Due to the fact that global firms are increasingly recruiting personnel from different countries, India has turned into a favored spot for the hiring of finance, technology, operations, and back-office staff. Nevertheless, for international firms that do not have a legal presence in India, payroll processing in India is much tougher than it looks at first sight. The payroll exercise that many founders and CFOs initially consider as simple quickly turns into a situation where there is a mix of tax exposure, labour law obligations to be fulfilled, and long-term compliance risks to be mitigated.
For non-resident employers, Indian payroll is not merely a matter of ensuring timely salary payments. It has strong connections with income tax withholding, employment classification, permanent establishment risk, and state-level labour regulations. Any error made in any of these areas could result in penalties, audits, or even corporate tax scrutiny. This is the reason why non-resident employer (NRE) payroll in India has to be handled with a completely different approach, whereby the priority is given to legal clarity and compliance ownership rather than operational convenience.
What Is Non-Resident Employer (NRE) Payroll in India?
Non-resident employer payroll in India is often misunderstood as a simplified version of remote payroll. In reality, it is a specific legal and tax construct governed by Indian income tax law, foreign exchange regulations, and employment statutes. The defining factor is not where the company is incorporated, but whether it employs individuals who are tax residents of India and performs payroll-related obligations connected to that employment.
Who Qualifies as a Non-Resident Employer in India?
In the context of India, a non-resident employer refers to a foreign entity that has individuals working from India and not having a subsidiary or branch office in India. Such companies may recruit Indian residents, employ expatriates working remotely from India, or even hire for roles that deal with the Indian market, all while being located outside India completely.
This arrangement is quite different from that of an Indian subsidiary, where an entity registered in India takes care of the payroll and employment obligations. Non-resident employers are legally outside India, but their employment relations cause tax and compliance obligations in India. Having no Indian entity does not mean that there is no responsibility it just changes the ways and places the risks arise.
How NRE Payroll in India Works
For non-resident employers, payroll in India typically involves salary disbursement to employees working locally, even though the employer itself is offshore. Salaries may be paid in Indian rupees through local banking channels or, in some cases, partially from overseas accounts. Regardless of payment mechanics, Indian tax law focuses on where the employee renders services, not where the employer is based.
This means withholding obligations apply even when there is no local entity. Employers are expected to calculate applicable income tax, deduct tax at source, and ensure accurate reporting. Payroll processing, therefore, becomes a legal compliance function rather than a purely administrative one. Without local expertise or an established compliance framework, many non-resident employers underestimate the scope of these obligations until issues surface.
Why Payroll in India Is Challenging for Non-Resident Employers
India’s regulatory environment is uniquely layered, combining central laws with state-specific rules and aggressive enforcement around payroll-linked compliance. For non-resident employers, this complexity is amplified by unfamiliarity with local requirements and the absence of in-house India-focused legal or payroll teams.
Complex Labour Laws in India
The Indian employment compliance is managed by a combination of central labour codes and state legislation. Even for employees who work remotely or live in different locations, the laws such as the Shops and Establishments Act are applicable depending on the location of the employee. These laws govern working hours, leave, termination, and record-keeping duties, among others.
Sometimes, foreign employers think that the labour laws are applicable only to those companies that have their office registered in India. However, in reality, the employment conditions are linked to the employee’s location instead of the employer’s address. This leads to a compliance risk when payroll is processed without ensuring that the employment terms match the local statutory requirements.
Income Tax, TDS, and Reporting Obligations
One of the most critical challenges in NRE payroll is income tax compliance. Under Indian tax law, employers are responsible for deducting tax at source on salary payments under Section 192. This obligation exists even when the employer has no physical presence in India.
Employees must hold valid PAN numbers, and payroll must account for applicable tax regimes, exemptions, and declarations. Employers are also expected to manage monthly and quarterly filings, along with annual documentation such as Form 16. For foreign companies unfamiliar with these processes, the risk of under-deduction, late filings, or incorrect reporting is high, often leading to penalties and scrutiny.
Permanent Establishment (PE) Risk
Perhaps the most underestimated risk associated with non-resident payroll in India is the creation of permanent establishments. Payroll mismanagement, especially when combined with decision-making authority or revenue-linked roles in India, can trigger PE exposure under Indian tax treaties.
Once PE risk is established, payroll compliance issues can quickly escalate into corporate tax liabilities. What starts as a payroll execution gap can evolve into a broader tax and regulatory challenge affecting the company’s global structure. This is why, for non-resident employers, payroll compliance in India is inseparable from corporate tax risk management.
