Best ways to pay remote workers in India

India is rapidly emerging as a global hub for remote talent, with a 60% surge in international job searches since June 2021, according to an article published in The Financial Express*.

As companies worldwide tap into India's vast, skilled workforce, they face the critical challenge of managing cross-border payments effectively. This involves navigating exchange rates, complying with local tax regulations, and understanding workers' preferred payment methods.

For businesses planning to hire remote workers in India, success depends on mastering the legal frameworks, payroll considerations, and compliance requirements.

This comprehensive guide covers everything you need to know about paying remote workers in India while building trust and minimizing risks.

Establishing a local entity in India provides direct control over employees and operations while ensuring compliance with Indian labor laws. Though complex and costly, requiring various licenses and registrations, this option suits companies planning long-term operations in India. The setup process involves obtaining necessary permits, registering for taxes, and maintaining statutory benefits for employees.

While setting up, companies also need to look at an EOR. An Employer of Record (EOR) enables foreign companies to employ Indian workers without establishing a local business. EORs handle all legal employment responsibilities, including payroll processing, tax deductions, and labor law compliance. This option is ideal for companies seeking quick market entry or testing the waters before committing to a local entity, though it comes with service fees and reduced direct control over employment relationships.

1. Virtual Bank Account Number (VBAN)

Virtual Bank Accounts offer a modern solution for managing remote worker payments without requiring physical presence in India. VBANs provide quick setup, lower fees than traditional banks, and straightforward currency conversion. While convenient and cost-effective, they may have transaction limits and fewer features compared to traditional banking services.

2. International wire transfers

Traditional wire transfers remain a reliable method for sending payments abroad. While straightforward for service payments, they involve various costs including transfer fees and exchange rate margins. Processing times can vary due to intermediary banks, time zones, compliance checks, and currency conversion, potentially causing payment delays.

3. Online payment service providers

New-age digital financial platforms offer secure, efficient payment solutions with user-friendly interfaces and features like currency lock-ins. These services provide enhanced security through encryption, fraud detection, and two-factor authentication while maintaining compliance with payment standards. Though transaction fees apply, they often offer more competitive rates and greater transparency than traditional methods.

a. Time zone management

Coordinating payroll across different time zones can lead to delays and confusion.

Solution: Establish a clear payroll schedule that considers both you and your remote workers' time zones. Using scheduling tools can help you set reminders so you don’t forget to process payments on time.

b. Bank holidays

India's diverse festival calendar means numerous banking holidays throughout the year--causing delays in payments.

Solution: Keep an updated calendar of banking holidays for both your location and your remote employees. Plan payroll runs a few days in advance to avoid any hiccups.

c. Exchange rate considerations

Fluctuations in forex rates can significantly impact your earnings.

Solutions: Consider using an online payment service platform that offers competitive exchange rates and transparent and affordable pricing, thus helping you minimize overall costs. You can also look at securing forex rates in advance, protecting your remote workers’ salaries from currency fluctuations, and reducing payment uncertainty.

1. Employment laws and worker classification

India's labor laws define specific rights, minimum wages, and entitlements like paid leave and overtime. The crucial first step is accurately classifying workers as employees or independent contractors. Employees are entitled to benefits such as provident fund contributions and insurance, while contractors handle their own taxes and insurance. Misclassification can result in severe penalties and liabilities for unpaid taxes and benefits.

2. Taxation requirements

Both international and Indian remote employee taxation rules must be followed. Employee payments are subject to income tax under Indian law, requiring tax deduction at source (TDS) before fund transfer. For contractors, understanding GST (Goods and Services Tax) obligations is essential, as certain freelance services may attract GST. Contractors earning above ₹20 lakh annually (₹10 lakh in some states) must register for GST and include it in their invoices.

3. Permanent establishment risk

Companies must evaluate whether their remote work setup creates a Permanent Establishment (PE) in India. If remote workers perform significant business tasks creating a substantial presence, this could establish a taxable entity, leading to corporate income tax obligations. Professional tax consultation is crucial for managing this risk effectively.

Double taxation agreements

India has Double Taxation Avoidance Agreements (DTAA) with numerous countries. These agreements prevent income from being taxed twice and clarify tax jurisdictions. Companies should:

• Review applicable DTAA provisions
• Maintain proper documentation
• Apply for tax relief where applicable

Reporting requirements

Foreign companies must fulfil various reporting obligations:

• Annual financial statements
• Tax returns and audits
• Foreign remittance reports
• Employment and compensation reports

Successfully paying remote workers in India requires understanding legal requirements, choosing appropriate cross border payment platforms, and implementing robust processes. By following these guidelines and best practices, companies can ensure compliant, efficient payments while maintaining strong relationships with their remote workforce.

Best practices for payment management

• Establish clear payment terms, including schedules, methods, and deductions upfront: Start by defining payment schedules, methods, and any deductions upfront. This way, you avoid misunderstandings down the line. For example, if you plan to pay every two weeks, ensure your team knows that from the start.

• Maintain consistent, timely payment schedules to build trust: Stick to a consistent payroll schedule. When you pay on time, it builds trust and keeps your team happy. Imagine being excited about payday, only to find out it’s been delayed—definitely not a great feeling!

• Provide detailed pay notifications showing earnings, deductions, and taxes: Send out pay notes that break down earnings, deductions, and taxes. This boosts transparency and helps your employees understand their compensation better. For instance, they’ll appreciate seeing how much goes to taxes versus what they take home.

• Keep comprehensive records of payments, contracts, and tax filings: Keep detailed records of payments, contracts, and tax filings. This not only ensures compliance with local laws but also makes audits a breeze when they come around.

• Maintain open communication about payroll changes or issues: If there’s a hiccup, let your team know what's going on. A simple message can go a long way in creating a supportive work environment.

• Utilize reliable payroll software to automate calculations and minimize errors: Consider investing in a reliable payroll platform. This helps automate calculations, minimize errors, and streamline the payment process, making your life—and your team's—much easier.

The key lies in selecting payment solutions that simplify international transactions while meeting all legal and practical requirements. Regular review and updates of payment processes, along with staying informed about regulatory changes, will help maintain smooth operations and happy employees.

References:

*The Financial Express article

More articles:

1. Simplifying international payments for Indian businesses
2. Are hidden FX charges hurting your business?
3. Strategies to avoid transfer pricing challenges in international payments