In short: Remote hiring compliance for India startups is not just an HR question — it triggers GST registration thresholds, TDS deduction duties, and state-specific labour obligations the moment you pay a contractor or employee in another state. Getting these wrong can mean interest, penalties, and disputed contracts.
Key points
- From 1 April 2026, the Income Tax Act, 1961 is replaced by the Income Tax Act, 2025. TDS sections such as 192, 194C, and 194J are retired; new section numbers and numeric payment codes now apply to all salary, contractor, and professional fee payments.
- For payments made in FY 2025–26, the old TDS framework still governs. Section 194C covers contractors (1% for individuals/HUF, 2% for entities). Section 194J covers professional and technical fees (10% and 2% respectively), with a threshold raised to ₹50,000 per category from 1 April 2025.
- A Finance Act 2024 amendment, effective 1 October 2024, explicitly removed Section 194J-covered payments from Section 194C’s definition of “work,” ending a long-running ambiguity between the two sections.
- Under GST, any person supplying taxable services with aggregate turnover above ₹20 lakhs (₹10 lakhs in special category states) must register — and inter-state supply of services triggers mandatory registration regardless of turnover.
- TDS must not be deducted on the GST component of an invoice where the GST amount is shown separately in the agreement or invoice.
- Manpower supply arrangements are set to be explicitly brought under the contractor TDS provisions from 1 April 2026 under a Budget 2026 proposal — startups using staffing intermediaries should plan ahead.
Why remote hiring compliance catches India startups off guard
Most founders think about remote hiring as a cost and culture decision. The legal reality is different. The moment you pay a designer in Jaipur, a developer in Pune, or a consultant in Bengaluru, you step into a web of tax deduction duties, GST obligations, and state labour laws.
Unlike a single-location office, a distributed team means your compliance touchpoints are multiplied — each state can have its own shops-and-establishments rules, professional tax slabs, and labour welfare fund contributions. Missing even one can expose your startup to back-demand notices.
TDS on remote workers: which law applies and when?
The transition from the old Act to the new
India replaced the Income Tax Act, 1961 with the Income Tax Act, 2025, effective 1 April 2026. Income earned during FY 2025–26 is assessed under the old Act in AY 2026–27. Income from 1 April 2026 onwards falls under the new Act and its new section numbering.
This means your TDS obligations look different depending on when the payment was made. Do not apply the old section numbers to payments made from April 2026 onwards.
TDS for FY 2025–26 payments (old framework)
If you hired a freelance developer and paid them before 31 March 2026, Section 194C governed the deduction. If you paid a chartered accountant or lawyer, Section 194J applied. The table below summarises the key rates and limits under the outgoing framework.
| Payment type | Section (old Act) | Rate — Individual/HUF | Rate — Company/Firm | Threshold (FY 2025–26) |
|---|---|---|---|---|
| Contractor payment | 194C | 1% | 2% | ₹30,000 single / ₹1,00,000 aggregate |
| Professional fees (CA, lawyer, doctor, architect) | 194J | 10% | ₹50,000 per category | |
| Technical fees (IT, engineering, management consulting) | 194J | 2% | ₹50,000 per category | |
| Salary | 192 | At slab rates | No separate threshold — deduct from first rupee once taxable | |
Note: Budget 2025 raised the Section 194J threshold from ₹30,000 to ₹50,000 per financial year per payment category, effective 1 April 2025. If your aggregate professional fee payments to one person stayed below ₹50,000 in FY 2025–26, no TDS was required.
The 194C vs 194J confusion — finally settled
For years, startups that hired IT service providers faced a painful question: is this a “work” contract under 194C or a “technical service” under 194J? The Finance Act 2024 resolved this. From 1 October 2024, payments already covered by Section 194J are explicitly excluded from Section 194C’s definition of “work.”
If your remote tech consultant provides technical services, Section 194J (2%) applies — not Section 194C. Getting this wrong means you may have under-deducted, which can attract demand plus interest.
The new framework from 1 April 2026
Under the Income Tax Act, 2025, the entire 194-series is replaced. Salary TDS moves to Section 392. All non-salary TDS — whether for contractors, professionals, or technical services — is consolidated under Section 393. Returns and challans no longer cite old section numbers; instead, deductors use numeric codes between 1001 and 1092.
| Payment type | Old section (pre-April 2026) | New section (from April 2026) | New payment code |
|---|---|---|---|
| Salary | 192 | 392 | — |
| Contractor — individual/HUF | 194C | 393 | 1005 |
| Contractor — company/firm | 194C | 393 | 1006 |
| Technical fees | 194J (2%) | 393 | 1026 |
| Professional fees | 194J (10%) | 393 | 1027 |
Ensure your payroll and accounting software is updated to use the new codes from April 2026. Filing challans with old section numbers for post-April 2026 payments will create mismatches in TRACES and can trigger notices.
