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India has a lot of highly-skilled workers and employers often look to the country to fill vacancies in their businesses, both for remote and on-site positions.
Before hiring workers in a foreign country, it is important to understand the basics of the standards, regulations, and labor practices.
Additionally, we will talk about how to hire in India without setting up a company or other legal entity. For example, hiring a team of software developers without having to register a local company.
Work Hours and Overtime Pay in India
For most industries, employees should not work more than 9 hours per day, and not more than 48 hours per week in total.
The Minimum Wages Act, 1948 states that if an employee has fixed minimum wages for a particular period of time, the employee should receive overtime pay for work done beyond the specified period. Like the regulations for work hours, regulations for overtime pay may also vary depending on the industry.
Employee Taxes in India
Employers must deduct their employees’ relevant income taxes upon payment of the employee’s monthly salary. Employers are also responsible for collecting documents in relation to employees’ allowances and deductible expenses.
The basis for tax deductions is the average rate of the employee’s income tax for the financial year.
Employer Contributions
Provident Fund
The Provident Fund is a retirement savings scheme mandated by the Indian government. Every month the employer and employee must each contribute an equal amount. The contribution is 12% of the employee’s basic salary, dearness allowance, and retaining allowance. However, if the company has less than 20 employees or if it meets other conditions, the maximum contribution rate is 10% each.
Upon retirement, the employee will receive a lump sum amount including both the employee and employer’s contributions with interest accrued.
State Insurance
Companies with at least 10 employees, or 20 employees in the State of Maharashtra, must make contributions to the Employees’ State Insurance fund. For all employees whose monthly wages do not exceed INR 21,000, the employer must contribute 3.25% of the employee’s monthly salary and the employee must contribute 0.75%.
Payment of Gratuity
Gratuity is a type of benefit in India for employees who are retiring or leaving the company after several years of service. This is applicable to companies that have had at least 10 employees within the preceding 12 months.
To be eligible for gratuity, the employee must render 5 full years with the employer except in cases where he or she can no longer work due to an accident or illness.
Gratuity is equivalent to 15 days’ worth of wages for each year of service. The number of years is rounded to the nearest number of years, i.e. five years and seven months would count as six years of service.
Annual Bonuses
In India, the law requires employers to pay bonuses. As stated in the Payment of Bonus Act, 1965, companies with at least 20 employees or factories with at least 10 employees must pay each eligible employee a bonus. The act states that the employer must pay the bonus within the financial year.
The amount must be at least 8.33% but not exceeding 20% of the salary or wage earned by the employee or INR 100, whichever is higher. The compensation package must include this bonus.
According to Section 16 of the same act, the company does not have to pay its employees the bonus for the first 5 years if it has not made a profit for that financial year. However, after the first 5 years, the company will have to pay the bonus whether it has profits that year or not.
Failure to comply with the act could result in imprisonment or a fine of up to INR 1,000.
Using an employer of record to hire remote employees
Setting up a legal entity in India is not the only way to hire employees from the country. An employer of record is a service provider that hires employees on your behalf. This allows foreign employers to hire staff without first setting up a company or any legal entity. As such, you can start hiring immediately once you connect with an employer of record, like Emerhub.
Employers of record will be responsible for employees hired through the service. This includes hiring, payroll management, and other HR functions. Employers of record will also take charge of maintaining compliance with local labor laws and regulations.
A common use case for the employer of record service is to hire software developers. This allows you to convert your freelance developers into full-time employees. Such an arrangement will attract a wider market of developers because you will be able to provide the same type of job security as locally incorporated companies.
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