The employee lifecycle in India, end to end
Reviewed by Mellow Editorial Team, HR & payroll content team
The employee lifecycle in India runs from the moment you make a hiring decision through to the final settlement when someone leaves — and at every stage there are statutory obligations that carry real penalties if you miss them.
Hiring and onboarding
Before someone joins, collect their PAN, Aadhaar, and bank account details. These are not optional niceties — you need the PAN to deduct TDS correctly and the Aadhaar for EPF and ESI registration.
Issue a written appointment letter that states the designation, cost to company, notice period, and place of work. Under the Labour Codes that came into force in 2025, the appointment letter requirement is strengthened — keep a signed copy on record.
Within the first month, enrol eligible employees in the Employees' Provident Fund (EPF) and, where applicable, the Employees' State Insurance (ESI) scheme. ESI applies to employees whose wages fall below the prescribed threshold. Missing the enrolment window creates backdated liability with interest and damages.
Compensation structure and payroll
How you structure the salary matters as much as the gross number. The four Labour Codes — particularly the Code on Wages — introduced the concept of a defined "wages" base that affects how EPF and gratuity are calculated. Broadly, allowances cannot be structured so aggressively that the basic wage shrinks to an artificially low figure. Review your current Cost to Company breakdowns against this.
For payroll, the employer contributes 12% of qualifying wages to EPF, and the employee contributes another 12%. Both contributions are deposited monthly, with the challan due by the 15th of the following month.
TDS on salary is governed by the income tax slabs under the new default regime, which rises to a top rate of 30%, plus a 4% health and education cess. A section 87A rebate applies for employees at lower income levels. You are responsible for estimating each employee's annual tax liability at the start of the year, deducting TDS in equal monthly instalments, and adjusting at year end. You file Form 24Q every quarter and issue Form 16 to each employee by 15 June after the financial year ends.
Running payroll accurately requires knowing each employee's investment declarations (under the old regime, if they opt in), any perquisites you provide, and whether any arrears or bonuses fall in the current year.
Performance, changes, and compliance through the year
Promotions, role changes, and salary revisions all require updated appointment letters or formal increment letters. Any revision that pushes a previously exempt employee above the ESI wage threshold means you stop deducting ESI contributions — track this actively.
Under the Labour Codes, standing orders (the documented rules governing conduct, leave, and termination procedures) now cover a wider range of establishments. If you have not reviewed your standing orders since 2025, do it now.
Leave entitlement — earned leave, casual leave, and sick leave — must be tracked and encashed or carried forward according to the applicable State rules and the Code on Social Security. Unpaid or disputed leave at exit is a common source of full-and-final settlement disputes.
Exits: resignation, termination, and retirement
When an employee exits, the clock starts on full-and-final (FnF) settlement. FnF covers outstanding salary, leave encashment, and any other dues. There is no single national deadline codified across all industries yet, but many establishments process FnF within 30 to 45 days as standard practice, and disputes escalate quickly if it drags.
Gratuity is payable to any employee who has completed five years of continuous service, whether they resign, are terminated (for reasons other than misconduct), or retire. Calculate it on the basis of the last drawn wages as defined under the Payment of Gratuity Act, which continues to apply even within the broader Labour Code framework.
EPF withdrawal or transfer is the employee's right. Your obligation is to ensure the UAN is active, the KYC is verified, and that you do not hold up the process. For employees who are transferring to a new employer, the transfer happens online through the EPFO portal — incomplete or incorrect KYC on your end will block it.
Issue Form 16 for the year of exit by the usual deadline, covering salary and TDS up to the last working day. If TDS was under-deducted because the employee left mid-year and their declarations changed, settle this carefully before the FnF is processed.
Record-keeping and audits
The Labour Codes consolidate several legacy registers into fewer combined records, but the obligation to maintain them is no different — inspectors from labour departments, EPFO, and ESIC can ask for them.
Maintain employment records (appointment letters, increment letters, attendance, leave ledgers) for a minimum of the period specified under the applicable rules — typically several years. For payroll specifically, your Form 24Q filings and TDS challans create a digital trail that the income tax department can access. Reconcile your payroll records with your TDS filings at least once a quarter, not just at year end.
If you operate across multiple states, remember that some obligations — shops and establishments registration, professional tax, and labour welfare fund contributions — remain state-specific. The four Labour Codes do not override these where states have their own enacted rules.
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