A US or UK company that wants to hire in India faces a decision it usually frames as a cost question: is an Employer of Record cheaper than setting up a subsidiary? That is the wrong first question. The right one is a compliance question — who carries the statutory liability, and for how long — because that is what actually decides which route is right for you.
An Employer of Record (EOR) lets a foreign company employ people in India in days, without a local entity, by becoming the legal employer itself. Setting up an Indian subsidiary takes months but gives full control. The decision turns on headcount, time horizon, and who you want holding the compliance liability — not on the monthly fee.
Deciding between the two for your India team? Send us your headcount and timeline on WhatsApp and we will tell you which route actually fits. Message TaxKitab
Quick Summary
| Point | EOR | Own Subsidiary |
| Time to hire | Days | Four to six months to set up |
| Legal employer | The EOR | Your Indian entity |
| Statutory liability | Sits with the EOR | Sits with you |
| Setup cost | None | Incorporation, registrations, ongoing |
| Control over employment terms | Shared / limited | Full |
| Break-even | Efficient up to roughly 25-30 staff | Own entity looks better beyond that |
| Data controller for HR data | Defined in the EOR contract | You |
💡 TaxKitab Tip –
The number nobody puts in the cost comparison is principal-employer liability. Even when a payroll vendor runs the numbers, an Indian court looks at the real-world nature of the relationship, not the label on the contract. A worker engaged as a “consultant” but managed like an employee — fixed hours, exclusivity, integrated reporting — will be treated as an employee under Indian law, with backdated EPF, ESIC and TDS following. The EOR route exists precisely to move that liability off your books. That is what you are buying, far more than speed.
The two legal paths, stated plainly
A foreign company cannot simply put an Indian worker on its US or UK payroll. The work happens in India, so Indian labour law applies and salary must be paid in rupees. To employ someone directly, the employer must be an Indian legal entity registered under the relevant state’s Shops and Establishments Act, and with EPFO, ESIC where applicable, the state Professional Tax authority and TDS.
That leaves two compliant routes.
Route one — Employer of Record. A third party that already holds those registrations becomes the legal employer. You manage the work; the EOR handles employment contracts, payroll, statutory contributions and filings. Onboarding takes days because the infrastructure already exists.
Route two — your own subsidiary. You incorporate in India, obtain the registrations yourself, and employ directly. This takes four to six months and carries ongoing compliance, but gives you full control and, past a certain headcount, better economics.
Where the break-even actually sits
The common industry estimate is that an EOR stays cost-efficient up to roughly 25 to 30 employees. Beyond that, the fixed cost of your own subsidiary starts to look more reasonable on paper.
But that arithmetic only works if someone on your side can own India payroll compliance, statutory filings and local HR. That is the hidden clause in the “just set up an entity” advice. An entity without a compliance function is not a saving — it is an exposure.
This is the gap we see most often. A foreign company crosses 30 heads, incorporates to save on EOR fees, and then discovers that EPF ECR filing, ESIC contributions, Professional Tax across states, TDS on salary and the new Code on Social Security wage rules do not run themselves.
The liabilities the fee comparison hides
Three statutory exposures decide far more than the monthly rate.
EPF. Mandatory for establishments with 20 or more employees, on wages up to the ₹15,000 ceiling. A single EPF non-compliance default carries penalties and, for repeat offences, criminal liability under the EPF framework.
ESIC. Applies to establishments with 10 or more employees, covering those earning gross wages up to ₹21,000 a month.
TDS on salary. Defaults attract interest at 1.5% per month from the date the deduction was due — not from when you noticed.
⚠️ Verify the current thresholds and rates at epfindia.gov.in and esic.gov.in before acting. The EPF wage ceiling has been the subject of a proposed revision to ₹25,000, and the Code on Social Security, 2020 introduced a rule requiring basic pay to be at least 50% of total remuneration, which can push your contribution base upward automatically.
So which route is right
Use time horizon and headcount as the filter, not the fee.
If you are testing the India market, hiring your first few people, or want speed and zero compliance learning curve, the EOR route is almost always correct. The liability sits with the provider and you are operational in days.
If you are building a long-term India presence, expect to cross 30 heads, and can resource a compliance function, your own subsidiary gives control and better long-run economics. Many companies run a hybrid — start on an EOR, move to an entity once the team and the case are proven.
What does not work is choosing on price alone, incorporating without a compliance plan, and discovering the statutory obligations after the first notice.
How This Connects
This decision connects to how you actually pay the team once it exists — see our guide on running payroll in India for a foreign company — and to the contractor misclassification trap that catches companies trying to skip the entity question. For the compliance load a subsidiary carries, see the new labour codes changes.
FAQs
Can a US or UK company hire an Indian employee on its home payroll?
No. Indian employment law requires a local employer, salary in rupees, and Indian statutory registrations. The two compliant routes are an EOR or your own entity.
Is a contractor arrangement a way around this?
Only if the relationship is genuinely contractor in nature. If it functions like employment, Indian authorities will reclassify it, with backdated employer contributions and penalties. See our separate note on the misclassification trap.
Does an EOR remove all our compliance responsibility?
It moves the employment-layer liability to the provider. You remain responsible for how you direct the work and for data-protection obligations under the DPDP framework. Read the contract for who holds data-controller responsibility.
When should we switch from EOR to our own subsidiary?
Commonly around 25 to 30 employees, and only when you can resource India payroll and statutory compliance internally.
Does using an EOR mean the foreign company has no India tax exposure?
No. An EOR addresses the employment/payroll layer, but it does not automatically eliminate potential corporate tax, permanent establishment, transfer pricing, data protection, immigration or other India regulatory considerations. Those issues should be assessed separately.
References
– Code on Social Security, 2020 (in force 21 November 2025) – EPF & MP Act 1952 framework; EPFO guidance – ESIC Act 1948; ESIC guidance – Shops and Establishments Acts (state-wise)
The India-team decision is a compliance decision
The fee is the part that is easy to compare, which is why everyone compares it. The liability — who carries it, for how long, and what a default costs — is the part that actually decides whether the India team runs smoothly or becomes a notice two years later.
TaxKitab advises foreign companies on the EOR-versus-entity decision and runs the India-side compliance either way: payroll, EPF, ESIC, Professional Tax, TDS and the statutory filings that hold it all together.
📞 Call or WhatsApp: +91 7448200422 🔗 Global Desk — India Entry & Compliance
Call or WhatsApp: +91 7448200422 · See our Global Desk — India Entry & Compliance service, or our Payroll & HR Compliance service to run the team once it is set up.
