entitled to a maternity leave of 26 weeks for their first and second child. One can take up to 8 weeks’ leave before their expected delivery date and up to 18 weeks after giving birth to their child.

For the third or subsequent pregnancy, expecting mothers are eligible to take maternity leave of 12 weeks.

Adopting mothers are eligible for a 12-week maternity leave, which starts from the day their newborn is handed over to them.

In case of medical termination or accidental miscarriage, a woman employee can take 12 weeks of maternity leave. However, in this case, medical proof of miscarriage is required.

Besides, additional paid leave can also be granted based on the health and situation of the mother and her baby.

If a female employee’s job requires her to work from home, the employer may permit her to do so after she has used the maternity benefit for the time period and on the terms that the employer and the woman may mutually agree upon.

The Act further requires an employer to inform a woman worker of her rights under the Act at the time of her appointment. The information must be given in writing and in electronic form (email).

While paternity leave is authorized for government employees, there is no law that instructs the private sector to make it obligatory. Hence, paternity leave is open to interpretation by individual companies.

Some types of leave will vary depending on the industry/sector or state of employment. Some are paid, unpaid or half-paid leaves like Study Leave, Bereavement Leave and Leave for Voting. These are left at the organization’s discretion.

Employee State Insurance (ESI)

• Registration under Employee State Insurance (ESI) becomes mandatory for manufacturing industries if the employee count is 10 or more, and for other companies, 20 or more.
• Employees with monthly salary of INR 21,000 are covered under this benefit. Companies provide health insurance to employees who are not covered under ESI.