How to Pay Contractors in India: Complete 2025 Guide

Why This Guide Is Different

India is one of the world's largest markets for remote contractors—especially for software development, IT services, design, content writing, and customer support. Indian contractors offer exceptional technical skills at competitive rates.

However, payment methods and compliance requirements are unique. Using PayPal instead of Wise can cost you 3-4% more per payment. For $100,000 USD/year in contractor payments, that's $3,000-4,000 USD wasted on fees and poor exchange rates.

This guide covers payment methods, GST requirements, FEMA compliance, TDS rules, and contractor management specifically for Indian contractors.

Payment Methods Compared

Recommended: Wise for Most Payments

Why Wise is best for Indian contractors:

• Lowest fees: $3-10 per transfer (vs 4.4% for PayPal)
• Mid-market exchange rate: 3-4% better than PayPal or banks
• Fast: 1-2 business days to Indian bank accounts
• Transparent: You see exact fees and exchange rates upfront
• FEMA compliant: Wise handles all regulatory requirements

Cost comparison example ($1,000 USD payment):

For $100,000 USD/year in payments, Wise saves you ~$4,400 USD/year vs PayPal.

How to Set Up Wise Payments

1. Create a Wise business account (free, takes 5 minutes)
2. Get contractor's Indian bank details (account number, IFSC code, bank name)
3. Send USD or INR to their bank account
4. Wise converts at mid-market rate (if sending USD to INR account)
5. Contractor receives money in 1-2 business days

Pro tip: Most Indian contractors prefer receiving USD because it protects against INR currency fluctuations. They can convert to INR locally when needed.

GST Requirements (Goods and Services Tax)

Indian contractors must register for GST if their annual turnover exceeds ₹20 lakhs (₹10 lakhs for special category states). Once registered, they charge 18% GST on services.

However, services provided to foreign clients are considered "export of services" and may be zero-rated (0% GST).

How GST Works for Foreign Clients

When an Indian contractor provides services to a foreign client (you), it's classified as export of services. This means:

• Zero-rated supply: 0% GST charged on invoice
• Input tax credit: Contractor can claim refund on GST paid for business expenses
• Invoice requirements: Must state "Export of Services" and show 0% GST
• Payment in foreign currency: Must be received in convertible foreign exchange

Example invoice for export of services:

Your responsibility: None. You don't pay GST, don't register for GST, and don't file anything with Indian tax authorities. The contractor handles all GST compliance.

TDS (Tax Deducted at Source)

If you're a foreign company with no permanent establishment in India, you do NOT withhold TDS.

TDS only applies when Indian companies pay Indian contractors. The payer withholds a percentage of the payment and remits it to the Income Tax Department on behalf of the contractor.

When TDS applies (Indian companies only):

• Indian company pays Indian contractor for professional services: 10% TDS (Section 194J)
• Indian company pays Indian contractor for technical services: 2% TDS (Section 194J)
• Contractor provides PAN (Permanent Account Number) to avoid higher TDS rates

When TDS does NOT apply:

• You're a foreign company with no Indian permanent establishment
• Payment is made from outside India
• Contractor is responsible for their own income tax compliance

FEMA Compliance (Foreign Exchange Management Act)

Indian contractors receiving foreign payments must comply with FEMA regulations. This is the contractor's responsibility, not yours.

What contractors must do:

• Receive payments through authorized channels: Banks, Wise, PayPal, Payoneer (all FEMA-compliant)
• Provide purpose code: When receiving foreign payments, specify purpose (e.g., "P0802 - Software consultancy services")
• File FIRC: Foreign Inward Remittance Certificate (proof of foreign payment received)
• Report to RBI: If annual receipts exceed certain thresholds

Your responsibility: Use legitimate payment methods (Wise, PayPal, bank wire). Don't use cash, cryptocurrency, or informal channels. The contractor handles FEMA compliance on their end.

