Compliant Hiring in India: What PF, ESI, Gratuity & TDS Actually Mean
Most India-EOR buyers ask the same question at some point in the sales cycle: "If you get something wrong, am I liable?" The honest answer involves four specific statutory regimes — PF, ESI, Gratuity, and TDS — each with its own threshold, filing cadence, and penalty if it's filed late or wrong. Under the EOR model, SynkPay is the legal employer of record in India, so the statutory liability for these filings sits with us, not with you. This post explains what each regime actually is, who's on the hook, and the things a careful buyer should still check in any EOR contract — including ours.
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"Are you compliant?" — the question buyers actually have
When a founder or ops lead asks an India EOR vendor "are you compliant?", they're not asking a yes/no question. They're asking: if something is wrong — a late PF filing, a missed TDS deposit, a misclassified employee — does it land on my company, or on yours?
The short answer for the EOR model is that the legal employment relationship sits between the EOR provider and the employee. The EOR is the employer of record on PF, ESI, TDS, and gratuity filings. So when filings are made wrong or late, the EOR provider is the entity penalised — not your foreign company. That is the entire structural point of EOR.
The longer answer has caveats. A few things can still touch you: direct contractor misclassification (if you hired someone yourself and then asked an EOR to "regularise" them), commercial accruals like gratuity that build on the EOR's books and may pass through to you on offboarding, and anything you do that overrides the EOR's compliance process (paying bonuses outside payroll, for example). The rest of this post is what each of the four regimes is, the cadence the EOR has to keep, and the questions you should be able to ask any vendor — including us — to test that they actually do it.
Five things to know before reading on:
PF, ESI, Gratuity, and TDS are the four statutory regimes every employer in India runs against. Professional Tax is a state-level fifth — covered briefly later.
Under EOR, the legal employer is the provider. That's where the statutory liability sits.
The provider should hold its own EPFO and ESIC registrations — not someone else's. Ask the question directly.
Gratuity is the one buyers usually miss in commercial review — it's an accruing liability over years, not a monthly cost.
TDS and Form 16 are the regimes employees care about (they need Form 16 to file their personal taxes). If your EOR is late, your employee notices personally.
PF — Provident Fund (EPFO)
What it is. The Provident Fund is India's mandatory retirement savings scheme, administered by the Employees' Provident Fund Organisation (EPFO). Both employer and employee contribute, and the money sits in the employee's individual EPF account until retirement, resignation (with rules around withdrawal), or transfer to a new employer.
Who has to register. Employer registration with EPFO is mandatory once you have 20 or more employees. Below 20, registration is voluntary — but in practice almost every credible EOR holds the registration anyway and enrols all employees from day one, because the employee can claim PF benefits even when the employer is voluntarily registered.
Contribution rate. 12% of basic + DA from the employer and 12% from the employee, on the basic-pay component (not the full CTC). Wages above ₹15,000/month/basic can be capped at the statutory minimum or contributed on the full amount, depending on the scheme — both are common in the Indian software industry, and the EOR should clarify which it applies. SynkPay's default is the statutory cap at ₹15,000 basic — the cost-optimized approach for most software hires; we offer uncapped 12% as an opt-in for compliance-strict clients.
Filing cadence. Monthly, by the 15th of the following month. The EPF challan is generated, contributions deposited, and the ECR (Electronic Challan-cum-Return) filed.
Penalty for non-compliance. Interest at 12% per annum on delayed contributions, plus damages at 5–25% depending on how late, per the EPF & MP Act. Late filing on a small employee base still hurts; on a 20-person team it compounds quickly.
The EOR shift. SynkPay holds its own EPFO registration. Every employee we hire for you is enrolled under our PF code, contributions are filed monthly, and the employee can verify their balance directly on the EPFO portal under their UAN (Universal Account Number). The liability for the filing — and any penalty if it were ever late — sits on us.
What to ask any EOR: Is the PF code yours, or your partner's? The answer should be "ours." If they say "we use a payroll partner's code," that's a third-party arrangement — your employee's PF account history will be tied to a vendor you didn't choose, which can complicate transfers when the employee moves on.
