Most foreign companies start their India hiring research with a single question: what does an employee actually cost? The honest answer depends less on the salary number and more on how you structure the hire. The same ₹1,00,000-a-month developer can cost you a predictable $1,300 a month through one route, or expose you to a five-figure backdated liability through another, and the salary line looks identical either way. This guide walks through the three models foreign companies use to hire in India: an Employer of Record, your own registered entity, and the informal DIY route, so you can see where the real cost sits in each.
The Three Ways Foreign Companies Hire in India
Before comparing numbers, it helps to be precise about what each model actually is.
An Employer of Record (EOR) is a third-party organisation, already registered in India, that becomes the legal employer of your India-based staff. You direct the work and set the targets; the EOR issues the compliant contract, runs payroll, and files every statutory contribution in its own name.
Your own legal entity means incorporating a private limited company, LLP, or branch office in India, then registering it for EPF, ESI, professional tax, and TDS, and running payroll either in-house or through a retained provider. Your entity, not a third party, is the legal employer on every filing.
DIY payroll, in this context, usually means one of two things: paying an Indian worker directly as an informal "contractor" with no registered Indian presence behind the arrangement, or attempting to run payroll and statutory filings in-house without dedicated India compliance expertise. Both versions look cheap on a spreadsheet and both carry costs that a spreadsheet does not show.
Read more: How to Hire Employees in India Without a Legal Entity Using an Employer of Record
What Each Model Costs, Side by Side
| Factor | EOR | Own Entity | DIY / Informal Payroll |
|---|---|---|---|
| Upfront cost | None | Roughly $20,000 to $27,000+ (incorporation, bank account, tax registration, first-year legal retainer, filing fees) | None on paper, but unbudgeted liability accrues from day one |
| Time to first hire | 7 to 10 business days | 3 to 6 months | Immediate, which is exactly the appeal and exactly the risk |
| Monthly overhead | Roughly $99 to $200 per employee, all-inclusive | $2,000 to $3,500 a month for a single state, scaling to $5,000 to $7,000 across multiple states | Looks like $0, until a reclassification claim or state audit arrives |
| Who carries compliance liability | The EOR | Your entity | Your company, retroactively, once a worker is reclassified as an employee |
| Best suited for | 1 to 15 employees, or testing the market | 15+ employees, long-term committed presence | Nobody, structurally, though it remains common in practice |
The Real Employer Cost Sits on Top of Salary, Regardless of Model
Whichever route you choose, Indian statutory contributions apply the same way once a worker is correctly classified as an employee. As a working baseline:
- Employees' Provident Fund: 12% of basic salary, mandatory once an establishment crosses 20 employees
- Employee State Insurance: roughly 3.25% of gross salary from the employer, for employees earning up to ₹21,000 a month
- Gratuity accrual: roughly 4.81% of basic salary, payable after 5 years for permanent staff and, under the current labour codes, after just 1 year on a pro-rata basis for fixed-term staff
- Statutory bonus: 8.33% to 20% of basic plus dearness allowance, for eligible lower-income employees
- Professional tax: a small state-level charge, varying by the employee's work location rather than your registered office
- TDS: income tax withheld from salary based on the employee's slab
Added together, these typically push total employer cost 20% to 25% above base salary before any EOR fee or entity overhead is applied. The 50% wage rule under the current labour codes has pushed this uplift higher for companies that previously kept basic pay low relative to total compensation, since PF and gratuity are both calculated on the basic salary component.
A Worked Example: One Mid-Level Developer, Three Models
Take a mid-level developer on ₹1,00,000 a month (roughly $1,080 at current exchange rates), a common profile for foreign companies building a first India tech team.
Statutory add-ons (EPF, ESI where applicable, gratuity accrual, bonus provision, professional tax) bring the actual employment cost to roughly $1,300 to $1,350 a month before any model-specific fee is applied. From there:
Under an EOR, add roughly $100 to $200 a month in service fees, landing total cost around $1,430 to $1,550 a month, with no incorporation cost and the employee operational within 7 to 10 days.
Under your own entity, the same statutory cost applies, but you also carry $2,000 to $3,500 a month in legal, compliance, and payroll operations overhead for a single-state setup, none of which is meaningfully shared across one or two employees. For a single hire, this model is the most expensive by a wide margin; it only becomes competitive once overhead is spread across a larger team.
