Hiring Your First Employee in India — Complete Checklist (2026)

Hiring your first employee is a milestone for any founder. In this guide, we cover everything you need to do — from offer letter to PF / ESI / payroll / TDS.

Pre-Hiring Checklist

• Define the role: job description, responsibilities, qualifications, experience, CTC
• Decide employment type: full-time / part-time / contract / internship
• Set up payroll: Tally, Zoho Payroll, Razorpay Payroll, or similar
• Set up PF + ESI registration (if applicable, see below)
• Prepare offer letter + appointment letter templates
• Set up bank account for salary payments
• Open salary account in employee's name

PF / ESI Registration

• PF registration once the establishment has 20 or more employees (voluntary coverage is allowed below that)
• ESI registration once 10 or more employees work in a notified area (employees earning up to ₹21,000 a month are covered); under the Code on Social Security, 2020 even one employee in hazardous work triggers coverage
• Allocate UAN for all employees (UAN activation)
• IP number (ESI) for all eligible employees

Offer Letter + Appointment Letter

Issue an offer letter first, then an appointment letter on joining; under the Occupational Safety, Health and Working Conditions Code, 2020 (in force from 21 November 2025) every employee must be given an appointment letter. It should include: name, designation, CTC, salary structure, working hours, leave policy, probation, termination, confidentiality, non-compete (where allowed).

On Joining

• Collect: PAN, Aadhaar, address proof, education certificates, experience letters, bank details, photo
• Run background check (employment, education, criminal, reference)
• Sign appointment letter + NDA + non-compete
• Activate UAN (if PF applicable)
• Enrol in ESI (if applicable)
• Add to payroll (Tally, Zoho, Razorpay, etc.)
• Open salary account (if bank-issued)
• Set up email + system access
• Orient + train (HR + manager + team)

Monthly Payroll

• Compute gross salary + deductions (employee PF, ESI, PT, TDS)
• Compute net salary
• Generate payslip
• Bank transfer (or cheque) for net salary
• Pay employee PF (12% of basic + DA, often capped at 12% of the ₹15,000 wage ceiling = ₹1,800) + employer PF (12%), by the 15th of the next month
• Pay employee ESI (0.75% of gross) + employer ESI (3.25%)
• Pay Professional Tax (state-wise; usually up to ₹200/month, never more than ₹2,500 a year)
• Deduct + deposit TDS on salary where the employee's estimated tax is above nil after the Section 87A rebate (for FY 2025-26, salary above ₹12.75 lakh in the new regime)
• File monthly PF return (ECR) with the PF payment
• Pay the ESI contribution online by the 15th of the next month
• Issue Form 16 (by 15 June of next FY; Form 130 for tax year 2026-27 onwards under the Income-tax Act, 2025)

TDS on Salary

TDS on salary is deducted at the average slab rate on estimated annual income (Section 192 of the 1961 Act for FY 2025-26; Section 392 of the Income-tax Act, 2025 from tax year 2026-27). Basic exemption for FY 2025-26: ₹4L in the new regime and ₹2.5L in the old, with the Section 87A rebate making salary up to ₹12.75 lakh tax-free in the new regime. Employer must consider: employee's investment declarations, regime choice, HRA, LTA, etc. Deposit TDS by the 7th of next month (30 April for March). Issue Form 16 (Form 130 from tax year 2026-27) by 15 June.

Termination + Exit

• Resignation letter (employee)
• Acceptance letter (employer)
• Notice period (per appointment letter, typically 1-3 months)
• FnF (Full and Final) settlement: salary, leave encashment, gratuity (if applicable), bonus — under the Code on Wages, 2019, wages due on resignation, removal, dismissal or retrenchment must be paid within two working days
• TDS on FnF
• Experience letter + relieving letter
• No-dues form (return of company assets)
• Exit interview (optional but recommended)
• Mark the date of exit on the EPFO and ESIC portals (the UAN stays with the employee for life and moves to the next employer)

Common Mistakes to Avoid

• Not registering for PF / ESI when threshold is crossed
• Not collecting proper documents on joining
• Not having a proper appointment letter (informal hiring)
• Late salary payment (the Code on Wages requires monthly wages by the 7th of the next month)
• Wrong TDS calculation (employee has refund / additional tax issues)
• Not issuing Form 16 (employee cannot file ITR)
• Not depositing PF / ESI on time (penalty + interest)
• Wrong classification of employees (full-time vs contract)
• Not maintaining attendance + leave records

Frequently Asked Questions