Running payroll in India means more than just paying salaries on time. Every payslip carries a web of legal deductions and employer contributions that must be calculated, deposited and reported to the right authorities each month. Getting this wrong invites interest, penalties and even prosecution. This guide breaks down payroll statutory compliance in plain terms — PF, ESI, TDS, Professional Tax and the other obligations every Indian SMB needs to handle correctly.
A quick but important note: the exact rates, wage ceilings and thresholds below are governed by statutes and notifications that change periodically and can vary by state. Treat the figures here as broad, indicative explanations — always confirm current numbers with the relevant authority or your compliance advisor.
The core components of payroll statutory compliance
Indian payroll compliance is built from several distinct obligations, each with its own law, authority, rate structure and filing calendar.
Provident Fund (PF / EPF)
The Employees' Provident Fund is a retirement savings scheme administered by the EPFO under the EPF & MP Act, 1952. It generally applies to establishments with 20 or more employees. Both the employee and the employer contribute a percentage of the employee's basic wages plus dearness allowance — commonly 12% each — with the employer's share split between the pension scheme (EPS) and the provident fund. Contributions are deposited via an ECR (Electronic Challan-cum-Return) every month, typically by the 15th.
Employee State Insurance (ESI)
ESI provides medical and cash benefits to employees and their dependants, administered by the ESIC. It usually applies to establishments with 10 or more employees (the threshold varies by state) and covers workers earning up to a notified wage ceiling. Contributions are a small percentage of gross wages, with the employer paying a larger share than the employee. Like PF, ESI is deposited monthly through challans.
TDS on salary
Under the Income Tax Act, employers must deduct Tax Deducted at Source (TDS) from salaries based on each employee's estimated annual income, chosen tax regime, declared investments and exemptions. Unlike PF and ESI, TDS is not a flat rate — it is computed using the applicable income tax slabs and spread across the year. Employers deposit TDS monthly (usually by the 7th of the following month), file quarterly returns (Form 24Q) and issue Form 16 to employees annually.
Professional Tax (PT)
Professional Tax is a state-level levy on income from employment, so it does not exist in every state and the slabs differ widely where it does. States like Maharashtra, Karnataka, West Bengal and Tamil Nadu levy it; some states do not. The employer deducts PT from the employee's salary and remits it to the state authority on the prescribed schedule (monthly or annually, depending on the state).
Labour Welfare Fund (LWF)
The Labour Welfare Fund supports the welfare of workers and is also administered state by state. Where applicable, both employee and employer contribute small fixed amounts, and the deduction frequency (often half-yearly or annually) and the rates depend on the specific state's rules.
Bonus
The Payment of Bonus Act, 1965 requires eligible establishments to pay an annual statutory bonus to employees earning below a notified wage limit. The bonus is calculated as a percentage of qualifying wages, subject to a statutory minimum and maximum, and is generally payable within a few months of the close of the accounting year.
Gratuity
Under the Payment of Gratuity Act, 1972, employees who complete a qualifying period of continuous service (commonly five years) are entitled to a lump-sum gratuity on resignation, retirement or termination. It is calculated using a formula based on last-drawn salary and years of service, subject to a statutory cap.
A simple summary
| Component | Typical applicability | Authority / law |
|---|---|---|
| PF / EPF | 20+ employees | EPFO (EPF & MP Act, 1952) |
| ESI | 10+ employees (state-dependent) | ESIC |
| TDS on salary | All taxable salaries | Income Tax Department |
| Professional Tax | Specific states only | State governments |
| LWF | Specific states only | State labour welfare boards |
| Bonus | Eligible establishments | Payment of Bonus Act, 1965 |
| Gratuity | 5+ years of service | Payment of Gratuity Act, 1972 |
Penalties for non-compliance
The cost of getting compliance wrong is rarely small. Late or short PF deposits attract interest plus damages levied per day of delay. Delayed TDS deposits carry interest and can lead to disallowance of expenses, while late or incorrect returns invite per-day late fees and penalties. ESI defaults similarly accrue interest and damages, and persistent non-compliance across any of these heads can escalate to prosecution of the responsible officers. Beyond the rupees involved, repeated lapses damage employee trust and create messy liabilities that surface during audits, funding due diligence or acquisitions.
How payroll software helps
Tracking changing rates, state-specific rules and overlapping filing deadlines manually is where most errors creep in. Good payroll software removes that risk by:
- Auto-calculating PF, ESI, TDS, PT, LWF, bonus and gratuity from each employee's salary structure and applicable rules.
- Generating challans and returns in the prescribed formats so deposits and filings are ready on time.
- Maintaining records — payslips, Form 16, registers and reports — that stand up to inspection.
- Adapting to changes in slabs and thresholds so your calculations stay current without manual rework.
To learn how each of these obligations is handled end to end, see our payroll statutory compliance feature, and explore the broader payroll module for how compensation, attendance and compliance fit together.
Stay compliant without the manual grind
Excellent Pay automates PF, ESI, TDS, Professional Tax, LWF, Bonus and Gratuity, with the reports and challans built in — so your statutory deductions are calculated correctly and your filings are ready when they're due. If month-end compliance is eating into your team's time, it's worth a closer look.