How to hire your first employee in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Hiring your first employee in India requires registering for several statutory schemes, running compliant payroll from day one, and filing returns on a fixed quarterly calendar. Get these foundations right and the ongoing administration is straightforward.
Step 1: Register your business as an employer
Before you can legally employ anyone, your business needs the right registrations.
- PAN and TAN. Your company already has a Permanent Account Number (PAN). You also need a Tax Deduction and Collection Account Number (TAN) — this is the identifier you quote on every TDS filing.
- EPF registration. The Employees' Provident Fund Organisation (EPFO) requires employers to register once they reach the applicable threshold. Register online through the EPFO unified portal and obtain your establishment code.
- ESIC registration. If your employee's wages fall below the threshold set by the Employees' State Insurance Corporation, both you and the employee must contribute. Register on the ESIC portal and get your 17-digit employer code.
- Professional Tax (PT). This is a state-level levy. Rules, rates and registration processes vary by state, so check the specific requirements for wherever your business is located.
- Shops and Establishments registration. Most states require commercial establishments to register under their local Shops and Establishments Act. This is typically done with the municipal or labour authority in your state.
Step 2: Draft a compliant employment contract
A written contract is not legally mandated at the national level for all categories of workers, but it is essential practice. A good contract should cover:
- Designation, reporting structure and place of work
- Compensation — gross CTC broken down into components (basic, HRA, allowances)
- Working hours, leave entitlements and public holidays
- Termination notice periods on both sides
- Confidentiality and intellectual property clauses where relevant
India's four consolidated Labour Codes, which came into force in 2025, reshape several employment rules — including provisions around standing orders, working conditions, and definitions of "wages". Review your contract against these Codes, or have a labour law practitioner do so.
Step 3: Structure the salary correctly
How you structure the CTC has direct consequences for the employee's tax liability and your compliance obligations.
Basic salary is the foundation. It drives EPF contributions (12% of basic from the employee, 12% from you as employer) and gratuity calculations. Setting basic too low reduces retirement savings and can raise scrutiny.
HRA is relevant if the employee rents accommodation — it can be partially exempt from income tax under certain conditions.
Allowances and reimbursements — meal vouchers, telephone reimbursements, leave travel — each carry their own tax treatment. Under the new income tax regime (the default regime for 2026/27), most exemptions and deductions are not available, so many employees now prefer a simpler, flatter salary structure. Discuss this with the employee when designing the CTC.
Gratuity accrues from the first day of employment but is only payable after five years of continuous service. It is good practice to account for this liability from the start.
Step 4: Set up payroll and TDS
As an employer, you are responsible for deducting income tax at source from salaries — this is the TDS (Tax Deducted at Source) mechanism.
- At the start of the financial year, collect a declaration from the employee confirming which tax regime they have chosen (old or new). This determines which deductions and exemptions, if any, apply.
- Estimate their annual taxable income and compute the TDS to be spread equally across the remaining months of the year.
- Deduct TDS each month, deposit it to the government by the seventh of the following month (using your TAN), and file Form 24Q every quarter.
- At year end, issue Form 16 to the employee — this is their salary TDS certificate and they need it to file their personal income tax return.
Income tax under the new regime applies at slabs rising to 30%, with a section 87A rebate for eligible lower incomes and a 4% health and education cess on the tax payable. If you are unsure how to compute the liability, a chartered accountant or a payroll platform can handle this calculation.
Step 5: Run the monthly payroll cycle
Once registered and set up, your recurring monthly obligations are:
1. Calculate gross pay, deductions (EPF, ESI, PT, TDS) and net pay
2. Credit salary to the employee's bank account on or before the agreed pay date
3. Deposit EPF contributions by the 15th of the following month
4. Deposit ESI contributions by the 15th of the following month
5. Deposit TDS by the 7th of the following month
6. File Form 24Q at the end of each quarter
Maintain payslips and payroll registers — these are statutory records under the Labour Codes and will be required in any inspection or audit.
If you are hiring across multiple states or expect to grow headcount quickly, how Mellow runs payroll across six countries on one platform may be worth reading alongside this guide.
A note on contractors versus employees
Some founders start by engaging a person as a contractor to avoid statutory obligations. Be cautious. If the working arrangement looks like employment — fixed hours, direct supervision, a single client — tax authorities and labour tribunals may treat it as employment regardless of what the contract says. The EPF and ESI obligations, and the associated penalties for non-compliance, can be significant. If the role is ongoing and integrated into your business, hire the person as an employee from the start.
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