Legal Models for Running Payroll in India as a Non-Resident Employer
Before choosing a payroll approach in India, non-resident employers must understand that there is no single “lightweight” or risk-free model. Each option carries different levels of legal exposure, cost, and operational control. The right model depends on hiring intent, timeline, and appetite for regulatory ownership, but ignoring these trade-offs is where most global companies run into trouble.
Direct Payroll Without an Entity
Some foreign companies attempt to run payroll in India directly without setting up a local entity or engaging an intermediary. This typically happens when hiring one or two employees quickly, often under the assumption that limited headcount equates to limited compliance risk. In reality, this is the most fragile and exposed model.
Running direct payroll without an entity places the full burden of tax deduction, reporting, labour law compliance, and audit response on a foreign employer that has no local legal standing. Indian authorities do not distinguish between “early-stage hiring” and scaled operations when enforcing payroll obligations. Even minor errors in tax withholding or employment documentation can trigger penalties, employee disputes, or inquiries that are difficult to resolve without a local presence. From a scalability standpoint, this model breaks down almost immediately as hiring expands beyond a single role or location.
Setting Up an Indian Entity
A completely different approach would be to establish a subsidiary or branch office in India; this option provides the greatest level of control and is generally preferred by companies with a clear long term Plan for expansion into India. However, it will have substantial upfront costs and ongoing commitments. In order to set up an entity in India, there are many steps including incorporation timelines, director appointments, bank account opening and tax registration which can take several months to complete.
After an entity has been established, it will be subject to various statutory obligations such as corporate tax filings, GST (if applicable), registrations with Labour Law authorities, payroll audits, and annual reports. While this may be cost-effective when companies have significant levels of scale, it is typically inappropriate for those companies that are testing their products in the Indian market or beginning to hire their early-stage workforce because the compliance costs will likely be greater than the potential benefits of an early-stage entry into the Indian markets.
Employer of Record (EOR) in India
The Employer of Record (EOR) solution is now the most frequently utilized solution by foreign companies recruiting people from India. Once again, in this model, the company employing the employees retains all operational, administrative management control of their day-to-day tasks while the EOR manages the EOR’s legal obligations concerning the employee on behalf of the foreign employer.
Employers of Record (EOR) are defined by the EOR’s designated responsibilities on behalf of foreign employers to manage payroll for employees. EORs process payroll, withhold payroll income taxes from employees, provide statutory benefits to employees through compliance with applicable labour laws, maintain employee documentation for compliance with labour and employment laws, and provide records for employment documentation for tax purposes. An EOR minimizes a foreign employer’s exposure to audits and its exposure to establishing a presence in India by acting as the foreign employer’s legal agent for the establishment of an employer/employee relationship in India while maintaining protection against liability to their employees in India. As well, through the use of EOR services, global companies may take advantage of the efficiencies of hiring quickly and efficiently, thereby remaining in compliance with local law and avoiding premature establishment of a foreign entity in India.
Payroll Processing Requirements Under Indian Labour and Tax Laws
Payroll processing in India extends far beyond salary calculation and bank transfers. It is a structured compliance function governed by multiple statutes, each with its own timelines, thresholds, and reporting requirements. For non-resident employers, understanding what payroll processing actually includes is critical to avoiding under-compliance.
Salary Structure and Statutory Components
Indian payroll begins with salary structuring, where compensation is broken into components such as basic salary, allowances, and reimbursements. These components are not arbitrary; they directly impact tax liability and statutory contributions. Certain benefits are fully taxable, while others are conditionally exempt, depending on structure and documentation.
Statutory contributions form a mandatory layer on top of salary. Provident Fund and ESIC applicability depend on salary thresholds and employee eligibility, while professional tax is governed by state-specific legislation. These obligations apply regardless of whether the employer is resident or non-resident. Failure to correctly assess applicability or compute contributions can result in backdated liabilities and penalties.
Payroll Compliance Calendar
Indian payroll operates on a strict compliance calendar with monthly, quarterly, and annual filing requirements. Income tax deductions must be deposited within prescribed timelines, and corresponding returns must be filed accurately. Annual documentation, such as employee tax certificates, must reflect precise payroll data and statutory deductions.
Delays or inaccuracies in payroll processing are not treated as procedural lapses; they are considered compliance failures. Consequences can include monetary penalties, interest charges, employee grievances, and increased scrutiny from tax authorities. For non-resident employers unfamiliar with these timelines, manual or fragmented payroll processes quickly become a liability rather than an operational function.
