Payroll in India: TDS, PF, ESI and professional tax explained

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Running payroll in India means more than paying salaries: employers deduct income tax at source, contribute to the Employees' Provident Fund, handle Employees' State Insurance for lower earners, apply state professional tax, and file quarterly returns and annual Form 16 certificates. The rules combine national law with state-specific requirements. This guide explains each part of payroll in India, with worked tax examples under the new regime, deadlines and tips for choosing payroll software.

The payroll cycle in India

A typical monthly cycle looks like this: collect attendance, leave and changes; calculate gross salary by component; deduct employee PF, ESI where applicable, professional tax and TDS; pay net salaries by bank transfer; deposit TDS with the government; pay PF and ESI contributions; and issue payslips. Quarterly, employers file TDS returns. Annually, they issue Form 16 to employees and complete other statutory filings.

Most employers pay salaries at the end of the month or in the first days of the next. The financial year runs from 1 April to 31 March.

Salary structure

Indian salaries are usually expressed as annual cost to company (CTC) and broken into components:

• Basic salary: the base for PF, gratuity and some allowances.
• House rent allowance (HRA): partly exempt under the old regime for employees paying rent.
• Special or flexible allowance: the balance of fixed pay.
• Other allowances and reimbursements, such as telephone or meal benefits.
• Employer PF contribution and sometimes gratuity and insurance, included in CTC but not paid monthly.
• Variable pay or bonus.

The labour codes define "wages" so that excluded components cannot exceed a set share of total pay, which affects how low basic salary can be. Design structures with current rules in mind.

TDS on salary: how it works

Employers must deduct tax at source from salaries based on the employee's estimated income tax for the year, spread across the months. At the start of the year, employees choose the old or new regime and, under the old regime, declare planned investments and deductions. Employers update TDS as actual pay and proofs come in, and adjust in the final months to match the year's liability.

If an employee joins mid-year, collect details of income and TDS from their previous employer so that the year's tax is calculated correctly.

New regime slabs for FY 2026-27

The new regime is the default. Its slabs are:

• Up to ₹4,00,000: nil.
• ₹4,00,001 to ₹8,00,000: 5%.
• ₹8,00,001 to ₹12,00,000: 10%.
• ₹12,00,001 to ₹16,00,000: 15%.
• ₹16,00,001 to ₹20,00,000: 20%.
• ₹20,00,001 to ₹24,00,000: 25%.
• Above ₹24,00,000: 30%.

Salaried individuals get a standard deduction of ₹75,000. A rebate reduces tax to nil where taxable income does not exceed ₹12,00,000, so salaries up to ₹12,75,000 are effectively tax-free under the new regime. A 4% health and education cess applies on the tax, and surcharges apply to very high incomes.

Worked example: ₹10 lakh salary

Annual salary ₹10,00,000 under the new regime:

• Less standard deduction ₹75,000: taxable income ₹9,25,000.
• Tax on slabs would be ₹32,500, but taxable income is below ₹12 lakh, so the rebate reduces tax to nil.
• TDS: nil.

The employee's 12% PF contribution and professional tax are still deducted from pay, but no income tax.

Worked example: ₹15 lakh salary

• Taxable income: 15,00,000 − 75,000 = ₹14,25,000.
• Tax: nil on the first ₹4 lakh; 5% of ₹4 lakh = 20,000; 10% of ₹4 lakh = 40,000; 15% of ₹2,25,000 = 33,750. Total ₹93,750.
• Cess at 4%: ₹3,750. Total tax: ₹97,500 a year.
• Monthly TDS: about ₹8,125.

Worked example: ₹30 lakh salary

• Taxable income: ₹29,25,000.
• Tax: 20,000 + 40,000 + 60,000 + 80,000 + 1,00,000 + 30% of ₹5,25,000 (1,57,500) = ₹4,57,500.
• Cess at 4%: ₹18,300. Total: ₹4,75,800 a year.
• Monthly TDS: about ₹39,650.

Try your own figures with the India income tax calculator.

The old regime

Under the old regime, employees can claim exemptions and deductions, such as HRA exemption, deductions for investments under section 80C, health insurance premiums and home loan interest, but face higher slab rates. It can still suit employees with large deductions. Employers must collect declarations at the start of the year and proofs before year end, and calculate TDS accordingly. Payroll software handles both regimes.

Employees' Provident Fund (EPF)

Establishments with 20 or more employees must register with the EPFO, and smaller ones may join voluntarily. Employer and employee each contribute 12% of basic wages (basic plus dearness allowance), commonly on a wage ceiling of ₹15,000 a month for mandatory coverage. The employer's 12% is split between the Employees' Pension Scheme (8.33% of wages up to the ceiling) and the provident fund. Employers also pay small administrative charges and EDLI insurance contributions.

Contributions are paid monthly through the EPFO portal with an electronic challan cum return (ECR), generally by the 15th of the following month. Each employee has a Universal Account Number (UAN).

