Hiring Employees and Processing Payroll for Startups in India is a critical compliance and operational responsibility for every growing business. From appointment letters, EPF and ESIC registration, salary structuring, payroll deductions, TDS compliance, and labour law obligations to monthly payroll processing, hiring employees and processing payroll for startups in India requires startups to establish legally compliant HR and payroll systems from the first employee itself. Full enforcement of the Central Rules under these codes is expected from April 2026, though state-level timelines may vary.
For a startup founder, the question is not just how to hire but how to hire in a way that keeps the business legally compliant from the first salary run. This guide covers the legal framework for hiring, statutory registration requirements, payroll structure, deduction calculations, and filing obligations that every Indian startup must understand before onboarding its first employee.
Hiring Employees and Processing Payroll for Startups in India: Legal and Compliance Framework
India’s employment law framework was consolidated through four Labour Codes notified on 21 November 2025:
The Code on Wages, 2019 replaces the Payment of Wages Act, Minimum Wages Act, Payment of Bonus Act, and Equal Remuneration Act. It establishes a universal definition of wages and a national floor wage that all states must meet or exceed. Critically, it mandates that basic wages plus dearness allowance plus retaining allowance must constitute at least 50% of the total Cost to Company (CTC). If allowances exceed 50% of CTC, the excess is automatically treated as wages for the purpose of EPF, ESI, gratuity, and other statutory calculations. This change directly affects how startups structure salary components. Hiring employees and processing payroll for startups in India involves accurate calculation of salaries, EPF, ESI, TDS, professional tax, and statutory deductions.
The Industrial Relations Code, 2020 replaces the Trade Unions Act, Industrial Employment (Standing Orders) Act, and Industrial Disputes Act. It formalises fixed-term employment with full benefit parity and mandates appointment letters for all hires including contractors, gig workers, and fixed-term employees.
The Code on Social Security, 2020 consolidates the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, the Employees’ State Insurance Act, 1948, the Payment of Gratuity Act, 1972, the Maternity Benefit Act, 1961, and five other social security laws. It extends social security coverage to gig workers and platform workers for the first time.
The Occupational Safety, Health and Working Conditions Code, 2020 consolidates 13 laws including the Factories Act and mandates that every employer with 10 or more employees must ensure a safe working environment, conduct periodic health examinations, and maintain digital records.
Step 1: Statutory Registrations Before the First Hire
Before onboarding the first employee, a startup must have the following registrations in place:
Tax Deduction and Collection Account Number (TAN): TAN is issued by the Income Tax Department and is mandatory for any employer deducting tax at source (TDS) on salary payments under Section 192 of the Income Tax Act, 2025. TAN must be quoted on all TDS returns, challans, and certificates. It is obtained by filing Form 49B on the NSDL portal.
Shops and Establishments Act Registration: This registration is mandatory under the applicable state-level Shops and Establishments Act for every commercial establishment, including startups operating from offices or virtual offices. The registration must be obtained from the respective state labour department. The process and fees vary by state.
Professional Tax Registration: Professional tax is a state-level tax applicable in Maharashtra, Karnataka, Tamil Nadu, West Bengal, Andhra Pradesh, Telangana, and several other states. Employers must register with the state professional tax authority, deduct professional tax from employee salaries as per the applicable state slab, and deposit it monthly or annually as required.
EPF Registration: Registration with the Employees’ Provident Fund Organisation (EPFO) is mandatory when the establishment employs 20 or more employees. Once the threshold is crossed, registration must be completed immediately through the Unified Shram Suvidha Portal (shramsuvidha.gov.in). Voluntary registration before reaching 20 employees is permitted and is often advisable for startups that expect to grow quickly.
ESIC Registration: Registration with the Employees’ State Insurance Corporation (ESIC) is mandatory when the establishment employs 10 or more employees. Registration is completed through the ESIC portal (esic.gov.in). Once registered, all employees earning up to Rs. 21,000 per month (Rs. 25,000 for persons with disabilities) are covered under the ESI scheme.
Step 2: Employment Documentation
Under the Industrial Relations Code, 2020, appointment letters must be issued to every employee at the time of joining, including permanent, fixed-term, contract, and gig workers. The appointment letter must specify the job role, salary and wage structure, working hours, leave entitlement, employment type, and applicable benefits.
Beyond the appointment letter, the following documents must be collected from every new employee before payroll processing begins: PAN card for TDS deduction; Aadhaar card for EPFO and ESIC enrolment; bank account details for salary credit; Universal Account Number (UAN) for EPF, which the employee may already have from a previous employer; income tax regime declaration (new regime vs old regime) under Section 115BAC of the Income Tax Act, 2025; and Form 12BB for investment declarations where the employee claims HRA, LTA, and other allowances.
Every startup must also maintain a digital register of employees covering each employee’s name, designation, date of joining, salary breakup, UAN, ESIC IP number, and attendance records. Under the Occupational Safety, Health and Working Conditions Code, 2020, this register must be available for inspection by labour authorities at any time. Paper-based registers are not compliant for establishments covered under the Code.
