Payroll Compliance in India: Complete PF, ESI, TDS, and PT Guide

Every company operating in India with employees on its payroll must comply with a set of statutory deductions, deposits, and filings that collectively form payroll compliance. This covers Employees' Provident Fund (EPF), Employees' State Insurance (ESI), Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, Professional Tax, minimum wages, bonus, and gratuity. Missing a single deposit deadline or filing an incorrect return can trigger interest charges, penalties ranging from ₹10,000 to ₹1 lakh per violation, and even criminal prosecution of directors. This guide breaks down every component of payroll compliance in India for 2026, with exact contribution rates, applicability thresholds, due dates, penalties, and a complete compliance calendar that your accounts team can follow month by month.

What Is Payroll Compliance in India?

Payroll compliance is the process of correctly calculating, deducting, depositing, and reporting all statutory obligations linked to employee compensation. It is not a single law but a framework built from multiple central and state legislations that apply simultaneously.

The primary statutes governing payroll compliance in India are:

• Employees' Provident Funds and Miscellaneous Provisions Act, 1952: Governs PF, pension (EPS), and deposit-linked insurance (EDLI) for establishments with 20+ employees
• Employees' State Insurance Act, 1948: Provides medical, disability, and maternity benefits; applies to establishments with 10+ employees in notified areas
• Income Tax Act, 1961 (Section 192): Requires employers to deduct TDS on salary at applicable slab rates and deposit with the central government
• Professional Tax (various state Acts): State-level tax on employment income, deducted monthly by the employer
• Payment of Bonus Act, 1965: Mandates minimum 8.33% bonus for eligible employees in establishments with 20+ workers
• Payment of Gratuity Act, 1972: Requires gratuity payment after 5 years of continuous service in establishments with 10+ employees
• Minimum Wages Act, 1948 / Code on Wages, 2019: Sets floor wages by state, industry, and skill level

Every employer, whether a Private Limited Company, LLP, or even a sole proprietorship with employees, must comply with the statutes applicable to their employee count, industry, and state of operation.

Employees' Provident Fund (EPF): Contribution Rates and Compliance

The Employees' Provident Fund is the largest statutory savings scheme for salaried workers in India, administered by the Employees' Provident Fund Organisation (EPFO). Every establishment with 20 or more employees must register for PF within one month of crossing the threshold.

PF Contribution Breakdown

Key PF Rules Employers Must Know

• Wage ceiling for PF: There is no upper wage ceiling for EPF deductions. However, if an employee joins with basic salary above ₹15,000/month, they can opt out of PF (except in establishments where PF was already applicable to all employees).
• EPS pension cap: The EPS contribution of 8.33% from the employer side applies only on a maximum of ₹15,000 basic salary. For employees earning above ₹15,000, the employer's EPS share remains ₹1,250/month, and the excess goes to EPF.
• International workers: International workers (non-Indian) from countries without a Social Security Agreement with India must also contribute to EPF with no wage ceiling.
• Voluntary coverage: Establishments with fewer than 20 employees can register voluntarily with consent from all employees and the Regional PF Commissioner.

PF Filing Obligations

Employers must file the Electronic Challan cum Return (ECR) on the EPFO Unified Portal by the 15th of each month. The ECR contains employee-wise wage details, contribution amounts, and account numbers. Late filing attracts interest and damages.

Employees' State Insurance (ESI): Rates and Applicability

The Employees' State Insurance scheme provides medical care, sickness benefits, maternity benefits, and disability coverage to employees earning up to ₹21,000 per month. It is administered by the Employees' State Insurance Corporation (ESIC).

ESI Contribution Rates

ESI Applicability Rules

• Employee threshold: Establishments with 10 or more employees in areas notified by the central government must register under ESIC
• Wage ceiling: Employees earning up to ₹21,000 gross salary per month are covered (₹25,000 for persons with disability)
• Coverage period: ESI coverage runs in two contribution periods: April to September and October to March. Benefits are linked to the contribution period.
• Once covered, always covered: If an employee's salary crosses ₹21,000 during a contribution period, ESI contributions continue until the end of that period

ESI Filing and Deposit

Contributions must be deposited by the 15th of the following month through the ESIC portal. The employer files an online return with employee-wise contribution details. Half-yearly returns are due by 11th May (for October-March) and 11th November (for April-September).

TDS on Salary: Section 192 Compliance

Every employer paying salary to an employee must deduct income tax at source under Section 192 of the Income Tax Act, 1961. Unlike other TDS sections with flat rates, Section 192 requires the employer to estimate the employee's total annual tax liability and deduct it proportionately each month.

