India's New Labour Codes: What Changes for Foreign-Owned Companies Hiring Their First Indian Employees

Every foreign founder who completes India incorporation and hires their first Indian team eventually assumes payroll is the easy part — set a CTC, split it into a few standard components, run it through payroll software, done. That assumption stopped being safe on November 21, 2025, when India's four new Labour Codes came into force and quietly rewired the math behind almost every salary structure in the country. If your subsidiary is hiring its first employees now, or you're midway through how to register a company in India and payroll is next on your list, this is genuinely worth understanding before your first offer letter goes out, not after.

This piece walks through what actually changed, why the biggest impact lands on your very first payroll cycle rather than some distant compliance deadline, and what a newly incorporated foreign subsidiary needs to get right from day one.

Twenty-Nine Laws, Four Codes, One Notification Date

For nearly a decade, India's labour reform sat in a strange limbo — passed by Parliament between 2019 and 2020, then parked while implementing rules were drafted and states worked through their own versions. That limbo ended on November 21, 2025, when the Government of India notified all four codes as effective law simultaneously: the Code on Wages 2019, the Industrial Relations Code 2020, the Code on Social Security 2020, and the Occupational Safety, Health and Working Conditions Code 2020. Together, these four codes replace twenty-nine separate central labour laws that had governed Indian workplaces since the 1940s — the single most significant employment law overhaul the country has seen in decades.

For a company that just completed online registration of company formalities and is now building its India team from scratch, this timing actually works in your favour in one specific way: you're building payroll structures fresh, under the new rules, rather than having to unwind decades of legacy structuring the way established Indian companies are currently scrambling to do.

The 50% Wages Rule: Why Your Planned CTC Structure Probably Doesn't Work Anymore

This is the single provision that touches every payroll in the country, and it's the one worth understanding before you finalise a single offer letter. Under the Code on Wages, "wages" is now defined as basic pay plus dearness allowance and retaining allowance, and this component must account for at least 50% of an employee's total cost-to-company. Where allowances are structured to push wages below that 50% threshold — a very common historical practice, where Indian companies kept basic pay at 20–30% of CTC specifically to limit provident fund and gratuity outflow — the excess gets added back into "wages" for every statutory calculation.

Practically, this means provident fund contributions, gratuity provisioning, bonus calculations, and leave encashment all get computed against a meaningfully larger wage base than the old-style CTC split would have produced. Industry estimates put the resulting increase in statutory costs somewhere between 3% and 15%, depending on how aggressively a company's original salary structure minimised the basic pay component. For a foreign subsidiary building its compensation philosophy from a blank page, this is actually the easier position to be in — you can design compliant CTC structures from the outset rather than restructuring existing employee contracts mid-cycle, which is the much more painful position most established Indian employers are currently in.

Appointment Letters Are No Longer Optional

One of the more operationally significant, if less headline-grabbing, changes: appointment letters are now mandatory for every employee under the new framework. This sounds like a formality, but for a foreign-owned subsidiary building its first HR processes, it means your onboarding documentation needs to be built correctly from the very first hire, rather than retrofitted later once someone notices the gap. A company that treats early hires informally — verbal offers, casual email confirmations — creates exposure that didn't necessarily exist under the old patchwork of laws in the same explicit way.

Gratuity for Fixed-Term Employees: A Real Budget Line, Not a Footnote

Under the previous regime, gratuity generally required five years of continuous service before it became payable — a threshold that conveniently excluded most short-tenure and contract hires. The new framework changes this specifically for fixed-term employees: they now receive gratuity on a pro-rata basis regardless of how short their tenure actually is. For a foreign subsidiary that plans to use fixed-term contracts for early-stage flexibility — a common approach while a new India entity is still finding its footing — this needs to be budgeted for explicitly rather than assumed away as a long-tenure-only liability.

What the Social Security Code Changes for a New Subsidiary

The Code on Social Security broadens coverage in ways that matter even for small, newly formed teams — expanding the categories of workers entitled to statutory benefits and formally recognising gig and platform workers within the social security framework, even though the operational scheme for that specific category isn't yet fully live. For a foreign company that assumed social security obligations only kick in once headcount crosses some higher threshold, it's worth confirming exactly where your specific team size and structure land under the new consolidated rules, rather than relying on outdated thresholds from the repealed legislation.