How Employer of Record (EOR) Simplifies NRE Payroll in India
For non-resident employers, payroll in India is not just an operational task, it is a legal exposure point. This is where an Employer of Record fundamentally changes the risk equation. Rather than acting as an outsourced processor, an EOR functions as a strategic compliance shield that absorbs employer obligations under Indian law while enabling foreign companies to hire and operate with confidence.
Compliance Ownership and Risk Mitigation
Under an EOR model, the EOR assumes full legal employer responsibility for Indian employees. This includes liability for payroll accuracy, tax deductions, statutory contributions, employment contracts, and terminations. For non-resident employers, this shift in ownership is critical because it removes direct exposure to Indian employment law enforcement and payroll-related audits.
One of the most significant advantages of using an EOR is mitigation of permanent establishment risk. When payroll, contracts, and statutory compliance are handled by a locally compliant employer of record, foreign companies significantly reduce the likelihood that their Indian hiring activity will be interpreted as a taxable business presence. Equally important, EORs ensure full adherence to labour laws in India, including state-specific regulations that are often overlooked by global employers managing payroll remotely.
End-to-End Payroll and HR Operations
An EOR not only takes care of compliance but also offers a complete payroll and human resource operations framework that is well-integrated. Along with that, the company takes care of the employees from hiring to retiring, and all the processes are carried out very smoothly. Employment agreements through an EOR comply with Indian legal requirements which lay down the foundation for solving conflicts arising from invalid or non-compliant documents.
For non-resident firms, collaboration with top-notch EOR suppliers in India translates into getting a local expert’s insight without investing in setting up the payroll, legal, or HR infrastructure. This permits the worldwide teams to concentrate on increasing their business and execution while the payroll and compliance department works in a non-disruptive manner at the back end.
Why Global Companies Choose Asanify for NRE Payroll in India
- Compliance expertise centering on India, developed exclusively for the intricacies of Indian tax, payroll, and labour law, not adapted from any global template.
- Total NRE payroll control, including the processing of salaries, tax deductions, statutory benefits, filings, and documentary support.
- Predictable and transparent pricing, without any hidden compliance or advisory costs as teams get larger.
- Instant payroll visibility allowing global finance teams to see the costs, deductions, and liabilities in a distinct manner.
- Employment contracts aligned with the local jurisdiction that are resistant to audits and employee disputes.
- Legal, payroll, and HR teams based in India are dedicated to bringing about and supporting compliance in a proactive manner.
- A payroll structure that can be expanded, catering to the employment of one person or more than hundred without changing the payroll models.
Key Risks of Getting NRE Payroll in India Wrong
Mistakes in non-resident employer payroll are rarely minor. Indian regulators enforce payroll and employment laws rigorously, and non-compliance often results in consequences that extend beyond financial penalties.
- Penalties and interest under the Income Tax Act due to incorrect or delayed TDS deductions and filings
- Exposure to labour disputes, including claims for unpaid statutory benefits, wrongful termination, or contract non-compliance
- Permanent Establishment (PE) risk, potentially triggering corporate tax liabilities in India
- Audit complications, with limited ability to respond effectively without local representation
- Employee trust and retention issues, caused by payroll errors or benefit mismanagement
- Reputational damage, especially with investors, acquirers, and regulators during due diligence
FAQs
What is Non-Resident Employer payroll in India?
Non-Resident Employer (NRE) payroll refers to salary processing for Indian employees hired by a foreign company without a registered Indian entity. Payroll is typically managed through an EOR or local payroll partner to ensure tax and labour law compliance.
Can a foreign company run payroll in India without an entity?
A foreign company cannot legally run payroll in India on its own without a registered entity. To pay employees compliantly, companies usually engage an Employer of Record or a licensed payroll provider with an Indian legal presence.
Is Employer of Record legal in India for payroll?
Yes, Employer of Record is legal in India for payroll when the EOR is a locally registered employer. The EOR becomes the legal employer and manages payroll, taxes, and statutory filings in compliance with Indian laws.
How is tax deducted for employees hired by foreign companies in India?
Income tax is deducted at source (TDS) by the Indian employer of record under the Income Tax Act. The EOR calculates, withholds, deposits taxes, and issues Form 16 to employees.
What is the difference between NRE payroll and EOR payroll in India?
NRE payroll focuses only on salary processing, while EOR payroll includes full employment responsibility. An EOR handles contracts, compliance, benefits, payroll, and termination, reducing legal and misclassification risks.
Does running payroll in India create permanent establishment risk?
Directly running payroll or managing employees without an EOR can increase permanent establishment risk. Using an Employer of Record helps reduce this risk by separating employment and payroll from the foreign company’s legal presence.
Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.