PF and Gratuity Compliance India: Guide for Foreign Companies

Foreign companies setting up Indian subsidiaries often get through incorporation, FEMA reporting, and GST registration before starting PF and gratuity compliance in India. By the time payroll is running and the establishment becomes covered under the Employees’ Provident Funds scheme or the gratuity provisions, the registration and compliance obligations may already have arisen. These are not marginal obligations. India’s PF and gratuity obligations which were governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Payment of Gratuity Act, 1972  now operating under the Social Security Code, 2020 together with the rules and notifications brought into force from November 21, 2025. Both require timely registration, regular filings, and statutory contributions. For foreign nationals working in India, the international worker provisions add a layer of complexity that catches most first-time India entrants by surprise.

What Triggers EPF Registration for Foreign Companies in India?

EPF registration for foreign companies in India becomes mandatory when an establishment employs 20 or more employees, subject to the applicability provisions .. Under the Employees’ Provident Funds Scheme, 2026 , registration must be completed within one month of crossing this threshold. Once triggered, coverage continues permanently even if headcount subsequently falls below twenty. Voluntary registration is permitted below the threshold if the employer and employees agree.

The definition of employee for EPF purposes is broader than most foreign employers expect. It includes all persons employed directly and all persons employed through contractors on the premises of or for the purposes of the establishment. A company that uses a facility management contractor with fifteen employees on site, combined with its own eight employees, has crossed the twenty-employee threshold even though its direct payroll shows only eight.

Coverage once triggered does not switch off. A company that reaches twenty-five employees, then downsizes to twelve, remains covered. The registration cannot be surrendered simply because headcount has reduced. This is one of the first things that surprises foreign companies exiting India operations who assume that PF and gratuity compliance India obligations lapse when the workforce shrinks.

The registration process requires:

• Form 5A filing with supporting documents: Certificate of Incorporation, PAN, address proof, and employee details
• EPFO assigns a unique Establishment Code Number
• Individual Universal Account Numbers are generated for each covered employee
• Monthly ECR (Electronic Challan cum Return) filing and contribution deposit by the 15th of the following month

. Late payment of contributions attracts interest at 12% per annum under Section 7Q, and damages under Section 14B can range from 5% to 25% of the arrears depending on the period of default.

How Are EPF Contributions Calculated and What Changed in 2025?

EPF contributions are calculated at 12% of basic wages plus dearness allowance plus retaining allowance from both employer and employee. While the statutory wage ceiling for mandatory EPF contributions remains ₹15,000 per month, employers may voluntarily contribute on higher wages with the employee’s consent, subject to the applicable EPF provisions. As a result, many foreign companies choose to base EPF contributions on actual basic wages for certain categories of employees. The employer’s 12% is split between EPF (3.67%) and the Employees’ Pension Scheme (8.33%), with the EPS portion capped at a wage ceiling of Rs. 15,000.

Where an employee earns a basic salary of ₹1,50,000 per month and both parties agree to contribute on the full basic salary, EPF contributions are calculated on ₹1,50,000 instead of the statutory wage ceiling. The employer’s contribution to the Employees’ Pension Scheme (EPS), however, continues to be subject to the applicable EPS wage ceiling. Employers should clearly document any voluntary higher-wage contribution arrangement in their payroll and compliance records. The employer’s 12% contribution breaks down as:

• 3.67% into the EPF account
• 8.33% into the Employees’ Pension Scheme, subject to a wage ceiling of Rs. 15,000 per month for EPS calculation purposes

The employer also pays an administrative charge of 0.50% of total wages (minimum Rs. 500 per month) into the EPF administrative account.

EPFO interest rate for FY 2025-26 is 8.25% per annum on the accumulated EPF balance. The EPFO is upgrading its portal to enable auto-settlement of claims reducing processing time..

What Are the International Worker Rules Under EPF for Foreign Nationals?