ESI — Employees' State Insurance
What it is. ESI is India's statutory health insurance plus maternity, disability, and dependant benefits scheme, administered by the Employees' State Insurance Corporation (ESIC). It functions like a basic public-health benefit funded by employer + employee contributions.
Who's covered. Employees earning gross wages up to ₹21,000/month are covered (₹25,000/month for employees with disabilities). Above that threshold, ESI does not apply. Most software engineers and senior hires earn above the threshold, so ESI is silent for them. For junior support, ops, or admin roles below ₹21,000/month, it's mandatory.
Contribution rate. 0.75% from the employee and 3.25% from the employer of gross wages, on the wages of covered employees only.
Filing cadence. Monthly contribution challan and return.
The EOR shift. SynkPay holds its own ESIC registration. We apply the wage-threshold check automatically — if the employee is below the ceiling, they're enrolled and contributions filed; if they're above, ESI is not deducted and the employee is on private health insurance instead (which most engineering hires expect anyway as part of the package).
What to ask any EOR: How do you handle the wage threshold when an employee gets a raise that crosses the ₹21,000 line mid-year? The honest answer is that ESI cover continues to the end of the contribution period (April–September or October–March) even if wages cross the ceiling mid-period, and then drops the following period. A vendor that doesn't know that off the top of their head probably hasn't processed many edge cases.
Gratuity
What it is. Gratuity is a lump-sum payment owed by the employer to an employee on separation, after a minimum tenure. It's governed by the Payment of Gratuity Act, 1972, and has been updated under the broader Code on Social Security, 2020 (yet to be fully notified). It is not a monthly cash benefit — it's an obligation that builds and crystallises later.
Who's eligible. Employees with 5 years of continuous service with the same employer. (There are exceptions — death and disablement — but the 5-year rule covers the standard case.)
How much. 15 days of last-drawn basic + DA per year of service, calculated as (last drawn basic + DA × 15 × years of service) ÷ 26. The 2020 code did not change the formula; it did broaden the definition of "wages" used elsewhere, which can affect the basis if you're calculating against the full new code.
Who's liable. The employer. Under EOR, that is the EOR provider.
The EOR shift — and the buyer's commercial question. Different EORs handle gratuity differently and this is the one buyers most often miss when comparing providers. There are two common approaches:
Monthly accrual on the provider's books. The EOR books a small monthly provision (roughly 4.81% of basic pay) and either invoices the buyer for it monthly or holds it on its balance sheet. Pro: the buyer never sees a large bill at separation; con: the buyer pays for gratuity they may never owe, since employees can resign before the 5-year mark.
Crystallise-and-collect at the eligibility point. The EOR tracks tenure and, when an employee actually reaches 5 years, calculates the gratuity payable and collects it from the buyer at that point. Pro: you only pay for liabilities that crystallise; con: it's a larger one-time bill when it lands.
SynkPay uses the second approach. We track tenure on every hire and notify you when an employee approaches the 5-year mark, calculate the gratuity due, and collect it at that point — there's no surprise bill, but there's also no monthly accrual on your books. This is the right model for early-stage teams where most engineers move on inside 3–4 years. If a monthly accrual matters for your own accounting (some larger ops teams prefer it for predictability), say so during onboarding — we can adjust the invoicing approach.
What to ask any EOR: Is gratuity accrued monthly or settled at the eligibility point — and if it's settled at the eligibility point, who is tracking the tenure? Neither model is wrong, but you need to know which one you're signing up for so it doesn't surface as a surprise on the first 5-year anniversary.
TDS — Tax Deducted at Source on salary
What it is. Every employer in India is required to deduct income tax at source from the employee's monthly salary, deposit it with the Income Tax Department, and issue annual proof of deduction (Form 16). The deduction is based on the employee's projected annual income, applied as a monthly average across the year.
