What an employee in India actually costs: EPF, ESI, gratuity and bonus explained

Every US company that hires in India starts with the same number: the salary. It is the number in the offer letter, the number in the budget, and the number that turns out to be incomplete.

On top of an Indian salary sit statutory employer contributions. They are not optional, they are not negotiable, and they are not small. This is a walk through each one — what it is, what it costs, and who it applies to.

The wage base comes first

Before any percentage can be applied, you need to know what it is a percentage of. Under India's new Labour Codes, that is "wages", and wages have a specific meaning: Basic + DA must be at least 50% of total remuneration, and where allowances exceed the other half, the excess is added back in.

This matters because most of the costs below are computed on wages rather than on gross pay. A salary structured with a small Basic component used to produce small statutory costs. Since 21 November 2025, it does not.

For the worked example below, take a monthly gross of ₹1,00,000. Wages are therefore ₹50,000.

The line items

• Gross salaryWhat the offer letter says₹1,00,000
• EPF12% of wages — employer share₹6,000
• ESI3.25% of gross, only up to ₹21,000 grossNot applicable
• Gratuity≈ 4.81% of wages, accrued monthly₹2,405
• Statutory bonusWithin the Payment of Bonus Act thresholdNot applicable
• Professional TaxState levy, ≈ ₹200/mo₹200
• Employer costBefore any service fee₹1,08,605

So a ₹1,00,000 salary costs ₹1,08,605 a month. Roughly 8.6% on top — at this salary level. At lower salaries it is considerably more, because two of the lines above switch on.

Provident Fund (EPF)

EPF is India's mandatory retirement contribution. The nearest US analogue is a 401(k), with the important difference that it is statutory rather than elective — neither you nor the employee opts in.

The employer contributes 12% of wages. On our example that is ₹6,000 a month. The employee contributes as well, deducted from their salary, so it does not appear in your cost.

The money goes to a government body, not to you and not to us. That is worth knowing for a reason that becomes obvious later: employee retirement balances sit outside any employer's balance sheet, which is what makes them safe if an employer disappears.

Employees' State Insurance (ESI)

ESI is a contributory medical and cash-benefit scheme. The employer contributes 3.25% of gross pay, but only for employees earning up to ₹21,000 a month in gross.

Above that ceiling it does not apply at all, which is why our example shows nothing. For a ₹20,000-a-month hire it would add ₹650 — a meaningful percentage at that salary level.

This is the first of the two thresholds that make the total cost percentage higher at the bottom of the salary range than at the top.

Gratuity

Gratuity is a statutory lump sum payable to an employee on qualifying exit, under the Payment of Gratuity Act. There is no US equivalent — the closest mental model is a severance entitlement that accrues from day one.

It accrues at roughly 4.81% of wages. On our example that is ₹2,405 a month, or about ₹28,860 a year, building steadily as a liability against a payment you will eventually make.

Two things changed here under the new Codes, and both increase the number. It is computed on the larger wage base. And fixed-term employees now qualify after one year of service instead of five.

The question that separates employers is what happens to that accrual. Provisioning it as a book entry is common and costs nothing today. Funding it — actually setting the money aside — is the alternative. We maintain an approved Group Gratuity Fund structure with a regulated insurer, so the liability is funded and ring-fenced rather than sitting as a number in a ledger. Why that distinction matters is worth its own article.

Statutory bonus

Statutory bonus is payable at between 8.33% and 20% of eligible wages, to employees within the Payment of Bonus Act wage threshold.

Like ESI, it is threshold-bound. Our ₹50,000-wages example sits above it, so nothing applies. A lower-paid employee would attract it, at a minimum of 8.33% of wages.

Professional Tax

Professional Tax is a small state-level levy, typically around ₹200 a month, charged per applicable state schedule. It is trivial in amount and not trivial in administration: the schedule differs by state, so a distributed team means several schedules running at once.

What this means for your budget

Two patterns fall out of the numbers.

The percentage is not constant. At ₹1,00,000 gross the statutory add-on is about 8.6%. At ₹20,000 gross, ESI and statutory bonus both apply, and the proportional cost is materially higher. Budgeting a single flat percentage across a team with a wide salary range will be wrong at both ends.

The wage base is the lever that no longer moves. Structuring a salary to minimise Basic was the standard way to reduce these costs. The uniform 50% wage definition closed it. If you are quoted an India cost that looks lower than the arithmetic above, the question to ask is what wage base it was computed on.

Where our fee sits

Everything above is statutory cost. It is passed through at actuals with proofs — challans and acknowledgements, every cycle — and no markup is applied to it.

Our fee sits on top and is separate: one flat monthly amount per employee, billed in USD. We quote it against your headcount and roles rather than publishing a list price, because the right number genuinely depends on what you are building. Our Employer of Record service page sets out what that fee covers, and how pricing works explains the billing model.

Ask us for a cost sheet for the role you are hiring and you will get the whole calculation above, done against your actual salary figure, with our fee itemized alongside it.

• cost of hiring in India
• EPF
• ESI
• gratuity
• statutory bonus