Overview
- Why the EOR vs legal entity India decision is really a headcount and timeline decision
- What each structure actually costs in year one and in every year after
- The hidden costs of an Indian subsidiary that rarely appear in a first quote
- How the 2026 Labour Codes change the cost of employing people under either model
- The headcount where an entity starts to make financial sense and how to move from EOR to entity
When a foreign company plans its first India hires, the question comes up almost immediately: hire through an employer of record or incorporate a subsidiary? The EOR vs legal entity India choice looks like a legal one, but it is mostly financial. One route charges a fee per employee, and the other charges you fixed setup and compliance costs whether you have two employees or twenty. This guide breaks down both, with 2026 figures, so you can see where the numbers cross over.
EOR vs Legal Entity in India: The Core Difference
An Employer of Record (EOR) is a registered Indian company that becomes the legal employer of your India-based staff. It issues contracts, runs payroll, files statutory contributions, and handles offboarding. You direct the day-to-day work, and the EOR carries the employment compliance.
A legal entity, usually a wholly owned private limited company, makes you the legal employer directly. India allows 100% foreign ownership in most sectors, but every obligation sits with you: payroll, PF, ESI, TDS, professional tax, corporate filings, audits, and tax returns.
Salaries and statutory contributions cost the same either way, because they are set by Indian law and not by your structure. What differs is the overhead around them: a per-employee fee under an EOR, versus fixed setup and running costs under an entity.
What Setting Up a Legal Entity in India Costs
Incorporation is the smallest part of the bill. The Ministry of Corporate Affairs and professional fees for a private limited company are modest, often a few thousand dollars. The real cost is everything needed to make the entity operational and keep it compliant.
One-time setup costs typically include:
- Incorporation, name approval, and MCA registration
- Apostilled and notarised parent-company documents
- A resident director, since at least one director must spend 182 or more days in India each year
- Registered office address
- Bank account opening, which can take 6 to 8 weeks for foreign-owned entities
- PAN, TAN, GST, PF, ESI, and professional tax registrations
- FEMA and RBI reporting for the foreign investment
Recurring annual costs typically include:
- Statutory audit and annual ROC filings
- Corporate income tax returns and transfer pricing documentation
- GST, TDS, PF, and ESI monthly and quarterly returns
- Payroll software and a compliance provider or in-house resource
- Registered office, company secretary, and bank maintenance
Most market estimates put total year-one entity costs at roughly USD 20,000 to 35,000 before a single salary is paid, with fixed running costs of USD 20,000 to 36,000 a year after that. Treat these as indicative ranges, since your sector, city, and advisers will move them.
What an EOR in India Costs
EOR pricing is simpler. You pay a monthly fee per employee on top of salary and statutory employer contributions, usually with no setup fee. Market fees generally range from about USD 150 to 700 per employee per month, depending on the provider and the depth of service.
That fee typically covers:
- Employment contracts and onboarding
- Payroll, PF, ESI, TDS, professional tax, and gratuity administration
- Statutory filings and labour-law compliance
- Benefits administration
- Offboarding and full-and-final settlement
Your first hire can usually start within two weeks, compared with three to six months for an entity that is fully operational.
Side-by-Side Cost Comparison
| Factor | EOR | Own Legal Entity |
|---|---|---|
| Time to first hire | Days to about 2 weeks | 3 to 6 months |
| Setup cost | Usually none | Roughly USD 20,000 to 35,000 in year one |
| Ongoing overhead | Per-employee monthly fee | Fixed annual compliance cost, regardless of headcount |
| Legal employer | The EOR | Your Indian entity |
| Compliance burden | Handled by the EOR | Fully yours |
| Corporate tax | None on your parent from the EOR itself | Around 25% effective on profits, plus transfer pricing |
| Resident director | Not required | Required |
| Cost as headcount grows | Rises linearly | Largely fixed, so per-head cost falls |
| Exit | Notice and settlement | Winding up or striking off can take many months |
The Break-Even Point: How Many Employees Justify an Entity?
The break-even depends on three variables: the EOR fee, the entity’s fixed running cost, and how long you commit to India.
Take an illustrative example. At an EOR fee of USD 400 per employee per month, each employee costs USD 4,800 a year in EOR fees. If an entity’s fixed compliance overhead is USD 25,000 a year, plus one-time setup, the entity begins to win somewhere between 6 and 15 employees, depending on your setup costs and how much internal HR and finance capacity you already have.
A practical rule of thumb:
- 1 to 5 hires, or testing the market: EOR is almost always cheaper and faster.
- 6 to 15 hires: run the numbers with real quotes; it depends on fee levels and how certain your India plans are.
- 15+ hires with a long-term commitment: an entity usually becomes the more economical structure, especially if you also need to sell to Indian customers or hold contracts locally.
Hidden Costs That Rarely Make It Into the First Quote
For an Indian subsidiary:
- Transfer pricing. Every intercompany transaction, such as salary recharges and service fees, needs arm’s-length documentation.
- Corporate tax from day one. An Indian entity is taxed on its profits and must file returns even if it is a cost centre.
