What an India EOR Covers Under the Labour Codes (2026): PF, ESI, PT, TDS and Gratuity
Short answer: an Employer of Record (EOR) in India takes on the employer’s legal duties for your team member. That means issuing the appointment letter, paying wages on time, deducting income tax, paying Provident Fund and ESI contributions, handling Professional Tax and Labour Welfare Fund, providing gratuity and bonus where due, and settling dues when the employee leaves. You direct the work; the EOR carries the compliance.
India’s four labour codes came into force on 21 November 2025. They replaced 29 older labour laws and changed several employer duties. If you are comparing EOR providers, this is the list of what “full statutory compliance” should actually include.
The labour codes in one paragraph
The four codes are the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020. For an employer of office staff, the changes that matter most are a common definition of “wages” for contributions, mandatory appointment letters, gratuity for fixed-term employees after one year, a free annual health check-up for workers over 40, and firm deadlines for paying wages and final dues.
What an EOR covers: the full list
| Obligation | What the EOR does | Key rule in 2026 |
|---|---|---|
| Appointment letter | Issues a written appointment letter to every employee | Mandatory for all workers under the labour codes |
| Wages and payslips | Runs monthly payroll and issues payslips | Wages are paid by the 7th of the following month under the Code on Wages |
| Employees’ Provident Fund (EPF) | Registers the employee, deducts 12% from wages, adds 12% employer share, files monthly returns | Mandatory wage ceiling of Rs 25,000 per month from 17 September 2026 |
| Employees’ State Insurance (ESI) | Registers eligible employees and pays contributions | Employer 3.25%, employee 0.75%, for wages up to Rs 21,000 per month |
| Income tax (TDS on salary) | Collects the employee’s tax regime choice and declarations, deducts tax every month, deposits it and issues the annual tax certificate | Deducted at source each month by the employer |
| Professional Tax | Deducts and pays Professional Tax where the state levies it | Small amounts set by each state; not every state levies it |
| Labour Welfare Fund | Deducts the employee share, adds the employer share, files with the state | Small amounts set by each state |
| Gratuity | Provides for gratuity and pays it on exit | 15 days’ wages per completed year; fixed-term employees qualify after one year of continuous service |
| Statutory bonus | Calculates and pays bonus to eligible employees | Minimum 8.33% of wages for eligible employees |
| Health check-up | Arranges a free annual health check-up | For workers aged 40 and above |
| Leave and holidays | Applies the leave and holiday rules of the state where the employee works | State Shops and Establishments laws apply |
| Exit and final settlement | Calculates notice, leave encashment and gratuity, and pays final dues | Final wages within two working days of the employee leaving, under the Code on Wages |
See what PF, ESI and other contributions add to cost
Our calculator shows the employer statutory cost on top of salary for an India hire.
The new definition of wages, and why it changes cost
Before the codes, many salaries had a small basic pay and large allowances, which kept PF and gratuity low. The codes use one definition of “wages”. If allowances excluded from wages make up more than half of total pay, the excess is added back to wages for contributions. For most employers this means PF, gratuity and bonus are calculated on a larger base than before. A good EOR builds salary structures that comply with this rule from the first month.
Provident Fund and ESI in practice
Under EPF, the employee and the employer each contribute 12% of basic wages. Of the employer’s 12%, 8.33% goes to the Employees’ Pension Scheme and 3.67% to the employee’s PF account. Since 17 September 2026, mandatory coverage applies up to a wage ceiling of Rs 25,000 per month, up from Rs 15,000. The employer can choose to contribute on higher wages.
ESI covers employees whose wages are up to Rs 21,000 per month (Rs 25,000 for persons with disability). The employer pays 3.25% and the employee 0.75%. Most professional roles hired by foreign companies earn above this limit, so ESI often does not apply. Your EOR should still check each salary, because the labour code definition of wages can bring some employees back within the limit.
For the cost effect of the new PF ceiling, see how the Rs 25,000 PF ceiling changes your employer cost.
Gratuity under the Code on Social Security
Gratuity is a lump sum paid when an employee leaves. It is worked out at 15 days’ wages for each completed year of service. Permanent employees qualify after five years of continuous service. Fixed-term employees now qualify after one year. Many employers set aside about 4.81% of basic wages each month so the money is ready when it falls due. Ask your EOR how gratuity is provided for and whether it is shown on your invoice.
What stays with you, the client
- Choosing the person and setting the salary
- Day-to-day work, targets and performance reviews
- Equipment, systems access and data security
- Approving leave, salary changes and exits
The EOR acts on your instructions but remains the legal employer in India, so changes to pay or employment must go through it.
How to check that an EOR is really compliant
- Ask for its EPF and ESI establishment codes and its registrations in the states where your staff will work.
- Ask whether it employs staff on its own Indian entity or passes them to a partner.
- Ask for sample payslips and a sample monthly compliance pack (PF, ESI, Professional Tax and TDS challans).
- Ask how it handles gratuity, bonus and the labour code wage definition.
- Ask what happens on exit: notice, final settlement and the two-day deadline.
Engaging full-time people as freelancers instead avoids none of these duties if the relationship is really employment. See contractor misclassification risk in India for the details, and the statutory compliance guide for the wider list of employer filings.
Frequently asked questions
Is PF mandatory for an employee hired through an EOR?
Yes, for employees whose basic wages are up to Rs 25,000 per month, and the employer may choose to cover higher earners. The EOR registers the employee and pays both shares.
Does the EOR deduct income tax from salary?
Yes. The EOR deducts tax at source every month based on the employee’s declarations and regime choice, deposits it, and issues the annual tax certificate.
When does an employee in India become eligible for gratuity?
After five years of continuous service for permanent employees, and after one year for fixed-term employees, under the Code on Social Security, 2020.
Do the labour codes apply to companies hiring through an EOR?
Yes. The codes apply to the employment, and the EOR as legal employer is responsible for meeting them. Your contract with the EOR should say so clearly.
Is ESI usually payable for professional roles?
Usually not, because ESI covers wages up to Rs 21,000 per month. It is still worth checking each salary under the new wage definition.
Compliance handled from day one
Team Management Services (TMS) employs staff in India on its own Indian entity and handles PF, ESI, Professional Tax, Labour Welfare Fund, TDS, gratuity and final settlements for companies abroad. To see what it would cost for your team, use the EOR cost calculator or visit EOR in India.
Compliance handled from day one
Ask us how we run PF, ESI, PT, TDS and gratuity for EOR employees, and what reports you receive each month.