Income Tax Requirements

Indian contractors are responsible for their own income tax compliance. They must:

• Obtain PAN: Permanent Account Number (tax ID)
• File ITR: Income Tax Return annually
• Pay advance tax: Quarterly if income exceeds ₹10,000 in tax liability
• Maintain books: Invoices, contracts, payment proofs, expenses

Your responsibility:

• Request contractor's PAN before first payment
• Keep invoices and payment records for your own tax purposes
• Ensure contractor is properly classified (not an employee)

Contractor vs Employee Classification

Indian labor law distinguishes between contractors (independent contractors) and employees. Misclassifying employees as contractors can result in penalties, back taxes, and mandatory benefits (PF, ESI, gratuity).

Signs of a proper independent contractor relationship:

• Contractor works for multiple clients (not just you)
• Contractor controls how, when, and where work is done
• Contractor uses their own equipment and tools
• Work is project-based or deliverable-based (not hourly supervision)
• No employee benefits (PF, ESI, health insurance, paid leave)
• Contractor invoices you (not on payroll)
• Contractor bears financial risk (can profit or lose)

Red flags for misclassification:

• Contractor works exclusively for you (100% of income)
• You set specific working hours or require daily check-ins
• You provide equipment, software, or workspace
• Contractor is integrated into your team structure
• Work is ongoing and indefinite (not project-based)
• You provide training or professional development

Common Mistakes (And How to Avoid Them)

Mistake 1: Using PayPal for Large Payments

Problem: You pay $5,000 USD/month to an Indian contractor via PayPal. PayPal charges 4.4% + $0.30 = $220.30 per payment. That's $2,643.60/year in fees. Plus poor exchange rates cost another $1,500/year.

Solution: Use Wise. For the same $5,000 payment, Wise charges ~$10. That's $120/year in fees. You save $4,023.60/year per contractor.

Mistake 2: Not Requesting PAN

Problem: You hire an Indian contractor who doesn't provide their PAN (Permanent Account Number). They don't file income tax returns. Later, Indian tax authorities investigate and determine they should have been classified as an employee. You face potential liability.

Solution: Always request contractor's PAN before first payment. Keep copies for your records. This demonstrates due diligence and confirms they're registered with Indian tax authorities.

Mistake 3: Expecting Contractor to Charge 18% GST

Problem: You budget $1,000 USD for a project. Indian contractor sends invoice for $1,180 USD (including 18% GST). You're confused and dispute the charge.

Solution: Services to foreign clients are export of services (0% GST). Contractor should NOT charge you GST. If they do, they're either not registered for GST or don't understand export of services rules. Clarify before engagement.

Mistake 4: No Written Contract

Problem: You hire an Indian contractor with just a verbal agreement or email exchange. Scope creep occurs, payment disputes arise, or IP ownership is unclear.

Solution: Always use a written independent contractor agreement. Include: scope of work, deliverables, payment terms, IP ownership, confidentiality, termination clauses, and explicit statement that contractor is not an employee.

Tools for Indian Contractor Management

For payments:

• Wise (best for most payments, $3-10 per transfer)
• PayPal (if contractor prefers it, but higher fees)
• Payoneer (popular with Indian contractors, 2-3% fees)

For contractor management:

Kontrable is built specifically for managing independent contractors, including Indian contractors:

• PAN and GST verification and storage
• Payment tracking (works with Wise, PayPal, any payment method)
• Invoice management with GST compliance
• Contract storage and e-signatures
• FEMA documentation
• Compliance tracking

Frequently Asked Questions

Get Started

Hiring Indian contractors?

1. Request contractor's PAN (Permanent Account Number)
2. Verify GST registration if applicable (turnover > ₹20 lakhs)
3. Create a written independent contractor agreement
4. Set up Wise for payments (saves 3-4% vs PayPal)
5. Agree on USD or INR payment (most prefer USD)
6. Ensure invoices show "Export of Services" with 0% GST
7. Keep records for your tax purposes

Want to automate this?

Kontrable launches Q1 2026 with contractor management tools built for international contractors. PAN and GST verification, payment tracking, invoice workflows, contract storage, and compliance documentation. $99/month for up to 25 contractors.