Foreign nationals working in India for EPFO-registered employers are classified as International Workers underSection 2(j) of Employee’s Provident Funds Scheme 2026 . International Workers are not entitled to the Rs. 15,000 monthly salary exemption available to Indian employees. They must contribute on their full salary with no ceiling. The Delhi High Court in November 2025 upheld the validity of this differential treatment, rejecting Article 14 challenges from foreign nationals who argued the distinction was discriminatory.

This is the provision that most foreign companies employing expatriates in India have not factored into their payroll modelling. An Indian employee earning Rs. 1,00,000 per month in basic salary can opt out of mandatory EPF contributions above the Rs. 15,000 ceiling subject to certain conditions. A foreign national in the same role has no such option under the International Worker provisions. Full salary is the contribution base.

International Workers from countries that have a Social Security Agreement with India may be exempt from Indian EPF contributions. India has signed SSAs with several countries, including Japan, Germany, France, Australia, Canada, South Korea, Sweden, Finland, Norway, Hungary, the Netherlands, and the Czech Republic. The exemption is available on producing a Certificate of Coverage issued by the home country’s social security authority. This is called the Detached Worker provision.

The practical compliance requirements for International Workers:

• Form 7  return filing within 15 days of the close of each month, covering names, nationalities, and UANs of international workers who became EPF members during the preceding month
• Form 2 declarations by qualifying international workers
• List of international workers who left employment during the preceding month

International Workers who cannot claim the Detached Worker exemption face a restricted withdrawal position. Unlike Indian members who can withdraw EPF on resignation and before retirement in various circumstances, International Workers can generally access their accumulated EPF corpus only on retirement at age 58 or in the event of permanent incapacity. This is the withdrawal constraint that the Delhi High Court was asked to strike down in the November 2025 ruling and upheld.

What Is the Gratuity Act Applicability in India and How Is It Calculated?

Gratuity act applicability in India under the Payment of Gratuity Act 1972 covers every establishment employing ten or more employees. Unlike EPF which has a twenty-employee threshold, the gratuity obligation activates at ten employees. Gratuity is payable to every employee who has completed five years of continuous service on termination, resignation, retirement except employee’s death or permanent disablement.. The formula is: last drawn basic salary plus dearness allowance, multiplied by 15 days, multiplied by the number of completed years of service, divided by 26.

PF and gratuity compliance India covers two separate activation thresholds that a foreign company’s growing headcount triggers at different points. EPF kicks in at twenty employees. Gratuity kicks in at ten. A company that has just hired its eleventh employee has a gratuity obligation, regardless of whether anyone has been employed long enough to qualify for payment yet.

The calculation in practice: an employee with ten years of service and a last drawn basic salary of Rs. 50,000 per month receives Rs. 50,000 multiplied by 15 multiplied by 10, divided by 26, equalling Rs. 2,88,461.54. The statutory maximum gratuity payment is Rs. 20 lakh for most employees. Gratuity payments are tax-exempt subject to the applicable provisions of the Income-tax Act. for employees covered under the Act.

The five-year continuous service requirement has one important exception: where an employee dies or becomes permanently disabled, gratuity is payable regardless of how long they have been employed. In those circumstances, the calculation is based on actual service rendered.

Gratuity must be paid within 30 days of it becoming payable. Late payment attracts simple interest at the rate interest at such rate, not exceeding the rate notified by the Central Government from the date it became payable. The employer cannot make deductions from gratuity except in cases where the employee has been terminated for causing damage, destruction, or loss through their negligence or default.

Under the Social Security Code 2020, now operative from November 21, 2025, the gratuity framework has been brought into the unified Code alongside EPF, ESIC, and other social security mechanisms. During the transition period, the gratuity rules and calculation method remain unchanged. Existing registrations under the earlier laws continue to be valid until November 20, 2026.

What Is the Difference Between EPF Exempted Establishments and Non-Exempted Establishments?

An EPF-exempted establishment is one that has received approval to operate its own recognised provident fund trust instead of contributing to the government-managed EPF. The trust must comply with EPFO investment guidelines and audit requirements. Most foreign-owned subsidiaries operate as non-exempted establishments contributing to the government EPFO. The exempted route requires Trust Deed registration, tripartite agreement with EPFO, and ongoing investment and audit compliance.