Background verification is not mandated by central law for most sectors but is contractually required by most enterprise clients and investors during vendor empanelment and funding due diligence. For roles involving access to financial data, client information, or sensitive systems, identity, previous employment, and educational qualification verification should be completed before the employee’s first working day.
Step 3: Structuring the Salary
Under the Code on Wages, 2019, the salary structure must ensure that basic wages plus dearness allowance plus retaining allowance equal at least 50% of the total CTC. Allowances such as HRA, conveyance, special allowance, and meal coupons cannot collectively exceed 50% of CTC. If they do, the excess is automatically reclassified as wages and attracts higher EPF, ESI, and gratuity liability.
A standard compliant salary breakup for a startup employee on Rs. 60,000 CTC per month would structure basic salary at Rs. 30,000 (50% of CTC), HRA at Rs. 15,000 (50% of basic, exempt from income tax subject to conditions), special allowance at Rs. 9,800, and employer EPF contribution at Rs. 3,600 and employer ESIC contribution at Rs. 1,950 if the employee is within the ESI wage ceiling. The actual net-in-hand and statutory liability calculations flow from this structure.
Step 4: Monthly Payroll Processing
Monthly payroll processing involves the following calculations and deductions for every employee:
Employee EPF Deduction: 12% of basic wages (basic salary plus dearness allowance) is deducted from the employee’s salary. For employees with basic wages above Rs. 15,000 per month, EPF deduction is capped at 12% of Rs. 15,000 (Rs. 1,800) unless the employer and employee opt for higher contributions.
Employer EPF Contribution: The employer contributes an additional 12% of basic wages. Of the employer’s 12%, 8.33% goes to the Employee Pension Scheme (EPS) and 3.67% goes to the EPF account of the employee. Both employee and employer EPF contributions must be deposited via challan on the EPFO portal by the 15th of the following month.
Employee ESI Deduction: 0.75% of gross salary is deducted from employees earning up to Rs. 21,000 per month.
Employer ESI Contribution: 3.25% of gross salary is contributed by the employer for eligible employees. ESI contributions must be deposited by the 15th of the following month.
TDS on Salary: Under Section 192 of the Income Tax Act, 2025, the employer must deduct tax at source from salary at the applicable slab rate under either the old or new income tax regime, as declared by the employee. TDS must be deposited with the government by the 7th of the following month (30th April for deductions in March).
Professional Tax: Deducted from employee salary as per the applicable state slab and deposited with the state authority.
Step 5: Statutory Filing and Compliance Deadlines
EPF: Monthly ECR (Electronic Challan cum Return) must be filed on the EPFO portal by the 15th of the following month. UAN activation and KYC seeding for each new employee must be completed within 30 days of joining.
ESIC: Monthly ESIC return must be filed and contribution deposited by the 15th of the following month. Half-yearly ESIC returns are also required.
TDS Returns: Quarterly TDS returns in Form 24Q must be filed with the Income Tax Department. Due dates are 31 July (Q1), 31 October (Q2), 31 January (Q3), and 31 May (Q4). Form 16 (TDS certificate) must be issued to all employees by 15 June after the close of the financial year.
Professional Tax: Monthly or annual filing and deposit depending on the state.
Gratuity, Leave Encashment, and Other Statutory Obligations
Gratuity: Under the Payment of Gratuity Act, 1972, consolidated under the Code on Social Security, 2020, every employee who completes five or more years of continuous service is entitled to gratuity on resignation, retirement, or death. The formula is: last drawn basic salary multiplied by 15, divided by 26, multiplied by completed years of service. For an employee earning Rs. 30,000 basic with six years of service, gratuity equals approximately Rs. 1,03,846. For fixed-term employees under the 2026 Labour Codes, gratuity accrues from Day 1 with no five-year minimum threshold.
Maternity Benefit: Under the Maternity Benefit Act, 1961, consolidated under the Code on Social Security, 2020, women employees are entitled to 26 weeks of paid maternity leave for the first two children and 12 weeks for subsequent children. Establishments with 50 or more employees must provide a crèche facility within a prescribed distance. Startups must provision for this liability in their HR and payroll planning from the moment female employees are onboarded.
Leave Encashment: Under the Code on Wages, 2019, every employee who has worked 240 days in a year earns one day of paid leave for every 20 days worked. Unused earned leave can be carried forward subject to the maximum prescribed, and any balance at separation must be encashed at the rate of the last drawn basic salary. Startups must maintain accurate leave balance records to calculate this liability correctly at full-and-final settlement.
Key Changes Under the 2026 Labour Codes Every Startup Must Know
50% basic wage rule: Every salary structure must be reviewed and restructured if basic wages currently fall below 50% of CTC. Failure to do so exposes the startup to retrospective EPF and gratuity liability assessments.
