Three statutory deductions sit at the heart of Indian payroll, and every employer running payroll in India has to get them right month after month: Provident Fund (PF), Employee State Insurance (ESI), and Professional Tax (PT). They are not optional, the rates and thresholds are prescribed by law, and the penalties for getting them wrong — late deposits especially — add up quickly.
This guide covers all three in practical terms, and it also factors in the most significant change to hit Indian payroll in years: the four Labour Codes, which came into force on 21 November 2025 and changed the very definition of "wages" that these contributions are calculated on. If your salary structures were designed before that, this is essential reading.
Let us take each one in turn.
Provident Fund (PF)
The Employees' Provident Fund is a retirement savings scheme under the EPF and Miscellaneous Provisions Act, administered by the EPFO. Both the employer and the employee contribute every month, and over a working life this builds into a meaningful retirement corpus for the employee.
When PF applies
PF coverage becomes mandatory once an establishment employs twenty or more employees. Once you cross that threshold and register, you stay covered even if headcount later dips below twenty. Registration is done online through the Shram Suvidha portal.
The contribution rate
The headline rate is 12% from the employee and 12% from the employer, calculated on basic wages plus dearness allowance. So on a qualifying wage of ₹15,000, the employee contributes ₹1,800 and the employer contributes ₹1,800.
The employer's 12% is not all parked in the same place, though. It splits into two: 8.33% goes to the Employees' Pension Scheme (EPS) and the remaining 3.67% goes into the EPF account proper. The EPS portion is capped — it is calculated only on a wage ceiling of ₹15,000, which works out to a maximum EPS contribution of ₹1,250 per month. Any employer contribution above that cap flows into the EPF account instead. This is why higher earners accumulate larger EPF balances over time.
On top of the 12%, the employer also bears small additional charges — an EDLI (insurance) contribution and an administrative charge — so the true employer outgo on PF is a little above 12% of the qualifying wage.
The ₹15,000 wage ceiling
The statutory wage ceiling for mandatory PF coverage is ₹15,000 per month of basic plus DA. An employee whose basic plus DA is at or below ₹15,000 must be covered. For those earning above the ceiling, coverage rules and the option to contribute on actual wages versus the capped wage come into play, and company policy and the employee's existing membership status matter here.
The interest
The EPFO declares an interest rate on PF balances each year. It is calculated monthly on the running balance but credited annually. The rate has hovered around 8.25% in recent years, which makes PF one of the better risk-free returns available to a salaried employee.
Employee State Insurance (ESI)
ESI is a social-security scheme providing medical care and cash benefits — sickness, maternity, disability, and more — to covered employees and their families. It is administered by the ESIC.
When ESI applies
ESI coverage is triggered at ten or more employees in most states, though some states set the threshold at twenty for shops and commercial establishments, so the state notification matters. As with PF, once registered, the establishment stays covered even if numbers later fall.
The wage ceiling
ESI covers employees whose gross wages are ₹21,000 per month or less. For employees with a disability, the ceiling is higher at ₹25,000 per month. Note the important difference from PF: ESI is calculated on gross wages, not just basic plus DA. An employee earning above ₹21,000 gross is outside ESI entirely.
There is a useful nuance on mid-period crossings. If an employee's wages cross the ₹21,000 ceiling partway through a contribution period, ESI deductions continue until the end of that period rather than stopping immediately. ESI runs on two six-month contribution periods — April to September and October to March — and the deduction continues to the end of the running period before coverage ceases.
The contribution rate
ESI's total rate is 4% of gross wages, split as 0.75% from the employee and 3.25% from the employer. These rates were set on 1 July 2019 and remain unchanged. The employer collects both shares and deposits the full 4% with the ESIC. Very low-wage employees — those on a daily average wage at or below a small threshold — are exempt from paying their own share, but the employer still pays its 3.25% for them.
Professional Tax (PT)
Professional Tax is where things get state-specific, because PT is levied by individual state governments, not the central government. That means the rates, slabs, and even whether PT applies at all vary from state to state.
How PT works
PT is a tax on income from employment, deducted by the employer from the employee's salary and deposited with the state government. It is typically a small monthly amount that increases in slabs based on the salary level, and almost every state caps the annual PT at ₹2,500 per person — that is a constitutional ceiling.
Because each state runs its own PT regime, the slabs differ. Some states deduct a few hundred rupees a month at higher salary levels; some states do not levy PT at all. For an employer operating across multiple states, this means maintaining a different PT calculation and a different deposit process for each state where you have employees. We maintain a separate detailed state-wise PT guide, but the operational takeaway is that PT cannot be handled with a single national rule — it has to be configured per state.
