It seems that it is high time for the world tech community to face one more challenge, namely the fact that the annual base salary of software developers in such cities as San Francisco and New York amounts to more than $150,000.
Speaking of the search for new resources, there is no other choice but India and its availability of extremely talented software engineers, data scientists, and so forth, who are fluent in English. However, there is yet another problem which every organization wishing to hire international remote staff needs to sort out first of all.
International human resource management may turn into a tricky matter, especially if a company operates outside the country. The main issue is cost of hiring an employee in India. To create a registered company in India, you would have to pay numerous amounts of money in order to hire lawyers. That is why most companies hire through Employers of Record.
What About the Actual Cost of Engaging with an Employee through EOR in India?
Unfortunately, it would seem that a lot of companies’ financial divisions are prone to taking a look at the actual base salary of the worker and then adding on an amount of EOR fee percentage. Unfortunately for them, the employment system in India works quite differently from that.
So, let us take you on a financial journey to make sure that you have all the information necessary to make the right decision to hire from India.
Central Theme: How Does an Employer of Record Help With Cost of Hiring an Employee in India?
First of all, before we delve into percentages, it’s important to understand what the whole process looks like. As soon as one begins to understand how employing remote workers using an EOR looks like, one gets involved in co-employment:
- Your Company: Has full control over all business processes. The entire recruitment process will be carried out by your company, including interviewing, hiring, managing, and compensating the staff members.
- EOR Service Provider: The formal employer for India. This firm shall conduct payroll transactions using its corporate status in India; make allocations of employee benefits, if any; and pay the applicable payroll taxes to the government of India.
Therefore, bearing 100% responsibility as the employer in the legal sense of the word, an EOR ensures that all your compensation packages conform to all legislative stipulations. Namely, 100% of your basic salary must be converted into “Cost to Company.”
Analysis of the “Cost of Hiring an Employee in India to Company” (CTC) Package
While your compensation package would be mentioned as part of your employment contract in the Western world, here in India, it is made based on Cost to Company (CTC). Cost to Company (CTC) is the total amount of money that must be paid to the employee during the course of one year including salaries, benefits, insurance, and pensions.
For the instance of employing Indian workers, the process of splitting up the salary package must be done in order that there is less burden on your part as an employer and compliance with the law. Below is the structure of salary when using EOR services:
Basic Salary
This is the most basic element where everything else is based on. By law, the share of Basic Salary in the total CTC is between 40%-50%. This is due to the fact that contributions for pension and gratuity are computed by taking the Basic Salary into consideration.
House Rent Allowance (HRA)
This is another component of the salary to cover the cost of paying rent. For workers in non-metro cities, the Basic Salary allotted for the HRA is 40%. But in metro cities like Bengaluru, Mumbai, and Delhi, the share of the Basic Salary allocated for the HRA is 50%.
Also Read : How Much Does PEO Cost In India?
Special Allowances and Perks
This is the variable portion of the salary, making up the remaining part of the gross salary. It includes allowances like internet allowance, medical allowance, and transport perks.
India Statutory Employer Contribution
It is important to note that the cost of hiring employee resources within India includes the aspect of statutory contribution that must be paid by the employer as an obligation. Failure to make such contributions could mean legal implications for the employer company.
| Statutory Component | Employer Cost / Contribution Rate | Applicability & Criteria |
| Employees’ Provident Fund (EPF) | 12% of Basic Salary + Dearness Allowance. | Mandatory for all permanent employees. Acts as a long-term retirement fund. |
| Employees’ State Insurance (ESI) | 3.25% of Gross Monthly Wages. | Only applies to employees earning less than or equal to ₹21,000/month (~$230 USD). |
| Gratuity Provision | 4.81% of Basic Salary (accrued monthly). | A statutory lump-sum payment owed to workers after 5 years of continuous service. |
| Statutory Bonus | Varies (8.33% to 20% of basic salary). | Mandated for lower wage brackets under the Payment of Bonus Act. |
| Professional Tax (PT) | Capped at ₹200 to ₹300 per month ($2.50 – $3.50). | A minor state-level employment tax that varies by location. |
Learning the Key Elements:
- Employees’ Provident Fund (EPF): This can be considered as the Indian equivalent of 401(k). The company is expected to pay its contribution at the rate of 12%, based on the Basic Salary, and that too at the cost of the same amount from the individual employee’s contribution.
