Hiring in India works differently from Germany: the contract is regulated by statute and state rules, provident fund and ESI are mandatory for most employees, gratuity builds after service, and notice and termination follow the labour codes, shops and establishment laws and the contract. There is no statutory works council, but trade unions and state inspectors play a role. An Indian subsidiary is the usual employer, running payroll with monthly Withholding Tax on salary, provident fund and ESI. German HR teams used to collective agreements and dismissal protection law should plan for more statutory components, not fewer.
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Key facts
| Employer | The Indian subsidiary (or an Employer of Record) is the legal employer |
|---|---|
| Contract | Written appointment letter with role, pay structure, notice and confidentiality; state shops and establishments law applies |
| Provident fund | Employer and employee contributions through the EPFO for covered establishments and employees |
| ESI | Health insurance scheme for employees below the wage ceiling, in covered areas |
| Gratuity | Lump sum after continuous service, payable on exit, with a minimum service period |
| Labour codes | The four labour codes were reported to be brought into force on 21 November 2025; state rules and transition steps continue |
| Payroll tax | Withholding Tax on salary under Section 392 of the Income-tax Act, 2025, deposited by the 7th of the following month |
| Equity | Parent shares or options can be offered; taxed as a perquisite on exercise and capital gains on sale |
Germany and India side by side
| Topic | German practice | Indian practice |
|---|---|---|
| Social insurance | Statutory pension, health, unemployment, care and accident insurance shared by employer and employee | EPF for covered employees with contributions from both sides; ESI below a wage ceiling; gratuity on exit |
| Employee voice | Works council with co-determination rights | No statutory works council; trade unions and state inspectors; grievance processes in larger firms |
| Dismissal | Dismissal protection law in larger firms; social selection | Notice per contract and state law; retrenchment compensation for covered workers; limits in larger establishments |
| Probation | Common; short statutory notice during it | Common; confirm in writing |
| Bonus | Contractual; often a 13th salary | A statutory bonus applies to eligible employees below a wage ceiling, plus any contractual bonus |
| Leave | Statutory minimum of four weeks paid leave | Statutory leave varies by state; maternity benefit up to 26 weeks for eligible women |
| Workplace harassment | General Equal Treatment Act | Internal Committee under the POSH Act in establishments with ten or more employees |
| Employee data | GDPR and the Federal Data Protection Act | DPDP Act when the main duties come into force; see the data protection guide |
Pay structure and cost
- Indian pay is split into basic pay, allowances, employer provident fund, gratuity accrual and benefits. The basic component drives provident fund and gratuity, so the split matters.
- Annual cost to the employer is higher than the headline salary because of contributions, gratuity, insurance and bonus.
- Variable pay is usually paid in cash and taxed in the hands of the employee as salary.
- Market rates, attrition and notice periods vary a great deal by city and sector.
The payroll compliance cycle
- Monthly: deposit Withholding Tax on salary by the 7th, provident fund and ESI by the 15th, and state professional tax where applicable.
- Quarterly: TDS returns for salary.
- Annual: employee tax statements, provident fund and ESI returns, bonus and gratuity checks, shops and establishment renewals.
- Registration: EPFO, ESIC, professional tax and shops and establishment registrations when you cross employee numbers.
The labour codes
India has consolidated twenty-nine central labour laws into four codes: wages, industrial relations, social security and occupational safety. They were reported to have come into force on 21 November 2025, with rules and state implementation still developing. German HR teams should assume rules for wages, overtime, fixed-term employment and gratuity are being updated, and ask the payroll provider for a short list of changes each quarter. Confirm the current position before drafting contracts.
Share plans for Indian employees
- Indian-resident employees can receive shares or options of a foreign parent under the foreign investment rules for residents; reporting and permissions apply.
- Many German groups use virtual or phantom plans instead of shares in a GmbH, which are simpler to administer; they are taxed as salary when paid.
- On exercise of real options, the difference between fair value and the price paid is taxed as a perquisite in the employee's salary, and the employer must withhold tax.
- A later sale of shares is taxed as capital gains. Resident employees must report foreign assets in their Indian return.
- A recharge from the Indian subsidiary to the German parent for share costs should be agreed in writing and priced under transfer pricing rules. See transfer pricing.
Employer of Record as a first step
An Employer of Record employs your people on its Indian entity and charges you a fee. It removes the registration burden for a pilot. Because the EOR, not you, is the employer, you have less control, and if your staff start concluding contracts for the German company, a permanent establishment may arise. Move to a subsidiary once you reach a stable headcount.
Official sources
Check the rules at the primary sources: Income Tax Department (India), Reserve Bank of India, Ministry of Corporate Affairs, Federal Central Tax Office (BZSt), Handelsregister and the Deutsche Bundesbank.
Frequently asked questions
What is the difference between German social insurance and India's provident fund?
Germany has several statutory insurance branches. India's EPF is a retirement and pension scheme for covered employees, with ESI for health cover below a wage ceiling and gratuity paid on exit.
Does an Indian subsidiary need a works council?
No. India has no statutory works council. Trade unions, grievance processes and state inspections take its place, and larger establishments have extra duties.
Do I need a written employment contract in India?
Yes. Issue a written appointment letter covering role, pay structure, notice, confidentiality and termination, and check state shops and establishment rules.
What is gratuity?
A lump sum paid on exit after a minimum period of continuous service, calculated from the last drawn basic pay and years of service.
When did the labour codes come into force?
The four labour codes were reported to have come into force on 21 November 2025. Rules and state implementation are still developing, so confirm the current position.
Can I give Indian employees shares in the German parent?
Yes, subject to the foreign investment rules for residents. They are taxed as a perquisite on exercise, and the employee reports foreign assets in the Indian return. Virtual plans are a common alternative.
Is an Employer of Record a long-term solution?
Not usually. It suits a pilot. For a stable team, a subsidiary gives control, brand and a clean legal position.
Related guides
German Employees Working in India: What the Tax Treaty and the Social Security Agreement Mean
How income tax and social security apply to German staff in India: the 183-day treaty test, the 2009 social security agreement, the 48-month detachment rule, certificates of coverage and German tax residence.
Read the guide →Relocating German Staff to India: Employment Visa, Indian Tax, Certificate of Coverage and PE Risk
What a German company must plan when sending staff to India: employment visa rules, FRRO registration, 183-day tax test, Section 392 salary tax, the Social Security Agreement, secondment contracts and PE risk.
Read the guide →Moving Personal Data Between Germany and India: GDPR Transfer Rules, Works Councils and the DPDP Act
How the GDPR and India's Digital Personal Data Protection Act apply when a German company has an Indian subsidiary: standard contractual clauses, transfer impact assessments, employee data, works council rights, breach notice and penalties.
Read the guide →Compliance Calendar: Indian Deadlines and the German Filings They Feed
A month-by-month compliance calendar for an Indian subsidiary of a German parent: TDS, GST, PF and ESI, advance tax, AGM, AOC-4, MGT-7, FLA return and the German-side reports.
Read the guide →Sources
Last updated 26 October 2026. General information only, not legal or tax advice. Indian and German rules change often; confirm current requirements before acting.