Employees' State Insurance (ESI)

ESI provides medical and cash benefits to employees earning up to ₹21,000 a month in covered establishments. Contributions are 0.75% of wages from the employee and 3.25% from the employer, paid monthly, generally by the 15th of the following month. Once covered, an employee usually remains covered until the end of the contribution period even if wages rise above the limit. Most professional salaries are above the limit, so ESI often applies only to some staff.

Professional tax and labour welfare fund

Professional tax is levied by some states on employment, with slabs based on monthly salary and a constitutional maximum of ₹2,500 a year per person. States such as Maharashtra, Karnataka, West Bengal, Tamil Nadu and others levy it, while some do not. Employers deduct it from salary and pay it to the state, with state-specific registration, deadlines and returns.

Some states also have labour welfare fund contributions, usually small amounts paid once or twice a year by employer and employee. Track rules by the state where each employee works.

Deadlines at a glance

• TDS deposit: by the 7th of the following month (with a later date for March).
• EPF and ESI: generally by the 15th of the following month.
• Professional tax: state-specific, often monthly.
• Quarterly TDS returns (Form 24Q): by the end of the month after each quarter, with a later date for the last quarter.
• Form 16: issued to employees by 15 June after the financial year.

Late deposits attract interest and penalties, and late returns attract fees.

Form 16 and year-end

Form 16 is the certificate of TDS on salary that employers issue to each employee. It has two parts: Part A, generated from the government's TRACES portal, showing tax deducted and deposited; and Part B, prepared by the employer, showing salary, exemptions, deductions and tax computation. Employees use it to file their own income tax returns. Accurate quarterly TDS returns are essential, since Part A reflects what was reported.

Gratuity, bonus and leave encashment

Gratuity is paid when employment ends after qualifying service, calculated as 15 days' wages per completed year, and is partly tax-exempt within limits. Statutory bonus applies to employees below a wage threshold. Leave encashment, paying for unused leave, is taxable when paid during employment and partly exempt on retirement or resignation within limits. Plan cash for these payments and account for them correctly in payroll.

Payroll software in India

Because of the many components, regimes and state rules, almost all Indian employers use payroll software or a payroll provider. Good software handles both tax regimes, investment declarations, EPF ECR files, ESI, professional tax by state, TDS returns and Form 16. Compare options in our India payroll software ranking, India payroll software guide, Zoho Payroll pricing and RazorpayX Payroll pricing.

If you employ in India from abroad without an entity, an employer of record runs payroll for you; see how to hire employees in India.

Accounting and GST

Payroll entries should flow into your accounting software as journals: salary expense, employer contributions, liabilities for TDS, PF and ESI, and payments. If your business is GST-registered, choose accounting software that handles GST returns and e-invoicing; see India accounting software, Busy pricing and GST e-invoicing in India. Our GST calculator helps with quick GST sums.

Common mistakes

• Applying old-regime deductions for employees on the new regime.
• Forgetting the rebate, so employees under ₹12 lakh taxable income are over-taxed.
• Missing previous-employer income for mid-year joiners.
• Late TDS deposits, which attract interest.
• Ignoring state professional tax registration in new states.
• Salary structures that do not meet the wage definition in the labour codes.

Example: monthly payslip for a ₹15 lakh CTC

Suppose an employee's annual CTC is ₹15,00,000, of which the employer's PF contribution on a ₹15,000 wage ceiling is ₹21,600 a year (₹1,800 a month). Annual gross salary is therefore ₹14,78,400, about ₹1,23,200 a month, split into basic, HRA and special allowance. Monthly deductions might be:

• Employee PF: ₹1,800 (12% of ₹15,000).
• Professional tax: around ₹200 a month in many levying states.
• TDS: calculated on the year's taxable salary of about ₹14,03,400 after the standard deduction, giving annual tax with cess of about ₹94,100, or roughly ₹7,850 a month.

Net pay would be around ₹1,13,350 a month. Exact figures depend on the structure, the state and the regime chosen. This is why showing a sample payslip with an offer is so useful.

Mid-year joiners and leavers

When someone joins mid-year, ask for their income and TDS from the previous employer in the same financial year, usually on Form 12B or from their payslips, so you calculate the correct annual tax and avoid both under- and over-deduction. When someone leaves, settle their final salary, leave encashment and any gratuity, calculate final TDS, and issue Form 16 for the period they worked. Transfer of PF is handled through the employee's UAN, and the exit date must be updated on the EPFO portal.

Reimbursements and perquisites

Some payments are not salary for tax purposes when properly structured, such as reimbursement of genuine business expenses supported by bills. Others are perquisites, taxable benefits valued under the rules, such as company-provided accommodation, cars used for personal purposes, or concessional loans. Under the new regime, many old-regime exemptions are unavailable, though some items, such as employer contributions to certain pension accounts within limits, still receive favourable treatment. Review the treatment of each benefit when employees switch regimes.

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