Industrial Relations Code: Fewer Surprises, More Formalisation

The Industrial Relations Code consolidates rules around standing orders, retrenchment, and dispute resolution, with adjusted thresholds for when certain protections and procedural requirements kick in. For most foreign subsidiaries hiring a handful of employees in their first year, this code's heavier provisions won't bite immediately — but the formalisation of fixed-term employment as a recognised category, alongside clearer standing order applicability, is worth understanding early if your hiring plan includes a mix of permanent and fixed-term roles from the outset.

OSH Code: A New Baseline Even for Small Teams

The Occupational Safety, Health and Working Conditions Code sets a more unified baseline across working hours, overtime, and workplace welfare provisions — including requirements around annual health check-ups and, depending on establishment size and composition, crèche facilities and provisions specific to women employees, including conditions around night shift work. Even a small foreign-owned team needs to check where its specific establishment size and sector fall under these new consolidated thresholds, since the OSH Code pulls together obligations that used to sit scattered across multiple separate, sector-specific laws.

Where Implementation Actually Stands Right Now

Here's the detail that makes this genuinely tricky to navigate in real time: the four codes are legally in force, but full enforcement depends on both central and state-level rules, and this rollout has been staggered. Final Central Rules across all four codes were notified on May 8, 2026 — the Code on Wages Rules, Social Security Rules, OSH Rules, and Industrial Relations Rules — but state-level rules remain uneven, with some states having finalised their versions and others still working through drafts. This means the practical compliance picture for a foreign subsidiary genuinely depends on which state your registered office and workforce sit in, and that picture is still shifting as more states catch up.

What This Means If You're Incorporating Right Now

If you're currently working through India online company registration or evaluating company incorporation services India providers ahead of your first hires, this is worth folding into your planning at the entity-formation stage rather than treating it as a separate HR project to tackle later. The state you choose for your registered office and primary operations affects which state-level rules apply to your workforce, and building your compensation structure around the new 50% wages rule from day one avoids the considerably more painful process of restructuring existing employee contracts once you're already operational.

Practical Steps for a Foreign Subsidiary's First Hires

Design your CTC structure around the 50% wages rule from the very first offer letter, rather than defaulting to a legacy split that will need correcting later.

Build a compliant appointment letter template as part of your initial HR setup, not as an afterthought once headcount grows.

Budget gratuity provisioning for fixed-term hires specifically, since the pro-rata rule removes the old long-tenure exemption.

Confirm your specific state's rule notification status before finalizing payroll processes, since central and state timelines aren't moving in lockstep.

Revisit your compensation and HR documentation again once your state finalizes its own rules, since several states are still catching up to the central framework as of mid-2026.

Getting This Right From the Start

For a company still working through how to register a company in India, this is one of the clearer arguments for coordinating incorporation and initial HR structuring with the same advisory team, rather than treating entity formation and payroll setup as sequential, disconnected projects. Accorp Partners works with foreign founders through exactly this handoff — helping structure compliant compensation and onboarding processes under the new Labour Codes from the very first Indian hire, so a subsidiary's payroll foundation is built correctly the first time rather than needing a costly restructuring exercise once employees are already on the books.

Frequently Asked Questions

1. Do the new Labour Codes apply to a foreign-owned subsidiary the same way they apply to Indian companies?

Yes — the codes apply based on establishment and employment relationships within India, regardless of who owns the company, so a newly incorporated foreign subsidiary is fully in scope from its first hire.

2. Does the 50% wages rule affect every employee, or only certain salary levels?

It applies broadly across the wage-earning workforce, restructuring how basic pay versus allowances get calculated for statutory purposes, regardless of seniority.

3. Are the Labour Codes fully enforced everywhere in India right now?

Not uniformly — central rules were finalised in May 2026, but state-level rules are still being notified at different paces, so the practical compliance picture varies by where your workforce is based.

4. Should payroll structuring happen before or after incorporation is complete?

It's best planned alongside incorporation rather than afterwards, since your registered office location determines which state rules apply, and building compliant compensation structures from the first offer letter avoids a harder restructuring exercise later.