TDS Calculation Process

The employer follows this sequence for each employee:

• Step 1: Estimate total salary income for the financial year (basic + HRA + special allowances + perquisites + profits in lieu of salary)
• Step 2: Deduct exemptions (HRA exemption under Section 10(13A), LTA under Section 10(5), standard deduction of ₹75,000 under new regime)
• Step 3: Apply deductions under Chapter VI-A (Section 80C, 80D, etc.) if the employee has opted for the old tax regime
• Step 4: Calculate tax liability using the applicable slab rates
• Step 5: Deduct education cess at 4% on the tax amount
• Step 6: Divide total annual tax by 12 (or remaining months) to arrive at monthly TDS

New Tax Regime Slab Rates (FY 2025-26)

TDS Filing Requirements

• Monthly deposit: TDS must be deposited by the 7th of the following month using Challan No. 281 (30th April for March deductions)
• Quarterly return: Form 24Q must be filed quarterly with the Income Tax Department (due by 31st July, 31st October, 31st January, and 31st May)
• Annual certificate: Form 16 must be issued to each employee by 15th June following the financial year
• Correction statements: If errors are found in Form 24Q, correction statements must be filed through TRACES

Professional Tax: State-wise Obligations

Professional Tax is a state-level tax on income earned through employment, profession, trade, or calling. Article 276 of the Constitution caps it at ₹2,500 per person per year. The employer is responsible for deducting Professional Tax from employee salaries and depositing it with the respective state government.

Professional Tax Rates by Major States

States without Professional Tax: Delhi, Haryana, Uttar Pradesh, Rajasthan, Punjab, Uttarakhand, Himachal Pradesh, and Jammu & Kashmir do not levy Professional Tax as of 2026. Companies with employees in these states have no PT obligation for those employees.

Minimum Wages and the Code on Wages, 2019

Every employer in India must pay at least the minimum wage prescribed for the relevant industry, zone, and skill level. Minimum wages are set by both the central and state governments. Paying below minimum wage is a criminal offence under the Minimum Wages Act, 1948.

How Minimum Wages Work

• Central minimum wage: The central government sets minimum wages for establishments under central sphere (mines, railways, ports, oilfields, and central government contractors). The central floor wage is currently ₹178 per day.
• State minimum wages: Each state sets minimum wages for industries and occupations within the state's jurisdiction. These vary significantly: Delhi's minimum wage for unskilled workers is ₹17,494/month, while Bihar's is ₹11,622/month.
• Skill-based categories: Wages are differentiated by unskilled, semi-skilled, skilled, and highly skilled categories. Employers must correctly classify each employee.
• Revision frequency: States typically revise minimum wages every 6 to 12 months based on the Consumer Price Index. Employers must update payroll systems with each revision.

Code on Wages, 2019

The Code on Wages, 2019 consolidates four existing laws (Minimum Wages Act, Payment of Wages Act, Payment of Bonus Act, and Equal Remuneration Act) into a single code. While the Code has been passed by Parliament, the final rules and effective date for implementation are still pending as of mid-2026. Once implemented, it will introduce a universal minimum wage applicable across all sectors and a definition of "wages" that caps allowances at 50% of total remuneration.

Bonus, Gratuity, and Other Statutory Benefits

Beyond PF, ESI, and TDS, employers must comply with two additional payment obligations: bonus and gratuity. Both carry specific eligibility criteria, calculation formulas, and penalties for non-payment.

Payment of Bonus

Payment of Gratuity

The Payment of Gratuity Act, 1972 applies to every establishment with 10 or more employees. Key rules:

• Eligibility: 5 years of continuous service (relaxed to less than 5 years in case of death or disability)
• Formula: Last drawn salary (basic + DA) x 15/26 x completed years of service
• Maximum limit: ₹25 lakh (enhanced from ₹20 lakh by the central government notification in 2024)
• Tax treatment: Gratuity up to ₹25 lakh is exempt from income tax for employees covered under the Act
• Forfeiture: Gratuity can be forfeited only if the employee is terminated for wilful destruction of employer's property or for moral turpitude

Payroll Compliance Calendar: Monthly, Quarterly, and Annual Deadlines

Missing a deadline is the most common payroll compliance failure. This calendar covers every recurring obligation an employer must meet throughout the financial year.