Under the DIY route, paying the same person as a contractor with no statutory deductions, the monthly outlay might look like just the $1,080 base pay, roughly 20% below the EOR figure. But Indian authorities determine employment status by how the person actually works, not by what the contract calls them. A worker on fixed hours, using company tools, and reporting to a manager will typically be treated as a misclassified employee if challenged, and the resulting liability, backdated EPF, ESI, gratuity, bonus, and TDS, plus penalties, is usually assessed across two to three years at once. On a single mid-level hire, that backdated exposure can run into several thousand dollars, arriving as a single liability rather than a monthly cost.
Why the Cheapest-Looking Option Usually Is Not
The DIY route is attractive precisely because the monthly number looks smaller. The problem is that the saving is not real, it is deferred. A correctly structured EOR or entity arrangement spreads statutory cost predictably every month. The DIY route defers that same cost, then adds penalties and interest on top of it, and settles the bill retroactively and all at once, usually at the worst possible time, during an audit or a labour complaint.
There is a similar, subtler version of this trap even for companies that do set up their own entity: running payroll in-house without dedicated India expertise. State-specific professional tax slabs, ESI applicability thresholds, and the wage restructuring required under the current labour codes change often enough that a generalist HR or finance team, however capable, tends to miss updates that a specialised India payroll provider tracks as a full-time job.
Where the Breakeven Point Actually Sits
For most foreign companies, the decision comes down to headcount and time horizon rather than a fixed preference for one model. An EOR wins clearly for the first 1 to 15 employees, since the fixed per-employee fee is difficult to beat against entity overhead that does not shrink with a smaller team. Your own entity starts to make financial sense once headcount crosses roughly 12 to 15 employees and you are committed to a long-term India presence, since the fixed monthly overhead of running an entity gets spread across enough people to bring the per-employee cost below the EOR fee. The DIY route does not have a genuine breakeven point; it is a cost deferral strategy, not a cheaper structure, and the risk grows rather than shrinks as headcount increases.
Read more: Cost of Hiring in India: Salaries, Statutory Contributions & EOR Payroll Explained
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. Every statutory contribution, wage restructuring requirement, and state-specific filing described above is something our in-house team manages directly under our own registration, not something we pass back to clients to figure out. If you already have your own India entity and want the payroll and compliance operations run by specialists rather than in-house, our Employment Services team can quote what that looks like against your current overhead.
If you want to see where your specific hiring plan lands cost-wise, run the numbers directly through our Cost Estimator rather than relying on industry averages.
Conclusion
The real cost to hire employees in India is rarely the number on the offer letter. It is that number plus a 20% to 25% statutory uplift, plus whichever model-specific overhead applies, an EOR fee, entity operating costs, or, in the DIY case, a deferred liability that eventually comes due with interest. For most companies hiring fewer than 15 people in India, an EOR keeps that full cost predictable and current from day one. For larger, longer-term teams, an entity earns its overhead back. The DIY route rarely earns anything back at all.
FAQs
1. What does it actually cost to hire an employee in India?
Beyond base salary, budget an additional 20% to 25% for statutory contributions such as EPF, ESI, gratuity accrual, and statutory bonus. On top of that, an EOR typically adds $99 to $200 a month per employee, while running your own entity adds $2,000 to $3,500 a month in overhead for a single state.
2. Is an EOR cheaper than setting up my own entity in India?
For small teams, generally yes. An EOR has no setup cost and a fixed monthly fee per employee, while an entity requires $20,000 or more upfront and months of setup time. An entity becomes more cost-effective once headcount grows past roughly 12 to 15 employees.
3. Can I just hire someone in India as a contractor to avoid these costs?
You can, but Indian authorities look at how the person actually works, not what the contract calls them. A contractor working fixed hours under your direction can be reclassified as an employee, triggering backdated EPF, ESI, gratuity, and TDS liabilities, typically covering two to three years at once.
4. How long does each hiring model take before an employee can start?
An EOR typically has an employee operational in 7 to 10 business days. Setting up your own entity generally takes 3 to 6 months before you can legally employ anyone through it.
5. Does the 50% wage rule under the current labour codes change these costs?
Yes. Since EPF and gratuity are calculated on basic salary, and basic salary must now equal at least 50% of total compensation, employers who previously kept basic pay lower now carry a higher statutory cost per employee, regardless of which hiring model they use.
