Payroll in India: the statutory deductions every payslip has to get right

Paying people in India means running several statutory schemes through the same payslip. Each has its own definition of wages, its own eligibility threshold, its own employer share and its own deadline. Getting gross pay right is the easy part. Getting every deduction calculated on the right base, for the right people, and deposited on time is where most of the work is.

Rates and thresholds below are as at October 2026. Statutory limits in India change by notification, and several state rules are still being aligned with the new labour codes, so confirm current figures before you configure a run.

Provident fund (EPF)

The Employees' Provident Fund applies to establishments with 20 or more employees. The employee contributes 12% of basic pay plus dearness allowance. The employer also contributes 12%, of which 8.33% goes to the pension scheme (EPS) and the remaining 3.67% to the provident fund. The EPS share is calculated on wages capped at ₹15,000 a month, so it never exceeds ₹1,250, and anything above that goes to the provident fund instead.

• Coverage is mandatory for employees whose PF wages are up to ₹15,000 a month. Higher earners can be covered on their full wage or on the capped wage, depending on what was agreed at joining.
• The employer also pays EDLI insurance at 0.5% and administration charges at 0.5%, both on capped wages.
• Contributions and the electronic challan cum return (ECR) are due by the 15th of the following month.
• Each employee is identified by a UAN that follows them between employers, so capture it at onboarding rather than at the first run.

Employees' State Insurance (ESI)

ESI covers employees earning up to ₹21,000 a month in gross wages, or ₹25,000 for persons with disability, in establishments with 10 or more employees in notified areas. The employee pays 0.75% of gross wages and the employer pays 3.25%. Unlike PF, the base is gross wages, so allowances and overtime count.

ESI runs in two contribution periods, April to September and October to March. An employee who is covered at the start of a period stays covered until it ends, even if a raise takes them over the ceiling halfway through. Stopping deductions the month someone crosses ₹21,000 is one of the most common ESI errors.

Professional tax

Professional tax is levied by states, not the centre, so the slabs depend on where the employee works. The Constitution caps it at ₹2,500 a year per person. Some states, including Delhi, do not levy it at all. Multi state employers need the slab table for each state and a work location on every employee record, because the deduction follows the place of work, not the head office.

Income tax deducted at source (TDS)

The employer deducts income tax from salary every month, based on the employee's estimated tax for the year. The new tax regime is the default; employees who want the old regime with its deductions and exemptions have to opt for it. Under the new regime, salaried employees with taxable income up to ₹12.75 lakh, including the ₹75,000 standard deduction, pay no tax because of the rebate.

• Collect each employee's regime choice and investment declarations at the start of the year, and proofs before the last quarter.
• Recalculate the projection every month, so joiners, raises and bonuses are spread over the remaining months rather than landing in March.
• Tax deducted is deposited by the 7th of the following month, with March due by 30 April.
• Quarterly TDS returns and the annual salary certificate to each employee close the year.

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The way salary TDS works carried over, but section numbers and form references changed. If your payslips, letters or reports still cite the old sections, they need updating.

Labour welfare fund

Several states, including Maharashtra, Karnataka, Gujarat and Tamil Nadu, collect a small labour welfare fund contribution from employer and employee, usually once or twice a year. The amounts are small, but the deduction months and deadlines differ by state, which makes it easy to miss.

What the labour codes changed

The four labour codes came into force in November 2025. The change that reaches payroll most directly is the uniform definition of wages: basic pay, dearness allowance and retaining allowance must make up at least half of total remuneration. If allowances exceed 50%, the excess is added back to wages. Because PF and gratuity are calculated on wages, structures that kept basic pay low to reduce contributions now produce higher PF and gratuity costs.

Review salary structures against the 50% test before the next increment cycle, not after. Changing a structure mid year means recalculating PF, gratuity provisions and often the employee's TDS projection at the same time.

Where these calculations usually go wrong

• Using one wage base for everything: PF on basic plus DA, ESI on gross, gratuity on last drawn wages.
• Ignoring the ESI contribution period when an employee crosses the ceiling.
• Deducting professional tax at the head office state instead of the employee's work location.
• Leaving TDS projections untouched after a mid year raise, then deducting a large balance in March.
• Missing half yearly deductions such as labour welfare fund because they are not in a normal month.

How PayLoom does it

In PayLoom each statutory deduction is a pay element with its own wage base, threshold and effective date, set per country and per state. Work location, regime choice and UAN sit on the employee record, so the run reads them instead of asking for them. Contribution reports and returns are generated at close from the same figures that went on the payslip.