Monthly Deadlines

Quarterly Deadlines

Annual Deadlines

Penalties for Non-Compliance

Payroll compliance violations carry financial and criminal consequences. Indian labour laws treat the failure to deposit employee contributions as a serious offence because the employer is holding money that legally belongs to the employee or the government.

Penalty Summary by Statute

Payroll Software and Outsourcing Options

Manual payroll compliance is feasible for companies with fewer than 10 employees but becomes error-prone and risky beyond that. Most companies with 15 or more employees use either payroll software or outsourced payroll services.

When to Use Payroll Software

• 25 to 200 employees: Cloud-based payroll software handles salary computation, PF/ESI challan generation, TDS calculation, Form 16 generation, and state-wise Professional Tax. Popular options in India include Zoho Payroll (₹40 to ₹100 per employee/month), greytHR (₹50 to ₹125 per employee/month), and Razorpay Payroll (₹40 to ₹80 per employee/month).
• 200+ employees: Enterprise solutions like SAP SuccessFactors, Oracle HCM, or Darwinbox offer end-to-end HRMS with payroll, attendance, leave management, and compliance modules.

When to Outsource Payroll

• Fewer than 50 employees: Outsourcing to a Virtual CFO service provider that handles payroll, PF/ESI filing, TDS returns, and statutory compliance is often more cost-effective than dedicated software plus a payroll executive.
• Multi-state operations: Companies with employees across multiple states face varying Professional Tax rules, Shop and Establishment Act requirements, and minimum wage schedules. Outsourcing ensures state-specific compliance without building internal expertise for each state.
• Startups in the first 2 years: Early-stage startups should outsource payroll and compliance to avoid the overhead of a finance team while meeting all statutory obligations from day one.

What a Payroll Outsourcing Provider Should Cover

At a minimum, your outsourced payroll partner should handle:

• Monthly salary computation with all statutory deductions (PF, ESI, TDS, PT)
• ECR filing and PF challan generation on the EPFO portal
• ESI contribution filing on the ESIC portal
• TDS computation, Challan 281 deposit, and quarterly Form 24Q filing
• State-wise Professional Tax deposit and return filing
• Form 16 generation and distribution to employees
• Bonus and gratuity computation
• Full-and-final settlement calculation for exiting employees
• Annual compliance support for labour law returns

Common Payroll Compliance Mistakes and How to Avoid Them

Based on compliance review patterns across hundreds of IncorpX client companies, these are the errors that most frequently result in notices, penalties, and prosecution.

• Structuring salary to minimise PF contribution: Some companies set basic salary at exactly ₹15,000 to limit PF outgo. While legally permitted, this approach fails the "wages" definition test once the Code on Wages is enforced. Restructure proactively with a minimum 50% basic component.
• Forgetting ESI after crossing the 10-employee mark: Many startups hire their 10th employee without realising they have triggered ESI applicability. Registration must happen within 15 days of crossing the threshold. Retroactive liability applies from the date of applicability.
• Depositing TDS late but filing Form 24Q on time: The system flags the mismatch. Late deposit attracts 1.5% per month interest even if the quarterly return is filed on time. Always deposit before the 7th.
• Ignoring Professional Tax in multi-state operations: A Bengaluru-headquartered company with employees working remotely from Maharashtra and West Bengal must register and pay PT in all three states. Each state has different thresholds, rates, and filing frequencies.
• Not issuing Form 16 by 15th June: Employees need Form 16 to file their income tax returns. Late issuance attracts ₹100 per day penalty per certificate under Section 272A(2)(g) of the Income Tax Act.
• Excluding contract workers from PF/ESI: The principal employer is responsible for PF/ESI compliance of contract workers. Relying on the contractor to handle compliance without verification exposes the principal employer to full liability.

Summary

Payroll compliance in India is a monthly, quarterly, and annual obligation that involves at least four distinct statutory frameworks: EPF, ESI, TDS on salary, and Professional Tax. Add minimum wages, bonus, and gratuity, and every employer with even a small team must manage 15 to 20 recurring deadlines per year. The financial penalties for missing these deadlines range from interest charges to damages of 25% on arrears. The criminal penalties for persistent default include imprisonment of up to 7 years for TDS violations and 3 years for PF defaults. Directors and KMPs face personal prosecution. The most effective approach for growing companies is to either invest in reliable payroll software or outsource to a Virtual CFO service that handles end-to-end compliance. Start with PF registration and ESI registration as soon as your employee count crosses the applicability threshold, set up TDS computation from the first salary payout, and build a compliance calendar that your finance team follows without exception.