Fixed-term employment and gratuity: Under the Code on Social Security, 2020, fixed-term employees are entitled to gratuity proportional to their period of service from Day 1, calculated at 15 days’ wages per year of service. The earlier five-year minimum service requirement does not apply to fixed-term employees. Startups using fixed-term contracts to avoid gratuity liability must revisit this approach.
Full-and-final settlement: Labour Codes require full-and-final settlement to be processed within 48 hours of an employee’s last working day for fixed-term employees. Startups must have a documented full-and-final process in place.
Gig and platform workers: The Code on Social Security, 2020 formally extends social security coverage to gig workers and platform workers. Contribution rates and the specific mechanism are subject to Central Government notification, but the legal liability framework is now in force.
Digital record-keeping: The Occupational Safety, Health and Working Conditions Code, 2020 mandates digital maintenance of attendance records, wage registers, leave records, ESI and EPF documentation, and appointment letter registers. Paper-based systems are no longer compliant.
Conclusion
Hiring Employees and Processing Payroll for Startups in India is one of the most important operational and compliance responsibilities for growing businesses in 2026. From onboarding employees and issuing appointment letters to salary structuring, EPF and ESIC compliance, payroll deductions, TDS filing, and labour law documentation, hiring employees and processing payroll for startups in India requires startups to build accurate and legally compliant systems from the beginning.
As startups scale teams across different states and employment structures, hiring employees and processing payroll for startups in India becomes increasingly important for maintaining employee trust, avoiding statutory penalties, and ensuring smooth business operations. Proper payroll compliance also strengthens investor readiness, audit preparedness, and long-term workforce management.
With evolving labour law frameworks and increasing digital compliance requirements, hiring employees and processing payroll for startups in India remains essential for startups aiming to build compliant, scalable, and professionally managed organisations.
How Virtual Offices Support Startups Setting Up Payroll
The Shops and Establishments Act registration, professional tax registration, and ESIC and EPFO registrations all require a valid business address in the state where the establishment operates. For startups without a physical commercial office, the registered address on these compliance documents must be consistent with the MCA registered office and GST records.
myHQ Virtual Offices provides verified, MCA-compliant registered office addresses across 40+ cities in India, supported by 150+ partner spaces, 50+ Virtual Office Experts, and 10,000+ clients served. With Digital KYC and Agreement for fully paperless onboarding, the fastest document turnaround time, flexible contract tenures suited to growing startups, and comprehensive help and support, myHQ ensures that the address infrastructure underlying all statutory employment registrations is consistent, compliant, and auditable.
FAQs
When does a startup need to register for EPF?
EPF registration is mandatory once the establishment employs 20 or more employees under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, as consolidated under the Code on Social Security, 2020. Registration must be done immediately on crossing the threshold. Voluntary registration before reaching 20 employees is permitted.
What is the 50% basic wage rule under the new Labour Codes?
Under the Code on Wages, 2019, notified on 21 November 2025, basic wages plus dearness allowance plus retaining allowance must constitute at least 50% of an employee’s total CTC. If allowances exceed 50% of CTC, the excess is reclassified as wages and attracts full EPF, ESI, and gratuity liability. All existing salary structures must be reviewed and revised accordingly.
Are fixed-term employees entitled to gratuity from day one?
Yes. Under the Code on Social Security, 2020, fixed-term employees are entitled to gratuity proportional to their service period from the first day of engagement, calculated at 15 days’ wages per completed year of service. The earlier requirement of five continuous years of service does not apply to fixed-term employees.
What is the TDS rate applicable to salary payments?
Under Section 192 of the Income Tax Act, 2025, TDS on salary is deducted at the slab rate applicable to the employee’s estimated annual income under either the new or old income tax regime, as declared by the employee. There is no fixed TDS rate for salary. The employer must estimate the annual tax liability and deduct it proportionately across the financial year.
What documents must be collected from every new employee before payroll begins?
PAN card, Aadhaar card, bank account details, UAN (if previously employed), income tax regime declaration, and Form 12BB for investment declarations. Under the Industrial Relations Code, 2020, a signed appointment letter must also be issued to every employee before or at the time of joining.
What are the biggest compliance risks in hiring employees and processing payroll for startups in India?
Common compliance risks in hiring employees and processing payroll for startups in India include incorrect salary structuring, delayed EPF or ESIC deposits, inaccurate TDS deductions, missing appointment letters, and failure to maintain employee and payroll records as required under labour and tax laws.
Why is salary structuring important while hiring employees and processing payroll for startups in India?
Salary structuring is important in hiring employees and processing payroll for startups in India because EPF, gratuity, ESI, TDS, and other statutory liabilities are calculated based on salary components such as basic pay, allowances, and gross wages. Improper structuring can increase compliance exposure and payroll costs.
Can startups outsource hiring employees and processing payroll for startups in India?
Yes. Many startups outsource hiring employees and processing payroll for startups in India to payroll consultants, HR firms, or compliance service providers to manage salary processing, statutory deductions, labour law filings, EPF, ESIC, TDS compliance, and employee documentation more efficiently.
