India Payroll Compliance Guide 2026: PF, ESI, TDS, PT, LWF

Overview of India payroll statutes

Payroll compliance in India is not one law — it is a stack of central and state statutes layered on top of each other. The central statutes apply uniformly across the country: PF (EPF & MP Act 1952), ESI (ESI Act 1948), TDS on salary (Section 192 of the Income-tax Act 1961) and gratuity (Payment of Gratuity Act 1972). On top of that, every state can levy its own professional tax (PT) and Labour Welfare Fund (LWF), each with its own slabs, rates and filing requirements.

Practically, this means a payroll team in a multi-state Indian company is filing four central returns plus state-specific PT and LWF returns every month, every quarter and every year. The cost of getting any one of these wrong ranges from interest and damages (typically 12–37 percent for PF arrears) to disqualification of expense deduction (TDS non-compliance under Section 40(a)) to prosecution of the principal officer in the worst cases.

Provident Fund (PF) and ECR

PF is governed by the Employees' Provident Funds & Miscellaneous Provisions Act 1952. Applicability kicks in at 20 or more employees (10+ in specified establishments). Once registered, an employer continues to be covered even if headcount falls below 20.

• Contribution: 12 percent of PF wages from the employee and 12 percent from the employer. The employer share is split between EPS (8.33 percent of wages up to ₹15,000) and EPF (the balance). An additional 0.5 percent EDLI contribution and admin charges apply on the employer side.
• Wage definition: Basic + DA + retaining allowance, with the ₹15,000-per-month statutory ceiling. Most employers apply PF on actual basic above ₹15,000 too — but only the statutory minimum is mandatory.
• Return: The Electronic Challan-cum-Return (ECR) is uploaded monthly to the EPFO Unified Portal.
• Due date: ECR upload and contribution payment by the 15th of the following month. Late payment attracts interest under Section 7Q (12% p.a.) and damages under Section 14B (5–25% depending on delay).

Employees' State Insurance (ESI)

ESI is governed by the Employees' State Insurance Act 1948 and provides medical, cash, maternity and disability benefits to insured workers. Applicability is 10 or more employees in implemented areas (20+ in some states). Coverage applies to employees earning gross wages up to ₹21,000 per month (₹25,000 for persons with disability).

• Contribution: 0.75 percent of gross wages from the employee and 3.25 percent from the employer.
• Contribution periods: April–September and October–March. An employee who crosses the wage ceiling mid-period continues to be covered until the period ends.
• Return: Monthly contribution file uploaded to the ESIC portal, with a half-yearly return of contributions.
• Due date: 15th of the following month for contributions.

TDS on salary (Section 192)

Every employer paying salary above the basic exemption limit must deduct tax at source under Section 192 of the Income-tax Act 1961 at the average rate of income tax applicable to the employee's estimated income for the financial year. From FY 2023-24 onwards, the new tax regime under Section 115BAC is the default, with the option to opt for the old regime.

• Computation: Estimate total income for the year, apply slab rates, add surcharge and cess, divide by the number of months remaining, and deduct accordingly. Investment proofs, HRA, LTA and Section 80 deductions are factored in for employees on the old regime.
• Form 24Q: Quarterly TDS return on salary, due by 31 July, 31 October, 31 January, and 31 May (for Q4). Annexure I is filed every quarter; Annexure II (salary details and Chapter VI-A deductions) is filed with Q4.
• Form 16: Annual certificate of TDS, issued to every salaried employee by 15 June following the end of the financial year. Part A is downloaded from TRACES; Part B is generated by the employer.
• Due date for deposit: 7th of the following month (30 April for March deductions).

Professional Tax (PT)

Professional tax is a state-level tax on income from employment, capped at ₹2,500 per person per year by Article 276(2) of the Constitution. Each state has its own slab structure, registration rules, return periodicity and due date. As of 2026, PT is levied in roughly half of Indian states — including Maharashtra, Karnataka, West Bengal, Tamil Nadu, Telangana, Andhra Pradesh, Gujarat, Madhya Pradesh, Kerala and Assam.

• Registration: Employers need both a PT Registration Certificate (PTRC, for deducting and remitting tax on employees) and a PT Enrolment Certificate (PTEC, for the employer's own liability) in each state where they have employees.
• Filing frequency: Monthly or annual depending on state and turnover. Maharashtra PTRC, for example, is monthly above a threshold and annual below it.
• Remote workers: Liability follows the place where the employee normally performs work — not the registered office. Companies with a remote-first workforce need PT registrations in every state where they have employees.

Labour Welfare Fund (LWF)

LWF is another state-level statute that funds welfare activities for workers. It is in force in around 15 states and union territories, including Maharashtra, Karnataka, Tamil Nadu, Andhra Pradesh, Telangana, Kerala, Gujarat, Madhya Pradesh, West Bengal, Punjab, Haryana, Delhi, Goa and Odisha.

• Contribution: Modest — typically ₹6 to ₹50 per employee per contribution period from the employee, with a matching or higher employer contribution.
• Frequency: Half-yearly in most states (June and December cutoffs are common), monthly in a few.
• Applicability: Varies by state — usually all employees other than those in supervisory or managerial roles above a defined wage threshold.