- Payment of Gratuity Act: As per the terms and conditions specified under this act, permanent employees employed in a business for a minimum period of five consecutive years should get their gratuity once they leave their job. The top-notch EOR companies take out 4.81% each month and make sure that there are no surprises left for you.
- The Generic Principle: When calculating the costs involved in hiring workers in India, the contributions made by law always go up by an average of 15% to 25%.
The EOR Layer: Service Fees, Deposit Fees, and Hidden Charges
Apart from the salary that the employer pays to the employee, your total cost of employing an employee in India would include the charges made by the EOR service provider. There are three main types of fees that need to be considered:
The EOR Service Charge (PEPM)
Almost all service providers across the globe work on the basis of Per Employee Per Month (PEPM). PEPM covers charges for contract creation, compliance checks, local hiring, and payroll services.
- Budget/Local EOR Providers: Charges vary between $99 and $199 per employee/month. Budget providers have extensive local capabilities but limited software connectivity.
- Mid-Market Platforms: Charges vary between $200 and $400 per employee/month.
- International/Employer Global Platforms: Charges vary between $499 and $699 per employee/month. International providers have global capabilities but are more expensive.
Security Deposit Requirement
There is almost no EOR service provider working in India who does not require a mandatory security deposit for their onboarding services. This security deposit normally includes 1-2 months of salary of the concerned employee including the EOR fee.
This capital provision helps the EOR cover payroll costs even in case the client defaults in paying. Although this security deposit is fully refundable at the end of the employment period, it still is an upfront cost.
FX (Foreign Exchange) and Currency Markup Fee
In case your corporate is in the United States Dollar, Euro, or British Pound Sterling, you will make your payments in your currency, and then EOR changes this amount to the INR currency. Most of the international PEOs and EORs add a hidden fee of 1%-3% on the prevailing foreign exchange rate on a daily basis. This 3% fee will eat up a lot of money over ten software engineers employed in a company.
Also Read : True Cost of EOR Services: Hidden Fees You Need to Know
Cost Analysis: EOR Platform or Local Entity Establishment?
At what scale would you stop using the EOR platform fee and opt for forming an independent entity locally in India? The key cost consideration is the scale of the team.
Small-Mid Team Scale (<15 Members)
If you have less than 15 team members, the EOR option is very affordable. It will cost you about $20,000-$27,000 for initial fees of setting up the structure, banking accounts, and compliance, and $2,000-$3,500 monthly fees for accountancy. These fees for structuring easily outweigh any variable fees of the EOR platform.
Break-Even Point for Enterprises (>25 Employees)
The tipping point is 25 employees. If you pay $300 on average per person using a mid-level EOR, it will be costing you about $7,500 monthly ($90,000 yearly) just for the platform fee. At this level, the cost of running your own entity in India is lower than the cost of the EOR margins, which is why it makes sense to go for an entity.
A Balance between Cost and 100% Compliance
In measuring the cost of hiring an employee in India, the EOR company is more than just another payroll services provider; it acts as a necessary financial protection for your company. While Indian statutory requirements including Employees’ Provident Fund and monthly gratuity requirements may hike up your actual costs by an additional 15% to 25% above base salary, the EOR service helps you save on upfront incorporation costs of forming your own entity.
Working with an EOR service that provides you with competitive pricing, full entity ownership, and transparent exchange rate calculations will help you leverage the exceptional talent in India in no time.
FAQs
Q1. What is the difference between Gross Salary and CTC in India?
The Gross Salary is what the employee receives before the deduction of any income taxes, whereas the CTC includes the Gross Salary and statutory contributions, retirement plans, and insurance premiums that the employer pays on behalf of the employee.
Q2. Is Gratuity fee paid on a monthly basis or is it a one-off payment?
Even though the gratuity fee is offered as one-off payment to the employee after completion of 5 continuous years of service, the best-of-breed EOR companies make provisions for 4.81% of the Basic Salary per month so that your company does not face any unexpected expenses.
Q3. Are there any hidden charges levied by the EOR providers in India?
Some of them charge 1% to 3% extra for foreign exchange currencies, contract modifications, or even for benefit programs that require additional setup costs.
Q4. Is a security deposit mandatory for all EOR companies operating in India?
Most EOR companies in India insist on security deposits equivalent to 1 to 2 months of overall employment cost.
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