For foreign companies with small to mid-size India operations, the non-exempted route is standard and appropriate. The exempted trust route suits large established employers where the scale of operations justifies the administrative overhead of maintaining a private trust with at least as favourable terms as the statutory EPF.

The non-exempted employer’s obligations are:

• Monthly ECR filing and contribution deposit by the 15th
• Annual EPF return filing
• Maintenance of statutory registers and records
• Producing records for EPFO inspections on demand

Producing records during inspections or audits conducted by the EPFO The EPFO portal  is upgraded  to automate much of the monthly reporting compliance, reducing the manual effort in the filing cycle. 

What Are the Penalties for PF and Gratuity Non-Compliance in India?

The defaults in PF and gratuity compliance in India attract overlapping penalty mechanisms. Late EPF deposit attracts interest at 12% per annum under Section 7Q of the EPF Act, damages at 5% to 25% of arrears under Section 14B, and administrative charges. Late gratuity payment attracts simple interest at the rate notified by the Central Government . Non-registration carries criminal liability on the employer and every officer in default including a fine and imprisonment of up to one year for EPF under Section 14 of the Act.

The Section 14B damages framework operates on a sliding scale:

For a foreign company that has been operating for eighteen months without EPF registration, the arrears calculation plus 25% damages plus 12% per annum interest creates a liability that can approach double the original unpaid contributions. The criminal liability provision is rarely invoked against first-time defaulters, but it remains available to the EPFO.

EPF inspectors have powers of entry, search, and seizure of records under the Act. EPFO inspections of foreign-owned subsidiaries typically focus on: whether the establishment should have registered earlier than it did, whether international workers are correctly enrolled, whether the correct salary components are being included in the contribution base, and whether contractor employees are being excluded when they should be included.

How Does the Social Security Code 2020 Change PF and Gratuity Compliance India?

The Social Security Code 2020, operative from November 21, 2025, consolidates EPF, gratuity, ESIC, and other social security mechanisms under a single statute. For PF and gratuity compliance India, the substantive contribution rates, calculation methodologies, and eligibility thresholds remain the same as under the predecessor acts. The principal changes are in administration, unified registration through the Shram Suvidha portal, and expanded coverage to gig and platform workers through a separate Social Security Fund.

The consolidation does not change what foreign companies need to pay or how it is calculated. It changes where they register and how they file. The Shram Suvidha portal becomes the unified registration and compliance interface largely replacing the separate EPFO and ESIC portals for establishments registering from November 2025. Existing registrations under the predecessor acts are valid until November 20, 2026, giving companies already registered a transition period to migrate.

The expansion to gig and platform workers is the most significant structural change for companies using delivery, logistics, or technology platform workers in their India operations. Under the Social Security Code, the government can notify social security schemes for unorganised workers, gig workers, and platform workers funded through aggregator contributions. The rate and mechanism for these contributions are subject to the applicable rules and notifications , but foreign-owned e-commerce, food delivery, and logistics operations should monitor the notification timeline closely.

Conclusion

PF and gratuity compliance India is not optional for any establishment that has crossed the applicable headcount thresholds. EPF registration within one month of reaching twenty employees, gratuity obligation from ten employees, and international worker rules that remove the salary ceiling exemption for foreign nationals all create obligations that begin accumulating from the trigger date regardless of whether the company is aware of them.

The Social Security Code 2020 has unified the framework without changing the substantive obligations. The Delhi High Court’s November 2025 ruling upholding international worker differential treatment are both live changes that affect payroll structuring for foreign companies with senior Indian and expatriate staff.

Corporate Legit Consulting LLP advises foreign companies on EPF registration for foreign companies in India, international worker compliance, Social Security Agreement exemption documentation, gratuity act applicability India assessments for growing workforces, gratuity trust structures, and Social Security Code transition compliance. Reach out to Corporate Legit before the first payroll run to ensure the statutory benefit framework is correctly set up from the start.