India’s statutory benefits framework covers paid leave, maternity protection, EPF retirement savings, and ESI health coverage. The rules come from a mix of central legislation and state-level acts, which means your obligations depend on where your employees are based, not just on national law. This guide covers everything you need to structure compliant benefits for India hires.
Overview of india’s statutory benefits framework
India operates on two legislative layers. Central laws, including the Employees’ Provident Funds and Miscellaneous Provisions Act, the Employees’ State Insurance Act, and the Maternity Benefit Act, apply uniformly across the country. Leave entitlements, on the other hand, are governed by state-level shops and establishments acts, which vary considerably from one state to the next. When you hire in India, you need to identify the applicable state act for each employee and build your leave policy around it, not just the minimum central standard.
Leave entitlements
India doesn’t have a single national leave law that covers all employees uniformly. Most employers structure their leave policies using the Factories Act as a baseline and then layer on the relevant state act for office-based workers. The sections below cover each leave type and what you can expect in practice.
Annual leave
The Factories Act sets a minimum of 15 working days of earned leave per year for workers who have completed 240 days of service in the preceding calendar year. State shops and establishments acts often mirror this figure, though some states set a higher minimum. Check the specific act for each state where you employ staff.
Unused leave can be carried forward to the following year. The rules on how much can be carried forward differ by state, so review the applicable act. On termination — whether by resignation, layoff, or retirement — any accrued but unused annual leave must be encashed and paid out to the employee.
Sick leave
Most state acts provide for 12 days of sick leave per year. This is state-specific, and some states set a higher entitlement under their shops and establishments acts. Sick leave is generally not encashable on termination, but confirm this under the applicable state act.
Casual leave
Casual leave covers short-notice absences and typically runs 7 to 12 days per year depending on the state. It isn’t always cashable on termination, and it usually can’t be accumulated — employees are expected to use it within the calendar year. Check the applicable state act for the exact entitlement and rules.
Maternity leave
Maternity leave in India is governed by the Maternity Benefit Act 1961, as amended in 2017. The key figures are:
| Situation | Total leave | Pre-delivery | Post-delivery |
|---|---|---|---|
| First or second child | 26 weeks | 8 weeks | 18 weeks |
| Third child onwards | 12 weeks | 6 weeks | 6 weeks |
The Act applies to establishments with 10 or more employees. You pay full wages throughout the maternity leave period. In addition:
- Nursing breaks: Employees are entitled to 2 nursing breaks per day for 15 months after delivery, in addition to their regular rest breaks.
- Creche facility: If you have 50 or more employees, you’re required to provide a creche facility. Employees can use it up to 4 times per day, including during nursing breaks.
Paternity leave
There’s no statutory paternity leave entitlement in India’s private sector. Central government employees have a separate scheme, but this doesn’t apply to private employers. In practice, most companies offer 5 to 15 days of paid paternity leave as a policy benefit to stay competitive. If you want to attract talent, budgeting for paid paternity leave is standard at mid-size and large employers.
Public holidays
India has three mandatory national holidays that apply to all employers across the country:
- Republic Day (26 January)
- Independence Day (15 August)
- Gandhi Jayanti (2 October)
Beyond these, states publish a list of gazetted holidays each year, typically 10 to 14 days. Employers are required to observe a set number of these. Many establishments also offer restricted holidays, where employees can choose 2 days from a prescribed list to take off based on personal or religious observance.
Epf: provident fund and retirement savings
The Employees’ Provident Fund (EPF) is a mandatory retirement savings scheme administered by the Employees’ Provident Fund Organisation (EPFO). It applies to establishments with 20 or more employees, and to employees earning up to ₹15,000 per month in basic wages plus dearness allowance (DA). Employers can choose to extend coverage to all employees regardless of wage.
Contributions are calculated on basic salary plus DA:
| Party | Contribution rate | Effective cap |
|---|---|---|
| Employee | 12% | ₹1,800/month |
| Employer | 12% | ₹1,800/month |
Of the employer’s 12%, 8.33% goes to the Employees’ Pension Scheme (EPS) and the remaining 3.67% goes to the EPF account directly.
The EPF account earns interest. For FY2026-27, the rate is 8.25% per annum. One important feature for globally mobile talent: the EPF account is portable. When an employee changes jobs, the account transfers to the new employer rather than being closed out.
