Before You Wire the First Payment: A CFO's Framework for Compensating Teams in Pune

The first payment to a Pune contractor is deceptively simple: you wire $4,000, they receive roughly the rupee equivalent, everyone's happy. The problems start with the second payment, the fifth hire, and the first tax season — when someone asks who was responsible for withholding, whether your contractor is actually a contractor, and why your burn rate moved 8% because of a currency you don't control.

For US finance leaders, compensating talent in India is fundamentally a structuring problem. Get the structure right early and it's nearly invisible. Get it wrong and you're retrofitting compliance under deadline pressure. Here's a framework for making the call deliberately.

The Three Models, Honestly Compared

Direct contractor payments. The default for early-stage companies: a US entity pays an Indian individual or their own consulting entity, typically via wire or a platform like Wise or Deel. The appeal is simplicity. The obligation to handle Indian income tax and GST registration sits with the contractor, not you.

The trap is misclassification. Indian authorities look at the substance of the relationship — fixed hours, exclusive engagement, integration into your management structure — not just the label. A "contractor" who works 45 hours a week on your roadmap, reports to your VP of Engineering, and uses your equipment looks a lot like an employee to an Indian regulator. The exposure lands mostly on the individual (unpaid provident fund, gratuity, and statutory benefits), but a misclassified workforce creates real friction in diligence and can generate obligations you didn't budget for.

Employer of record (EOR). An EOR legally employs the person in India on your behalf, handling payroll, TDS (tax deducted at source), provident fund, gratuity, and benefits. You pay a monthly fee — commonly $150 to $400 per employee depending on the provider and seniority — and receive a single consolidated invoice in dollars.

This is the right structure when you want genuine employees with proper Indian benefits, without the six-to-nine-month process of establishing your own entity. It's also the cleanest answer to the misclassification question. The trade-offs: the per-head fee is real money at scale, and the EOR arrangement is inherently transitional — most companies outgrow it.

Your own Indian subsidiary. A private limited company in India, wholly owned by your US parent. This gives you full control over employment terms, equity (within the constraints of Indian exchange-control rules), and local credibility with senior hires who want a real employment relationship with an Indian entity.

The costs are recurring and non-trivial: incorporation, a resident director requirement, annual statutory audits, GST and TDS filings, transfer pricing documentation once cross-border transactions with the parent exceed thresholds, and the general overhead of running a second corporate entity across an ocean. For a team of three, it's overkill. For a team of thirty, it usually pays for itself.

The Withholding Traps That Catch US Companies

Even with the right model, several specific issues recur:

• Form 15CA/15CB. Remitting money from India (for instance, repatriating dividends from a subsidiary) requires foreign exchange compliance certificates. US companies that plan the India entity as a one-way dollar pipeline often don't budget for this.

• Equalization levy and GST on services. If you're paying an Indian vendor, confirm who bears GST and whether the vendor is GST-registered. If you're receiving services from India, understand the reverse-charge mechanics rather than assuming the invoice tells the whole story.

• Section 195 withholding. Payments to non-residents from Indian entities can trigger withholding obligations on the paying side. If your subsidiary pays royalties or management fees to the US parent, this is squarely relevant.

• The PE question. The most expensive trap of all: if your Pune team habitually concludes contracts or acts as a dependent agent of the US company, Indian tax authorities can assert that the US company has a permanent establishment in India — taxing a slice of your global profits here. EOR structures and properly scoped contractor arrangements are designed to avoid exactly this. It's a reason to be thoughtful about who signs what.

The Currency Variable

The rupee has depreciated against the dollar gradually but persistently over long periods — on the order of 3–4% annually across many stretches, with meaningful short-term swings around that trend. For a US-based payer, this cuts both ways.

When your team is paid in rupees, dollar-cost declines in rupee-depreciation years are a quiet tailwind: your $500,000 annual payroll commitment might cost $475,000 in dollar terms. But if you've committed to dollar-denominated compensation — common with senior hires who benchmark against global rates — you've absorbed the FX risk yourself, and a strong rupee year inflates your burn.

Practical guidance: pay in rupees wherever possible, revisit compensation annually rather than pretending FX doesn't exist, and if you have material rupee exposure, ask your bank about forward contracts once the amounts justify the administrative effort. What you should never do is let individual hires negotiate ad hoc currency terms — the variance alone will make your finance calendar miserable.

A Decision Framework

Use these thresholds as starting points, adjusted for your specifics:

• 1–3 contributors, project-scoped work: Direct contractor payments with well-drafted agreements. Keep classification defensible.

• 4–15 contributors, ongoing full-time roles: Employer of record. The fee is the price of compliance clarity and hiring velocity.

• 15+ contributors, or senior leadership hires demanding equity, or multi-year commitment to India: Establish the subsidiary. Model the entity overhead against EOR fees over three years — the crossover usually arrives well before you'd guess.

• Any structure: Talk to a cross-border tax advisor before, not after, the first payment. An hour of planning is cheaper than a year of corrective filings.

The companies that scale successfully in Pune treat compensation structure as infrastructure — boring, deliberate, and built before it's load-bearing. The ones that get burned treated it as paperwork to catch up on later.