Do not deduct TDS on the GST portion of an invoice
This is a common and costly mistake. Where your agreement or invoice with a resident payee shows the GST component separately, you are not required to deduct TDS on that GST amount. Deduct TDS only on the base service value. Always insist that your remote workers and contractors show GST as a separate line item.
Manpower supply: a new trap from 2026
Startups that use staffing firms or manpower agencies to hire remote workers should note a significant Budget 2026 proposal. The definition of “work” is being expanded to explicitly cover “supply of manpower to a person to work under his supervision, control, or direction.” From 1 April 2026, most such arrangements will attract contractor TDS. If your startup currently treats manpower supply invoices as outside TDS, revisit that position immediately.
GST traps when hiring remote workers across states
The ₹20 lakh threshold and inter-state supply
Under the CGST Act, 2017, a person supplying taxable services with aggregate turnover above ₹20 lakhs in a financial year (₹10 lakhs in special category states) must register for GST. For your startup as the buyer, the key question is whether the remote worker or contractor you are hiring ought to be registered.
Critically, inter-state supply of services triggers mandatory GST registration regardless of turnover. If a freelancer based in Tamil Nadu provides services to your Delhi startup, that is an inter-state supply and registration rules apply on the supplier’s side.
If you receive services from an unregistered person who should have been registered, you may face GST liability under the reverse charge mechanism — a trap many startups discover only during a GST audit.
Verify your contractors’ GST status
Before you make your first payment to a remote worker, ask for their GSTIN and verify it on the GST portal. If they are required to be registered but are not, seek advice on whether reverse charge applies to your transaction. For related guides on commercial agreements and vendor onboarding, see The Courtroom’s Law for You resources.
Labour law obligations across state lines
Which state’s law applies?
India’s labour laws are a concurrent subject — both Parliament and state legislatures can legislate. When you hire a remote worker who sits in another state, that state’s shops-and-establishments act, professional tax rules, and labour welfare fund requirements may apply to the worker’s place of work, not your registered office’s state.
This means a startup registered in Karnataka hiring a remote worker in Maharashtra may need to comply with the Maharashtra Shops and Establishments Act for that worker, pay Maharashtra professional tax, and potentially contribute to the Maharashtra Labour Welfare Fund — all separately from Karnataka obligations.
The four labour codes: implementation still pending
Parliament passed four labour codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code — to consolidate and modernise India’s fragmented labour laws. As of the date of this article, the central government has not notified the rules under these codes, and state governments are at varying stages of readiness. The existing labour statutes therefore continue to apply.
Founders should monitor the Ministry of Labour and Employment website for notification updates, as implementation will significantly change compliance obligations for remote and gig workers.
Contractor vs employee: get the classification right
Misclassifying an employee as an independent contractor is one of the highest-risk errors in remote hiring. If a labour authority determines that your “contractor” is actually an employee — based on factors such as supervision, fixed working hours, and economic dependence — your startup could face back-demands for provident fund contributions, ESIC contributions, gratuity, and leave encashment, plus penalties.
Document the basis for contractor classification carefully. A well-drafted services agreement, clear deliverable-based payment terms, and evidence that the contractor works for multiple clients all support independent contractor status.
Frequently asked questions
Which TDS section applies if I pay a remote IT developer from April 2026 onwards?
From 1 April 2026, the Income Tax Act, 2025 governs all new payments. The old 194-series is retired. Salary TDS is now under Section 392, and all non-salary TDS — including payments to contractors and technical service providers — falls under Section 393. You must also use the corresponding numeric payment codes (for example, Code 1026 for technical fees) in your returns and challans instead of citing old section numbers like 194J. Update your accounting software before filing any post-April 2026 challans.
Does my startup have a GST obligation when hiring a remote freelancer from another state?
Your primary concern is whether the freelancer is GST-registered. Under the CGST Act, 2017, inter-state supply of services triggers mandatory GST registration on the supplier’s side regardless of turnover. If the freelancer should be registered but is not, your startup may face reverse charge liability. Always verify the freelancer’s GSTIN on the GST portal before onboarding and include GST compliance representations in your services agreement.
Can I treat remote workers as contractors to avoid PF and ESIC obligations?
Not safely, unless the relationship genuinely meets the legal test for an independent contractor. Labour authorities look at the substance of the arrangement — who controls the work, whether hours are fixed, and whether the worker is economically dependent on you. Misclassification can result in back-demands for provident fund and ESIC contributions, plus penalties. Get the engagement agreement reviewed by a qualified labour lawyer and document the basis for your classification before the engagement begins.
