Payroll compliance in India: PF, ESI, Professional Tax & TDS explained

Running payroll in India is not just "salary minus deductions." Four separate statutory systems — Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), and Tax Deducted at Source (TDS) — each have their own rates, thresholds, and filing deadlines. Get one wrong and you're looking at interest, penalties, and unhappy employees.

Here's a clear breakdown of what a small or growing Indian business actually needs to know.

1. Provident Fund (EPF)

The Employees' Provident Fund is a retirement savings scheme run by the EPFO.

• Rate: 12% of Basic (+ DA) is deducted from the employee, and the employer contributes a matching 12%.
• Employer split: of the employer's 12%, 8.33% goes to the pension scheme (EPS) and 3.67% to EPF (EPS is capped on a ₹15,000 wage).
• Applicability: mandatory once you have 20 or more employees; smaller firms can register voluntarily.
• Wage ceiling: PF is statutorily required up to a Basic of ₹15,000/month; many employers apply 12% on actual Basic above that by policy.
• Identifier: each employee has a UAN (Universal Account Number) that stays with them across jobs.

2. Employee State Insurance (ESI)

ESI provides medical and cash benefits to lower-earning employees.

• Rate: 0.75% from the employee and 3.25% from the employer, on gross wages.
• Threshold: applies only when monthly gross is ≤ ₹21,000 (₹25,000 for employees with disabilities). Above that, no ESI.
• Applicability: generally establishments with 10 or more employees (varies by state).
• If an employee crosses the ₹21,000 ceiling mid-cycle, ESI still applies until the end of the contribution period.

3. Professional Tax (PT)

Professional Tax is levied by state governments, so it varies.

• Not every state charges it — e.g. Maharashtra, Karnataka, West Bengal and Tamil Nadu do; some states don't.
• Typical amount: around ₹200/month, with a statutory annual cap of ₹2,500.
• Slabs depend on salary and on the specific state's schedule.

4. TDS on salary

Under the Income Tax Act, employers must deduct income tax at source based on each employee's projected annual tax liability.

• The new tax regime is the default; employees may opt for the old regime.
• A standard deduction applies, and the Section 87A rebate can bring tax to nil for lower incomes.
• Employers file Form 24Q quarterly and issue Form 16 annually to each employee.
• TDS is an estimate spread across 12 months, so it's sensitive to investment declarations, HRA exemption and proofs.

Don't forget the rest

Beyond the big four, you may also deal with Gratuity (Payment of Gratuity Act — 15 days' wages per year of service, after 5 years, for establishments with 10+ employees), Labour Welfare Fund in some states, and loss-of-pay proration for unpaid leave.

Why this trips up small businesses

Each system has a different base (PF on Basic, ESI on gross, PT flat, TDS on projected annual income), a different threshold, and a different filing calendar. Doing this in a spreadsheet across a dozen employees is where mistakes — and penalties — creep in.

This is exactly the kind of work an HRIS should do for you. NayaHR computes PF, ESI, PT and estimated TDS automatically each month, prorates for mid-month joiners and loss of pay, generates payslips, and produces a bank/UPI payout file and a statutory summary for filing — so compliance is a by-product of running payroll, not a separate scramble.

This article is general information for Indian SMBs, not legal, tax or financial advice. Verify statutory rates and rules with a qualified professional.