Employee Retention Strategy in India: Corporate Sector Explores New Retirement Options in 2025

With India’s job market becoming more dynamic and complex, comprehensive retirement plans are a significant draw for prospective employees. Organizations that offer such benefits distinguish themselves as employers of choice, thereby attracting and retaining top talent. This approach is particularly effective in industries where skilled professionals are in high demand.

For companies based in India, providing a range of retirement benefits, such as the Provident Fund (PF), gratuity, superannuation, and the National Pension System (NPS), helps employees build a substantial post-retirement corpus. This financial security can also make employees more inclined to remain with organizations that actively contribute to their long-term financial stability.

Tax efficiency and compliance benefits

India’s NPS offers several tax benefits for private companies in India, making it an attractive employee benefit option. Under Section 80CCD(2) of the Income Tax Act, 1961, employers can contribute up to 10 percent of an employee’s basic salary plus dearness allowance (DA) towards NPS. This contribution is fully deductible as a business expense for the employer, reducing the company’s taxable income and overall tax liability.

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For employees, the employer’s contribution to NPS is tax-exempt up to the specified limit, providing an additional financial advantage. Unlike other retirement benefits such as PF or Employee Stock Option Plans (ESOPs), NPS contributions do not attract Fringe Benefit Tax (FBT), making it a cost-effective retention tool for organizations.

Additionally, employees can claim tax deductions under Section 80CCD(1B) for voluntary contributions up to INR 50,000 (US$571.5) per year, over and above the standard INR 150,000 (US$1,714) limit under Section 80C. This dual benefit enhances the attractiveness of NPS, encouraging employee participation and long-term retention.

By integrating NPS into their compensation structures, private companies in India not only optimize their tax benefits but also strengthen their employee value proposition (EVP), ensuring workforce stability and financial security for their employees.

Mandatory retirement compliance for foreign companies in India

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Foreign companies operating in India are required to comply with Indian labor laws, which mandate certain retirement benefits for employees. The applicability of these benefits depends on the type of legal entity the foreign company has established in India, such as a wholly owned subsidiary, joint venture, branch office, or liaison office.

Foreign companies hiring employees in India must provide statutory retirement benefits as per Indian labor laws, including:

1. Employees’ Provident Fund (EPF): Under the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, organizations with 20 or more employees must contribute 12 percent of basic salary + dearness allowance (DA) towards the EPF. Foreign companies registered as an Indian entity must comply with this requirement.
2. Employees’ Pension Scheme (EPS): A part of the employer’s EPF contribution (8.33 percent) goes towards the Employees’ Pension Scheme (EPS), providing retirement benefits to employees after reaching the age of 58.
3. Gratuity: As per the Payment of Gratuity Act, 1972, companies with 10 or more employees must pay gratuity to employees who have completed at least 5 years of continuous service. Gratuity is calculated as 15 days’ salary for each year of service and is payable upon retirement, resignation, or termination.
4. National Pension System (NPS) (optional): Many foreign companies in India are voluntarily offering the corporate NPS, which allows both employers and employees to contribute towards a market-linked pension scheme. It provides tax benefits under Section 80CCD(2).
5. Superannuation funds (optional): Some multinational corporations (MNCs) also offer superannuation schemes through private insurance providers as an additional retirement benefit to attract and retain talent.

Applicability for foreign liaison or branch offices

Foreign liaison offices in India, which do not engage in direct commercial activities, are generally not required to offer retirement benefits, as they do not directly employ staff under Indian payroll. However, branch offices conducting business operations in India must comply with local labor laws, including EPF and gratuity.

Flexibility to meet diverse employee needs

A diverse array of retirement options allows employees at various career stages to select plans that align with their individual financial goals. For instance, younger employees may prefer the investment flexibility offered by the NPS, while those nearing retirement might favor the stability of traditional superannuation or gratuity benefits.

Strengthening employer value proposition

By offering a mix of retirement benefits, companies enhance their EVP. This assurance to employees’ long-term welfare develops a positive workplace culture, boosts morale, and increases overall engagement, all of which are pivotal for employee retention.

Conclusion

Implementing a variety of retirement plans not only ensures compliance with regulatory standards but also plays a vital role in creating a financially secure workforce that encourages employees to remain with the organization. This strategy is instrumental in driving business success and maintaining a competitive edge in the market.

(US$1 = INR 87.48)

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