Gratuity

Gratuity is governed by the Payment of Gratuity Act 1972 and is payable to every employee with five or more years of continuous service on resignation, retirement, death or disablement. Establishments with 10 or more employees are covered. The five-year requirement is waived in case of death or disablement.

• Formula: 15 days of last drawn wages for every completed year of service. The standard formula is (Last drawn basic + DA) × 15 / 26 × completed years.
• Statutory ceiling: ₹20 lakh — gratuity in excess is taxable for private-sector employees.
• Funding: Employers can self-fund gratuity, but most companies above 100 employees fund it through an LIC or insurer-managed gratuity trust to smooth the liability.

Common compliance mistakes

• Wrong PF wage base: Splitting basic salary artificially low to reduce PF — the EPFO has clarified that allowances ordinarily, necessarily and uniformly paid to all employees should be included in PF wages.
• Missing ESI thresholds at mid-month joining: A new joiner whose wages would cross ₹21,000 only after pro-rating is still covered for the contribution period they joined in.
• TDS estimation drift: Not updating tax estimates after a bonus, leading to a large catch-up deduction in March that the employee disputes.
• Missing PT registrations for remote employees: A common gap when companies hire across states without realising each state requires its own PTRC.
• Treating gratuity as a future problem: Underestimating gratuity liability until the first cohort of employees crosses five years and the cash outflow arrives all at once.
• Late ECR upload: Even one day late triggers interest and damages, and the EPFO is aggressive in pursuing them.

How HR teams stay compliant

Compliant payroll comes down to three practical things. First, a payroll system that encodes the statutes correctly — not a spreadsheet, not a payroll service that does not provide audit trails. Second, a monthly compliance calendar: 7th for TDS deposit, 15th for PF ECR and ESI, plus state-specific PT and LWF dates. Third, a quarterly review of the full statutory output — Form 24Q, PF and ESI summaries, PT and LWF challans — to catch drift before year-end.

At year-end, the priority shifts to Form 16 generation by 15 June, gratuity actuarial valuation, and reconciling the salary register with the financial statements. Most of the mistakes that show up in tax audits are not new — they are accumulated drift over the year that a quarterly review would have caught.

Building a monthly payroll compliance calendar

Most compliance issues in Indian payroll come from missed dates rather than mis-applied rules. A working monthly calendar for a typical multi-state mid-sized employer looks like this:

• 1st–5th: Lock the previous month's attendance, run reimbursement and variable pay approvals, and freeze inputs to payroll.
• 5th–7th: Run payroll, review anomalies, get finance sign-off, deposit TDS by the 7th (30 April for March deductions).
• 7th–10th: Pay net salaries, generate and publish payslips, push payroll journal entries to Tally or Zoho Books.
• 10th–15th: Upload PF ECR and pay PF contributions, file ESI contribution and pay challan, file state-wise PT returns where monthly, file LWF where monthly.
• Quarterly: File Form 24Q by 31 July, 31 October, 31 January and 31 May. Reconcile TDS deposited with Form 24Q figures before filing — mismatches are the most common reason for TRACES notices.
• Annual: Form 16 to employees by 15 June. Gratuity valuation (typically March quarter close). PT and LWF annual returns per state. Review and update salary structures for the new financial year.

Documentation and audit trail

Statutory authorities — EPFO, ESIC, the income-tax department, state PT authorities — can request payroll records during inspections or scrutiny assessments. The records expected include monthly salary registers, attendance and leave records, statutory challans, ECR and contribution files, Form 24Q acknowledgements, Form 16 copies and Form 12BA where applicable. Indian tax law generally requires payroll records to be retained for at least six to eight years after the end of the relevant financial year.

For the records to be useful in a defence, they need to be tied together — a salary register that does not reconcile to the bank disbursement and the Form 24Q is worse than no record at all. The simplest way to build this audit trail is to insist on it from day one of HRMS implementation: every payroll cycle should produce a single archived bundle containing the input data, the computation, the statutory outputs and the approvals.

Frequently asked questions

What is the PF applicability threshold in India?

20 or more employees for most establishments under the EPF & MP Act 1952. Once registered, coverage continues even if headcount falls below 20. A small number of notified establishments are covered at 10+ employees.

What is the ESI wage ceiling in 2026?

₹21,000 per month gross wages for employees, and ₹25,000 per month for persons with disability. Employees earning above the ceiling are not covered. Contribution rates are 0.75% from the employee and 3.25% from the employer.

When is Form 16 due to employees?

By 15 June following the end of the financial year. Part A is downloaded from the TRACES portal after Form 24Q for Q4 is filed; Part B is generated by the employer and covers the salary computation and deductions.

Is professional tax applicable in every Indian state?

No. PT is levied in roughly half of Indian states. It is capped at ₹2,500 per person per year by Article 276(2) of the Constitution. Each state sets its own slabs and returns.

Is gratuity mandatory for all employees?

Yes, for establishments with 10 or more employees and for any employee who has completed five years of continuous service. The five-year requirement is waived in case of death or disablement. The statutory ceiling is ₹20 lakh.

What happens if PF or ESI is paid late?

PF attracts interest under Section 7Q (12% p.a.) and damages under Section 14B (5–25% depending on length of delay). ESI attracts simple interest at 12% p.a. on delayed contributions. In both cases the employer cannot recover the late portion from employees.