Independent Contractor Agreements in India: The Tests Courts Apply, the Labour Codes, and a Clause Checklist
How Indian courts decide whether a contractor is really an employee, what the Labour Codes in force since November 2025 add, the tax and GST points that follow, and a clause checklist for an Indian independent contractor agreement.
Calling someone a contractor does not make them one. Indian courts look past the label at how the relationship works, and the consequences of getting it wrong (employee benefits, statutory contributions, termination protections) arrive years later. Foreign-origin templates apply US IRS factors that no Indian court uses. This guide sets out the Indian tests, the new statutory context, the tax mechanics and a clause list. Position as of October 2026.
The tests Indian courts apply
Control. The Supreme Court in Dharangadhara Chemical Works Ltd. v. State of Saurashtra (1957) treated the employer's right to supervise and control the work, including the manner in which it is done, as the prima facie test, while noting that the degree of control varies by business.
Integration, economic reality and the whole picture. In Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (15 April 2020) the Supreme Court reviewed the case law and held that control is one factor among several: whether the person is integrated into the business or peripheral to it; who pays, who owns the tools, who bears profit and loss, whether the person works on their own account; and that the court weighs "a conglomerate of all applicable tests taken on the totality of the fact situation". The Court added that where beneficial legislation for weaker sections is involved, the balance tilts toward finding employment.
What this means for drafting: a contractor agreement is evidence of intent, not a shield. If the "contractor" works fixed hours on your premises, uses your laptop, reports to a manager and has no other clients, the agreement will not save the classification.
The Labour Codes: what changed from 21 November 2025
The four Labour Codes were brought into force with effect from 21 November 2025 by notifications of the Ministry of Labour and Employment; the Industrial Relations Code, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 in full, the Code on Wages, 2019 and the Code on Social Security, 2020 in substantial part. Commentary at the time noted that the regime is not fully operational for employers until the central and state rules are notified, and that existing enactments continued to govern compliance in the meantime. Two points touch contractor arrangements:
- Gig and platform workers. The Code on Social Security, 2020 defines "gig worker" (section 2(35)) as a person who performs work or participates in a work arrangement and earns from it outside the traditional employer-employee relationship, and "platform worker" (section 2(61)) as a person engaged in platform work, and provides for social security schemes funded in part by aggregator contributions. A business engaging individuals through an app or marketplace model should track the rules under these provisions.
- Fixed-term employment. The Industrial Relations Code recognises fixed-term employment with benefits proportionate to permanent employees. For a role that is really a job with an end date, a fixed-term employment contract may be the honest instrument, rather than a contractor agreement. ****
Tax and GST mechanics
- TDS. Payments for professional services attract withholding under section 194J of the Income-tax Act, 1961 (10% for professional services; 2% for technical services), with the annual threshold raised to Rs 50,000 from 1 April 2025. Payments for "work" under a contract attract section 194C at 1% (individual or HUF) or 2% (others). **** Specify in the agreement which section the parties consider applicable and that fees are exclusive of applicable taxes.
- GST. A contractor whose aggregate turnover exceeds the registration threshold must register and charge GST on invoices; the agreement should state whether fees are inclusive or exclusive and require a GST-compliant invoice so the company can claim input tax credit. Under the second proviso to section 16(2) of the CGST Act, 2017, the credit must be reversed if the contractor is not paid within 180 days of the invoice.
- MSE status. A contractor registered as a micro or small enterprise must be paid within 45 days of acceptance under section 15 of the MSMED Act, 2006; since AY 2024-25 a late payment defers the company's deduction under section 43B(h) of the Income-tax Act.
Clause checklist
| Clause | Indian point |
|---|---|
| Services and deliverables | Define outputs, not hours; let the contractor decide how |
| Independent status | Contractor controls method, may serve other clients, uses own tools, bears own expenses |
| Fees, invoicing, taxes | GST treatment; TDS section; MSE flag and 45-day payment |
| Term and termination | Notice both ways; no "disciplinary" language |
| IP assignment | Written assignment of deliverables; moral-rights waiver where needed; carve out pre-existing IP |
| Confidentiality | Survives termination; separate from any data-processing terms |
| Non-compete | Void post-term under section 27, Indian Contract Act, 1872; keep to confidentiality and a narrow non-solicit |
| Data protection | If the contractor processes personal data for you, a "valid contract" is required under section 8(2), DPDP Act, 2023 |
| Insurance and liability | Contractor's own cover; indemnity for third-party claims from their work |
| Governing law and disputes | Indian law; arbitration seat; section 28 of the Contract Act saves arbitration clauses |
| Execution | E-sign under IT Act ss. 5, 10A; stamp per state |
A two-question self-test before you use the template
- If this person stopped tomorrow, would you hire a replacement into the same seat, with the same manager?
- Does this person have, or could they have, other clients?
"Yes" to the first and "no" to the second means you are looking at an employee, whatever the document says.
Where Legatio fits. Legatio holds the contractor template with the clauses above, captures the GST and MSE flags at intake, executes electronically and tracks invoice-to-payment timelines against the 45-day and 180-day rules. The classification tests are law, not software.
Position stated as of October 2026. General information; classification questions with significant exposure should be reviewed with counsel.