- Management time. Someone has to own India compliance, meet auditors, and respond to notices.
- Slow exit. Closing an entity is far slower and more paperwork-heavy than ending an EOR arrangement.
For an EOR:
- Fee escalation. Confirm whether the per-employee fee is fixed or rises with salary bands.
- Add-ons. Check whether benefits, background checks, equipment, and relocation are included or billed separately.
- Lock-in. Ask about the process and cost of transferring employees to your own entity later.
How the 2026 Labour Codes Affect Both Options
India’s four Labour Codes took effect on 21 November 2025, with central and state rules still being finalised through 2026. The change that matters most for cost is the uniform definition of “wages”: basic pay plus dearness allowance must generally make up at least 50% of total remuneration. Employers who kept basic pay low to reduce PF and gratuity now face a higher wage base, and many estimates put the increase in statutory cost at 5% to 15% per employee for restructured salary packages.
Fixed-term employees can also qualify for pro-rata gratuity after one year rather than five.
This raises costs under both structures, but it changes who has to manage the transition. With your own entity, restructuring salary bands and updating contracts is an internal project. With an India-based EOR, it is the provider’s responsibility, though you should still budget for the higher statutory cost.
Read more: 7 Critical Questions to Ask Before Choosing EOR Services in India
Compliance and Risk: What Each Structure Really Protects You From
Cost is only half the comparison. An EOR places employment-law liability on the registered employer. That includes PF and ESI filings, gratuity, and termination procedure, which is where many foreign companies make expensive mistakes.
An EOR does not remove every risk. If your India team habitually negotiates and concludes contracts on behalf of the foreign parent, a permanent establishment question can still arise, so the scope of what the team does matters as much as the structure. An entity resolves PE ambiguity by giving your India operations a clear taxable home, but it brings corporate tax, transfer pricing, and FEMA compliance with it.
Companies currently using contractors for what is really a full-time team should also read our guide on employee vs contractor misclassification in India, because backdated PF, ESI, and gratuity exposure can dwarf the cost difference between EOR and entity.
The Hybrid Path: Start With an EOR, Move to an Entity Later
For most foreign companies, the choice is not permanent. A common path is to hire through an EOR while you test the market, then incorporate once headcount, revenue, or strategic commitment justifies it. The employees can be transferred to your new entity, with continuity of service and correct statutory handling so their tenure and accrued benefits are not disrupted.
The advantage is that you avoid paying USD 20,000 or more in fixed costs before you know whether India will work, and you keep the option to build your own entity when it clearly makes financial sense.
Read more: Employee EOR Transition Process
Where Vandey Global Fits
Vandey Global has been the registered legal employer for foreign companies’ India teams since 2017, an ISO-certified, India-first EOR that has onboarded 600+ employees across 50+ international clients. We work with companies at every stage of the EOR vs legal entity India decision: those hiring their first employee, those approaching the headcount where an entity makes sense, and those ready to transition an existing EOR team into their own subsidiary. If you want a cost comparison for your specific headcount and timeline, our team can model both routes with you.
Conclusion
The EOR vs legal entity India decision comes down to headcount, timeline, and commitment. An EOR converts fixed costs into a per-employee fee and gets you hiring in days, which is why it suits early-stage entry and small teams. A legal entity has a high fixed cost but a lower marginal cost, which is why it suits larger, long-term India operations. Since the 2026 Labour Codes raise statutory costs under either structure, the smartest approach is to model both with current numbers before you commit. For most foreign companies, that means starting with an EOR and revisiting the entity question once the team is large enough to justify it.
FAQs
What is the main difference between EOR vs legal entity in India?
An EOR is a third-party company that legally employs your India staff and handles payroll and compliance, while a legal entity is your own Indian company that employs them directly. The EOR charges a per-employee fee. The entity carries fixed setup and compliance costs regardless of headcount.
Is an EOR cheaper than setting up a subsidiary in India?
For small teams, usually yes. There is typically no setup fee, and you avoid fixed costs such as audits, filings, and resident director requirements. As headcount grows, the per-employee fee accumulates, and an entity can become cheaper.
How many employees do I need before a legal entity makes sense in India?
There is no fixed number, but most companies find the break-even between roughly 6 and 15 employees, depending on EOR fees, entity running costs, and how long they plan to stay in India.
How long does it take to hire through an EOR compared with setting up an entity?
An EOR can usually onboard a first employee within days to two weeks. Setting up a fully operational entity, including bank accounts and registrations, typically takes three to six months.
Can I switch from an EOR to my own entity later?
Yes. Many companies start with an EOR and transfer employees to their own subsidiary once it is set up. Done correctly, service continuity and accrued statutory benefits are preserved.
Do the 2026 Labour Codes change the cost of hiring in India?
Yes. The uniform wage definition, which requires basic pay plus dearness allowance to be at least 50% of total remuneration, raises the base for PF and gratuity and can increase statutory costs for salary structures that previously kept basic pay low. This applies whether you use an EOR or your own entity.
