Get a complimentary cost simulation today!

Setting up a wholly owned subsidiary in India means navigating the Companies Act, GST registration, Shops and Establishments registration in every state you operate, and a payroll build that now has to comply with four newly consolidated Labour Codes. Realistically, that's 2–3 months and a meaningful legal spend before your first employee gets an offer letter.

‍

For HR leaders who need India talent now, an Employer of Record (EOR) is the alternative: a licensed local entity employs your worker on your behalf, runs statutory compliance, and lets you onboard in days rather than months. This guide walks through how that works, what changed under India's 2025–2026 labour law reform, and how to evaluate whether EOR or entity setup is the right call.

What "Hiring Without an Entity" Actually Means

‍

There are three real paths into the Indian market without immediately incorporating:

Employer of Record (EOR): A licensed local provider is the legal employer of record that runs payroll, EPF, ESI, gratuity, and tax compliance while you direct the person's day-to-day work. ‍
Independent contractor: You engage the individual directly, with no employer-employee relationship and no statutory benefits obligation. ‍
Entity setup: You register your own Indian entity (typically a private limited company) and become the direct legal employer.

‍

Contractor arrangements are the fastest and cheapest on paper, which is exactly why they're the most misused. Treating an India-based hire as a contractor when the relationship functions like employment with fixed hours, exclusive engagement, company equipment, ongoing supervision exposes the hiring company to retroactive EPF and ESI liability, penalties, and potential reclassification by labour authorities. Under the new Codes' expanded social security coverage (which now explicitly extends to gig and platform workers), scrutiny of contractor arrangements that look like disguised employment is not decreasing.

‍

Why India Compliance Just Got More Complex and More Consolidated

‍

India's four Labour Codes on Wages, Social Security, Industrial Relations, and Occupational Safety took effect nationwide on 21 November 2025, replacing 29 overlapping central labour laws. A few changes matter directly to how you hire and pay:

The 50% "wage" rule. Basic pay plus dearness allowance must now equal at least 50% of total CTC. If allowances push basic below that threshold, the excess is added back into the wage base used to calculate EPF, ESI, and gratuity, which raises employer cost even if gross CTC doesn't change. ‍
‍
Gratuity eligibility dropped from 5 years to 1 year. This is a major shift from the old Payment of Gratuity Act. Fixed-term employees now qualify for pro-rata gratuity after just one year of continuous service, at parity with permanent staff. ‍
‍
Full and final settlement within 2 working days. Down from a common 30–45 day (sometimes 60-day) practice. This requires payroll infrastructure that can calculate final dues in real time, which is a strong argument for EOR providers who already run this natively, rather than an in-house team retrofitting old processes. ‍
‍
Retrenchment permission threshold raised from 100 to 300 workers. More flexibility for mid-sized employers, though notice and compensation obligations (one month's notice, 15 days' average pay per completed year of service) are unchanged.

‍

Statutory Contributions HR Leaders Should Know
‍

Contribution	Employer Rate	Employee Rate	Wage Ceiling / Note
EPF (Provident Fund)	12% of Basic+DA	12% of Basic+DA	Mandatory up to ₹15,000 Basic+DA; often extended above by employer choice
ESI (State Insurance)	3.25% of gross wages	0.75% of gross wages	Applies only if gross wages ≤ ₹21,000/month (₹25,000 for persons with disabilities)
Gratuity	~4.81% of Basic+DA (accrual basis)	—	Now payable after 1 year of continuous service (down from 5)
Professional Tax	State-specific	State-specific	Varies by state; not levied in all states

Cost and Timeline: EOR vs. Entity Setup

	EOR	Entity Setup
Time to first hire	Days to ~2 weeks	6–12 weeks
Upfront cost	None (monthly per-employee fee)	Legal, registration, and compliance setup costs
Ongoing compliance burden	Owned by the EOR provider	Owned by your India entity
Best for	First hires, market testing, 1–15 headcount	Established India operations, 15+ headcount, long-term commitment

‍

How the EOR Process Works

Offer and contract. The EOR issues a compliant India employment contract on your behalf, aligned to the new appointment-letter requirements under the Codes.

Onboarding. EPF, ESI, and gratuity registration are handled by the provider.

Payroll. Monthly payroll run with statutory deductions, payslips, and ECR filing by the 15th of the following month.

Ongoing compliance. The EOR tracks state-specific Shops and Establishments obligations and Labour Code updates.

Offboarding, if needed. Full and final settlement within the new 2-working-day window.

Ready to hire in India without the entity setup timeline? Talk to AYP’s EOR experts today → [contact us]

Frequently Asked Questions (FAQs)

Can I legally hire an employee in India without a local entity?

Yes, through an Employer of Record. The EOR is the legal employer; you direct the work.

What's the difference between an EOR and a PEO in India?

A PEO co-employs alongside your own registered entity. An EOR is the sole legal employer, so no entity is required. This is the relevant model if you don't yet have an India entity.

How long does EOR onboarding take in India?

Typically days to about two weeks, versus 6–12 weeks for full entity incorporation.

What changed with India's 2026 Labour Codes?

Four codes replacing 29 laws took effect 21 November 2025, introducing the 50% basic pay rule, 1-year gratuity eligibility, 2-day final settlement, and a 300-worker retrenchment threshold, among other changes.

What are the mandatory employer contributions in India?

Primarily EPF (12% employer), ESI (3.25% employer, only under the ₹21,000 wage ceiling), and gratuity (payable after 1 year of service under the new rules).

Can I hire a contractor in India instead to avoid this complexity?

You can, but a contractor relationship that functions like employment risks misclassification penalties and retroactive statutory liability. This has not gotten more lenient under the new Codes.

How much does an EOR cost compared to entity setup?

EOR is a monthly per-employee fee with no upfront cost. Entity setup carries legal, registration, and ongoing compliance overhead regardless of headcount, so it only pays off at scale.

Do compliance requirements vary by state in India?

Yes. ESI thresholds, Professional Tax, and Shops and Establishments registration are state-administered and vary meaningfully across states.

Can I convert an EOR employee to my own entity later?

With most EOR providers, yes. The employee's contract and record transfer to your entity once it's established, without a gap in employment.

How to Hire in India Without a Local Entity