“We’ll just wire them the money” is how a lot of India hiring stories start. It’s understandable — you’re moving fast, the person is good, and the admin feels like something you’ll sort out later. The problem is that “later” tends to arrive at the worst possible time: a compliance audit, a disgruntled ex-employee, or a tax authority on either end of the transaction.
Here are the most common payroll and compliance mistakes European startups make when hiring in India — and what to do instead.
Mistake 1: Treating Salaried Employees as Freelancers
This is the most widespread mistake, and the most consequential. When a developer is embedded in your team — attending standups, following your processes, working exclusively or primarily for you — they are functionally an employee, regardless of what the contract says.
Indian labour law, like many European equivalents, looks at the substance of the relationship, not just the label. If an authority decides your “contractor” was actually an employee, you may be liable for unpaid Provident Fund contributions, gratuity, statutory leave, and penalties — backdated to the start of the relationship.
The fix is simple: match your contract to your reality. If someone is working like an employee, hire them as one.
Mistake 2: Ignoring Provident Fund (PF) Obligations
India’s Provident Fund is a mandatory retirement savings scheme. Once an employee earns below a certain threshold and once your India operation crosses a headcount threshold, both employer and employee are required to contribute — currently 12% of basic salary each, totalling 24% on top of the base.
Many European founders discover this late, either when setting up payroll properly or when an employee asks about their PF account. It’s not optional, and the retroactive calculation can be significant.
Factor PF into your India team cost modelling from the start. If you’re using an EOR, this is handled for you. If you’re running your own payroll, you need a registered PF account and a compliant payroll system.
Mistake 3: Missing TDS Requirements
TDS — Tax Deducted at Source — is India’s withholding tax mechanism. When you pay a contractor or employee in India, the payer is often required to deduct tax at source and remit it to the Indian government. The rate depends on the nature of the payment and whether a PAN number has been provided.
If you’re paying a contractor from a European entity via bank transfer and not deducting TDS, you may be creating a compliance issue for both yourself and the contractor. The rules are nuanced, and the answer depends partly on your legal structure and the nature of the engagement.
Get local advice on this before you start paying. It’s not complicated once you understand it, but it’s easy to get wrong by assumption.
Mistake 4: Forgetting Professional Tax
Professional Tax is a state-level tax in India — the rules, rates, and thresholds vary by state. Maharashtra, Karnataka, Tamil Nadu, and West Bengal all have it; some states don’t. For employees working in applicable states, it must be deducted from salary and remitted monthly or annually depending on the state.
It’s a small amount — typically a few hundred rupees per month — but the obligation is real and the penalties for non-compliance are disproportionate to the sums involved.
This is one of those things an Indian payroll provider or EOR handles automatically. If you’re doing payroll yourself, make sure your accountant knows which states your employees are in.
Mistake 5: Assuming the Contract Protects You from Misclassification
A well-drafted contractor agreement is important. It is not a shield against misclassification if the underlying reality is employment. Authorities on both sides — Indian labour inspectors and European tax bodies — assess the actual working relationship, not the paperwork.
The test is generally: who controls how the work is done (not just what the output is)? If you’re directing the person’s day-to-day activities, they’re likely an employee in substance.
What to Put in Place from Day One
- A contract that accurately reflects the nature of the engagement (contractor vs. employee)
- A clear understanding of PF, TDS, and Professional Tax obligations before the first payment
- A payroll setup — either through an EOR or a local payroll provider — if you’re hiring employees
- A local accountant or compliance partner who knows Indian labour law, not just tax law
None of this is complicated once it’s in place. The cost of getting proper advice upfront is a fraction of the cost of unwinding a non-compliant arrangement later.
We help European startups set up compliant India payroll and hiring structures. Get in touch if you want to get it right from the start.