Esi: health and social security
The Employees’ State Insurance (ESI) scheme provides health insurance and social security coverage for employees earning up to ₹21,000 per month in gross wages (₹25,000 per month for employees with disabilities). The ESI Act applies to establishments with 10 or more employees in notified areas.
ESI covers:
- Medical treatment for employees and their dependants
- Sickness benefit (cash payment during certified illness)
- Maternity benefit (for establishments where the Maternity Benefit Act doesn’t otherwise apply)
- Disablement benefit (for employment injuries)
- Dependants’ benefit (for dependants of employees who die due to employment injury)
Contribution rates are:
| Party | Rate |
|---|---|
| Employee | 0.75% of gross wages |
| Employer | 3.25% of gross wages |
Once an employee’s gross salary exceeds ₹21,000 per month, ESI contributions stop for that employee. They retain coverage until the end of the contribution period in which their salary crossed the threshold.
Gratuity
Gratuity is a statutory end-of-service payment governed by the Payment of Gratuity Act 1972. It applies to establishments with 10 or more employees.
An employee becomes eligible for gratuity after completing 5 years of continuous service with the same employer. The formula is:
15 days’ basic salary x completed years of service
For the purpose of this calculation, a year in which the employee has worked more than 6 months counts as a full year. The gratuity payment is capped at ₹20,00,000 (₹20 lakh). Gratuity is payable on resignation, retirement, death, or termination (including retrenchment).
You’ll want to budget for gratuity as a long-term liability. Many employers fund it through a group gratuity scheme with a life insurer, which simplifies administration and keeps the liability off the balance sheet.
Leave encashment
Leave encashment is the cash payment of accrued but unused annual leave. Two scenarios trigger it:
- On termination: Employers must encash all accrued annual leave when employment ends, regardless of the reason. This is a statutory obligation under most state acts.
- During employment: Some employers allow employees to encash a portion of their leave balance while still employed. This is a policy choice, not a statutory requirement.
From a tax standpoint, leave encashment received at the time of retirement or superannuation is exempt from income tax up to certain limits under the Income Tax Act. Leave encashment received during employment is fully taxable as salary income.
Hiring in india without a local entity
Setting up an Indian entity takes time, involves regulatory filings with multiple authorities, and requires you to administer EPF, ESI, gratuity, and state-specific leave obligations from day one. Many foreign employers choose not to take that route, especially for small or early-stage India teams.
An Employer of Record (EOR) lets you hire in India without incorporating locally. The EOR acts as the legal employer on record, handles all statutory compliance (EPF registration, ESI filings, gratuity provisioning, leave administration) and runs payroll in INR. You retain full control over the employee’s day-to-day work.
This structure is worth understanding before you scale. For a detailed overview of how the model works, see this guide on what an Employer of Record is. If you’re evaluating providers, this comparison of EOR services covers the main options.
RemotePass supports compliant hiring across India, covering EPF, ESI, maternity, gratuity, and leave entitlements under the applicable state and central laws.
FAQs
Is maternity leave for a third child different from the first two?
Yes. Under the Maternity Benefit Act 1961 (as amended 2017), the first and second child entitle the employee to 26 weeks of paid leave. From the third child onwards, the entitlement drops to 12 weeks. You pay full wages throughout in either case.
Is paternity leave mandatory in India?
No, not in the private sector. There’s no central law requiring private employers to offer paternity leave. It’s a policy benefit, and most competitive employers offer 5 to 15 days. If you don’t have a paternity leave policy, you aren’t in breach of any statute, but you may find it harder to attract and retain talent.
Is an EPF account portable when an employee changes jobs?
Yes. The EPF account is linked to the employee through their Universal Account Number (UAN), not to the employer. When the employee moves to a new job, the same account continues. The new employer contributes to the same account, so the employee doesn’t lose any accrued balance.
What happens to ESI contributions if an employee’s salary goes above ₹21,000?
ESI contributions apply to employees earning up to ₹21,000 per month in gross wages. Once an employee’s salary crosses that threshold mid-contribution period, contributions continue until the end of that contribution period (ESI operates in 6-month contribution periods). After that, contributions stop and the employee is no longer covered under ESI. You may want to offer a private health plan as a replacement benefit at that point.
Does unused annual leave have to be paid out on resignation?
Yes. Under most state shops and establishments acts, accrued but unused annual leave must be encashed on termination, which includes resignation. The exact calculation depends on the applicable state act, but the obligation to pay it out is consistent across states.