India's income tax slabs (new regime, FY 2025–26). Income up to ₹12,00,000 is effectively zero-tax under the new regime (after standard deduction). Above that, slabs run at 15%, 20%, 25%, and 30% — the 30% slab applies above ₹24,00,000. (Live slabs are encoded in our India employee cost calculator and apply in the take-home figure it generates.)
Filing cadence. TDS deposited monthly by the 7th of the following month. Quarterly TDS returns (Form 24Q). Form 16 issued to every employee by 31 May for the previous financial year.
Penalty for non-compliance. Interest at 1% per month for late deduction, 1.5% per month for late deposit, plus a per-day late-fee on the return. Late Form 16 directly impacts the employee — they can't file their personal tax return until they have it.
The EOR shift. SynkPay calculates TDS on every payroll cycle, deposits it monthly by the 7th, files the quarterly returns, and issues Form 16 to every employee within the statutory window. The buyer impact is zero — if the EOR is competent.
What to ask any EOR: Is Form 16 issued by 31 May, or "during the financial year"? The deadline is 31 May. Anything later is the vendor's miss, and your employee feels it personally because their own ITR filing slips.
What sits outside the four — Professional Tax (PT)
Professional Tax is a state-level levy — not federal — and applies in roughly half of India's states (Karnataka, Maharashtra, West Bengal, Tamil Nadu, Telangana, Gujarat, Kerala, and others). Delhi and Uttar Pradesh do not levy PT.
It's a small monthly deduction — typically ₹150–₹300/month per employee on full-time wages — capped by the constitution at ₹2,500/year per employee. The amount and slab vary by state, which is the wrinkle: an EOR has to run different PT rules for each state where it employs people.
This matters because your India hires won't all live in the same state. A 5-person India team might span Bangalore (Karnataka), Pune (Maharashtra), Hyderabad (Telangana), and Bengaluru-but-with-a-Delhi-bank-account (still Karnataka, but worth checking). The EOR should be registered for PT in each state where it has an employee — which means PT is one more state-by-state filing the vendor must keep current.
SynkPay handles state-specific PT across all states our clients hire from, with the exact slabs encoded in the India employee cost calculator (try the state dropdown).
The "are you compliant?" 5-question vendor checklist
If you're evaluating any India EOR — SynkPay or otherwise — these are the five questions that separate vendors who actually hold the compliance from vendors who outsource it and hope:
PF code: yours or a partner's? The provider should hold its own EPFO registration. If they're using a third-party payroll vendor's code, your employees' PF history is tied to a vendor you can't easily move them off.
Gratuity: monthly accrual, or settled at the eligibility point? Either is defensible — but you need to know, and it should be in writing. A vendor who can't give a clear answer hasn't thought it through for clients with multi-year tenure.
Form 16 issuance: by 31 May? That's the statutory deadline. Anything later means delayed personal-tax filings for your employees and a reputational problem you find out about by Slack DM.
State-specific PT: handled in every state where you might hire from? A vendor only registered in Karnataka can technically employ a Maharashtra resident, but they're filing PT wrong from day one. Ask which states they're registered in.
Independent audit or third-party verification? Annual statutory audit, GST compliance, EPF inspections — these happen on every legitimate India entity, every year. A vendor should be able to say cleanly "yes, our last EPF inspection was X, our statutory audit is filed annually" without flinching.
A "no" on any of these isn't automatic disqualification — every vendor has trade-offs. But a vendor who can't answer the question, or gives a vague answer, is telling you they don't know their own compliance posture. That's the actual signal.
Where SynkPay sits on the five
We have run a directly owned India entity since 2016 — so every annual compliance cycle (EPF inspections, ESI returns, statutory audits, GST filings) has been closed for a decade, including through GST reform, multiple PF threshold changes, and the introduction of the Code on Social Security 2020. Concretely:
EPFO and ESIC registrations: held by SynkPay directly. No third-party payroll partner sits between you and the registration.
Gratuity: crystallise-and-collect at the 5-year eligibility point, with tenure tracking from day 1.
Form 16: issued by the 31 May statutory deadline.
