“Can a Foreign Company Pay an Indian Employee Directly???”

Hiring an employee in India does not necessarily mean the employer must immediately establish an Indian subsidiary. For many overseas companies, the bigger question is simpler: Can we hire someone in India and pay their salary directly from our foreign company?

The short answer is: it may be possible, but paying the salary is only one part of the arrangement. Tax, payroll, employment compliance, foreign exchange rules and the company’s activities in India all need to be considered.

As India continues to attract remote and cross-border talent, understanding the difference between direct salary payment and compliant employment has become increasingly important.

Can a Foreign Company Directly Pay an Indian Employee?

A foreign company may be able to make payments to an individual in India, but the arrangement should not be viewed simply as an international bank transfer.

If the person is genuinely an employee working from India, the company needs to consider the employer’s obligations relating to salary taxation, payroll records and applicable employment requirements.

The fact that salary arrives in an Indian bank account does not by itself determine whether the arrangement is compliant.

What About Salary Tax in India?

For employees working in India, taxation can become a key consideration.

India’s Income Tax Act, 2025 applies to tax years beginning on or after April 1, 2026. The new Act retains a dedicated framework for tax deduction from salary, with Section 392 covering TDS on salary payments.

This means foreign employers should not assume that simply paying an Indian employee in foreign currency removes Indian tax responsibilities.

The employee may also need appropriate salary documentation and evidence of tax deducted, depending on how the employment arrangement is structured.

Does Direct Payment Solve Payroll Compliance?

Not necessarily.

Payroll involves much more than transferring money every month. Depending on the employment structure, companies may need to consider:

• Salary TDS
• Provident Fund and other applicable statutory contributions
• Professional tax where applicable
• State-specific employment requirements
• Leave and holiday requirements
• Payroll records
• Employment documentation
• Final settlement when employment ends

The exact obligations depend on the facts of the arrangement, including the employer structure, employee status, location and applicable laws.

What About Foreign Exchange and International Payments?

Cross-border salary payments also need to be considered under India’s foreign exchange framework.

RBI guidance recognises certain situations in which employees of foreign companies can receive salary abroad or maintain foreign currency arrangements, subject to specified conditions and tax compliance.

Therefore, companies should work with their authorised bank and professional advisers to confirm the appropriate payment route rather than assuming every international salary transfer will be treated identically.

The Bigger Question: Does the Foreign Company Need an Indian Entity?

This is where the discussion becomes more important.

A company may be able to make payments to an Indian individual without immediately creating a traditional Indian subsidiary, but the employment relationship and the company’s activities in India still matter.

If the company is building a permanent Indian workforce, managing employees locally and conducting ongoing business operations, it should assess whether its structure creates additional Indian legal, tax or corporate obligations.

This is why companies often evaluate alternatives such as an Employer of Record (EOR).

Direct Hiring vs EOR: What Changes?

With direct hiring, the foreign company remains responsible for determining and managing the appropriate employment, payroll and compliance structure.

With an EOR, a local entity employs the worker and manages relevant employment administration, while the foreign company generally directs the employee’s day-to-day work.

An EOR can therefore be particularly useful when a company wants to hire its first few employees in India without immediately establishing its own local entity.

When Does Direct Payment Become Risky?

The biggest mistake is treating salary payment as a standalone transaction.

A foreign company should take extra care when:

• The employee works permanently from India
• The company has several employees in India
• The employee works under the company’s direct supervision
• The company has ongoing business activities in India
• Payroll taxes or statutory obligations have not been assessed
• There is no clear employment agreement
• The company assumes an international bank transfer eliminates local compliance

The longer and more structured the Indian workforce becomes, the more important the underlying employment model becomes.

A Better Way to Think About It

The real question is not “Can we send salary from overseas?”

It is:

“Can we employ this person in India in a way that properly addresses tax, payroll, employment and cross-border requirements?”

For a one-off or carefully structured arrangement, direct payment may be workable depending on the circumstances. For companies planning to build an ongoing Indian team, an EOR can provide a more structured route to employment without requiring the company to immediately establish its own Indian entity.

Before making the first salary payment, companies should assess the complete employment structure—not just the payment method.