PT also usually appears as a deduction under the salary head when computing taxable income, which is a small but real interaction with the TDS calculation.
The big change — the new Labour Codes and the wage definition
Here is the development every employer needs to understand, because it changes the base that PF, ESI, gratuity, bonus, and leave encashment are all calculated on.
On 21 November 2025, the four Labour Codes came into force, consolidating 29 older labour laws into four codes — the Code on Wages, the Code on Social Security, the Industrial Relations Code, and the Occupational Safety, Health and Working Conditions Code. The single most consequential element for payroll is a new, uniform definition of "wages" that now applies across all of these for computing benefits.
The crux of the new wage definition is this: the components that count as "wages" — essentially basic pay and dearness allowance — must constitute at least 50% of an employee's total remuneration. If the allowances and other excluded components exceed 50% of total pay, the excess is added back into "wages" for the purpose of calculating statutory contributions.
For years, a common practice was to keep the basic salary low and load up allowances, precisely to keep PF and other contributions down. The new wage definition closes that door. It forces the wage base up to at least 50% of total remuneration, which means PF contributions, gratuity, and other wage-linked benefits all rise.
What this means in practice
The immediate, visible effect for many employees is a slightly lower take-home salary, because more of their pay is now being routed into PF rather than paid out in cash. To be clear, this is not a pay cut — the total cost to company can stay the same; it is a redistribution from present cash into future retirement savings. The employee gains a larger PF corpus and stronger gratuity entitlement.
For employers, the effects are twofold. First, statutory contribution costs can rise where salary structures were previously basic-light. Second, and more pressing operationally, existing salary structures very likely need to be re-examined for compliance with the 50% rule. A structure that was perfectly fine in October 2025 may not align with the new wage definition, and continuing on the old structure carries compliance risk.
There remain some ambiguities about exactly which salary components fall inside or outside the new definition, and the detailed rules continue to settle, so this is an area to watch and to take professional advice on for your specific structures. But the direction is clear and the headline rule — basic plus DA at least 50% of total — is what salary structures now need to be built around.
Deadlines that matter
For both PF and ESI, contributions must be deposited by the 15th of the following month. Miss the PF deadline, and interest is charged from the due date, along with potential damages. ESI follows the same monthly deposit discipline through the ESIC portal. PT deposit timelines are set by each state and vary, which is one more reason multi-state PT needs careful per-state tracking.
These deadlines are unforgiving, and late deposits are one of the most common and entirely avoidable compliance failures in Indian payroll.
Common mistakes employers make
A handful of errors recur across companies.
Splitting basic into multiple allowance heads to keep PF low — a practice the Supreme Court had already pushed back on, and which the new wage definition now directly targets. Salary structures built this way need fixing.
Understating headcount by excluding contract or daily-wage workers from the coverage count, which can pull an establishment incorrectly below the registration threshold.
Missing the 15th-of-the-month deposit deadline for PF or ESI and incurring interest and damages.
Treating PT as a single national rule rather than configuring it state by state.
Failing to issue a unique UAN to every employee for PF, or not keeping the ECR filings clean.
Not revisiting salary structures after the Labour Codes came into force, leaving the company exposed on the 50% wage definition.
Why a unified payroll system makes this manageable
The reason these three deductions are error-prone is that they each draw on different slices of the salary, governed by different thresholds, with different deposit processes — and on top of that, the Labour Codes have just shifted the wage base they all sit on. PF runs on capped basic plus DA, ESI on gross up to a ceiling, PT on state-specific slabs, and all of them now have to respect the new 50% wage rule. Maintaining this correctly by hand, for every employee, across multiple states, is exactly where mistakes creep in.
When payroll, salary structures, and statutory compliance live on a single database, the contribution engine computes PF, ESI, and PT off the same live salary definition, applies the right ceilings automatically, and adapts the wage base to the Labour Codes rule consistently across the workforce. A salary revision flows into the contribution calculation immediately. A new state of operation gets the correct PT slab configured once and applied thereafter. Because nothing has to be reconciled across separate tools, the statutory numbers stay correct by design. This single-source-of-truth approach is the core of how Helion handles Indian payroll compliance — the deductions are computed from the real, current salary structure rather than a spreadsheet that someone has to remember to update.
For a company growing across states and headcount, that reliability is the difference between payroll being a quiet monthly routine and a recurring source of compliance anxiety.
This guide reflects the position as of 2026, including the four Labour Codes effective from 21 November 2025. Contribution rates, wage ceilings, and the detailed scope of the new wage definition are governed by the applicable statutes and continue to settle, and Professional Tax varies by state. This is general information for employers, not a substitute for advice from a qualified chartered accountant or labour-law professional on your specific structures.