How to pay international contractors in India

Global companies choose to hire independent contractors in India to tap into the country’s skilled workforce. But when it’s time to pay them, what steps do you need to take to comply with all of India's complex labor and tax laws?

Before you receive your first invoice, read on to learn what you need to know to correctly classify contractors, onboard them, and pay them according to India's labor laws in our guide below.

Step #1: Classify your workers

Classifying Indian workers correctly is crucial. Misclassifying employees as contractors can result in steep fines, back pay on entitlements, and maybe even jail time from Indian courts. 

To help employers determine whether a hire meets the criteria for an employee or independent contractor, the courts and other regulatory authorities look at all aspects of a working arrangement. They assess various factors to determine whether an employer-employee relationship exists, including:

Step #2: Determine the best way to pay your contractors

The first thing to do before you can pay contractors in India is to determine how you'll pay them. With the rise of global workforces and remote work, employers now have more choices than ever for sending paychecks to Indian contractors. Here are some options:

• Bank wires. You can open an Indian bank account and use it to deposit funds into Indian contractors' accounts or use your bank to send a global wire transfer to pay an Indian contractor.
• International money orders. This long-standing payment method can be slow—especially because the employer needs to physically purchase the money order, and the contractor needs to physically deposit it upon receipt. Money orders can also come with fees and bad exchange rates.
• Digital wallets or payment platforms. Note that not all digital payment platforms are available in India (for example, Venmo only works within the US) though some employers use platforms like Wise to transfer money across borders. Remember that exchange rates can change from day to day, making it difficult to predict your outgoings.
• Global payroll services. Typically, contractors aren't included in payroll, since they aren't subject to the same withholdings as employees—instead, they invoice for their services, which goes through accounts payable for many companies. But with Rippling, you can pay Indian employees and Indian contractors, simplifying Indian pay runs for your team.

Step #3: Use global payroll software to process payments 

As you saw in Step #2, there are multiple ways to pay contractors in India. But the fastest and simplest way is paying contractors through global payroll software.

With Rippling, you can pay employees and contractors across the world in one system. Here’s a preview of how Rippling’s global payroll system works:

Step #4: Ensure your contractor has the right tax information 

Employers aren't usually required to withhold and pay income taxes for contractors in India, who are responsible for filing their own tax returns if they earn more than INR 250,000. And if contractors make more than INR 2,000,000, they also need to pay a Goods and Services Tax (GST).

US companies hiring contractors in India need to submit an IRS Form W-8BEN as a part of their annual tax return. Sometimes employers will also need to include a Form 1096. 

To file taxes, contractors typically need a:

• Personal Account Number (PAN)
• Aadhaar Card Number
• Income Tax Return (ITR)

Effortlessly manage contractors around the world

Expanding your international workforce has never been easier. With Rippling, you can pay international contractors in India and around the world in one system.

FAQs about paying contractors in India

Do you need to withhold taxes when paying contractors in India?

No, foreign companies don't have to withhold payroll taxes when paying contractors in India. Contractors are required to pay all of their own taxes. 

Does Indian minimum wage apply to independent contractors in India?

No, minimum wage laws don't apply to independent contractors in India.

Do Indian contractors get benefits?

No, independent contractors in India are not entitled to benefits in the same way as employees. Offering employee benefits to independent contractors can even increase the risk that the courts will consider the contractors to have been misclassified.

Can you pay contractors in India in your home currency?

Contractors in India should generally be paid in Indian Rupees (INR). However, if you choose to pay Indian contractors in a different currency, this agreement should be explicitly stated in your contract with them.

Many international payment providers, like Rippling, support contractor payments in either Indian Rupees or your currency.

Can you manually pay contractors in India?

Yes, and it's common for small business owners to manually process contractor payments in an attempt to cut costs. But this can be time-consuming, especially as your business grows and if you work with multiple contractors in India or across borders.

It's also important to note that manually processing payments comes with some risks:

• Compliance. Running payroll manually means assuming the risk of human error and omission. Protect yourself and your business with Rippling, which automatically enforces compliance with any applicable local laws—no matter where your contractors live.
• Security. Manual payroll processing also poses security risks, especially if you use spreadsheets or paper records. Sensitive contractor information can be lost, stolen, or misused.
• Contractor experience. Manual payments can be time-consuming and lack transparency regarding payment timelines and what contractors are being paid for. This can get frustrating when contractors are trying to understand their earnings.

Make payroll automatic by using Rippling. Rippling syncs all your business's HR data with payroll, eliminating the need for manual data entry entirely. Employees and contractors all over the world get paid quickly (and compliantly) in one system. 

How do you turn a contractor into an employee in India?

You need to decide on the best employment model for your business when transitioning contractors to employees. While hiring independent contractors over full-time employees can come with benefits, like increased flexibility and cost savings, sometimes you do need a full-time employee.

The challenge is making sure all the legal requirements are in order: India's labor laws require payroll deductions, benefits, and more for employees that you don't have to worry about for contractors. Businesses are more likely to employ through their own entity if they already have one in India. However, companies can still hire employees in India without an Indian entity through an employer of record service.

With Rippling, you can effortlessly manage contractors—as well as quickly transition contractors to full-time employees—with legally compliant paperwork, benefits administration, payroll, and more. Rippling handles it all, so you stay compliant from onboarding to offboarding.