Professional Tax: state-specific filings handled across every state our clients hire from. The full list of state slabs is on our India employee cost calculator.
Audit posture: annual statutory audit filed; EPF and ESI inspections closed in every cycle since 2016.
All of this is covered by the flat $349 per employee per month EOR fee — no separate compliance fee, no setup charge, no add-on for state filings. If you want the structural detail of how an India EOR engagement works, the EOR India service page covers the contract and onboarding flow, and the pre-flight onboarding checklist covers what we need from you to get a new hire live in 1 business day.
Frequently asked questions
If SynkPay files something wrong, am I liable?
No — under the EOR model the legal employer is SynkPay, so statutory filing liability and any penalty for late or incorrect filings sits with us, not with your foreign company. That is the entire point of the structure. You retain commercial responsibility for things like agreeing the salary, approving offers, and managing the day-to-day work; we hold statutory responsibility for PF, ESI, TDS, and gratuity. Where exposure can flow back to you is in edge cases like contractor misclassification you did before engaging us, or commercial accruals like gratuity that crystallise on the EOR's books and pass to you at the eligibility point.
Does PF apply if I'm only hiring one or two people in India?
Technically PF registration is mandatory once an employer has 20 or more employees, and voluntary below. In practice almost every credible India EOR — SynkPay included — holds the EPFO registration and enrols every employee from day one regardless of headcount. That means your single India hire gets a real PF account from their first payslip, can later transfer it when they move on, and you don't have a compliance edge case to manage when your team grows past 20.
What happens to gratuity if an employee leaves before 5 years?
Nothing — gratuity is only owed under the Payment of Gratuity Act once an employee completes 5 years of continuous service. Below that threshold, no gratuity is payable. This is exactly why SynkPay uses the crystallise-and-collect model rather than monthly accrual: for the typical software engineer who moves on at the 2–4 year mark, you never owe gratuity at all, so accruing for it monthly would mean paying for a liability that never materialises.
How do I verify that PF and TDS are actually being filed on my employee?
Both have employee-facing verification. For PF, the employee logs into the EPFO Member Portal using their Universal Account Number (UAN) and can see every monthly contribution credited by the employer. For TDS, the deductions show up on the employee's Form 26AS on the Income Tax portal, updated each quarter. We encourage every SynkPay employee to check both at least once after their first month — and we'll walk you through how to ask them to verify if you want independent confirmation.
Is professional tax included in the $349 EOR fee?
Yes — the $349 per employee per month covers the complete EOR service including state-specific Professional Tax filings, PF and ESI contributions (employer share is part of CTC, not the EOR fee), TDS deduction and deposit, Form 16 issuance, and gratuity tracking. The only things outside the $349 are recruitment (a separate 12% of annual salary, billed on a successful placement), background verification ($300 one-time per employee, optional), and HR outsourcing or RPO if engaged separately. There's no extra compliance fee.
What's the difference between PF, ESI, and TDS in plain English?
PF is a retirement savings account — employer and employee both contribute 12% of basic pay monthly into the employee's individual EPF account. ESI is a public health insurance scheme — applies only to lower-wage employees earning under ₹21,000/month gross, with both sides contributing a small percentage. TDS is income tax — the employer deducts the employee's projected income-tax liability from each monthly salary and deposits it with the government, then issues Form 16 at year-end so the employee can file their personal return. They are three independent regimes with three different employee groups (PF: everyone, ESI: lower-wage only, TDS: everyone above the tax-free threshold) and three different filing cadences.
If I move to my own India entity in 2–3 years, can I take the PF history with me?
Yes. PF accounts are tied to the employee's UAN, not the employer, and PF can be transferred from SynkPay's PF code to your new entity's PF code by the employee using the EPFO online transfer service. Tenure for gratuity does not automatically transfer when the legal employer changes, however — that's worth planning for if employees are approaching the 5-year mark when you transition. We've supported clients through this transition before and can walk you through the cleanest sequence; the EOR India service page sets out the contractual framework and you can book a 20-minute compliance walkthrough to go through your specific timing.