India Payroll Compliance Guide 2026: PF, ESI, TDS, Labour Codes & Salary Structure

Overview: India Payroll Statutory Contributions

Every employee on an Indian payroll generates a set of mandatory statutory contributions — paid by both employer and employee. Getting these wrong results in penalties, interest charges, and personal liability for directors. Here is the complete picture:

Provident Fund (EPF) — The Essentials

How EPF Works

The Employees' Provident Fund is a retirement savings scheme mandatory for all establishments with 20 or more employees (and voluntary for smaller ones). Both employer and employee contribute 12% of the employee's basic salary.

The employer's 12% is split: 8.33% goes to the Employee Pension Scheme (EPS) and 3.67% to the EPF account. The employee's full 12% goes to EPF. Additionally, the employer pays 0.5% as EDLI (Employee Deposit Linked Insurance) and 0.5% as admin charges.

EPF Wage Ceiling

Contributions are calculated on basic salary. The statutory wage ceiling for EPF is ₹15,000/month basic — meaning employees earning more than ₹15,000 in basic can opt for contributions only on the ceiling amount. Most companies contribute on actual basic as a best practice.

ESI (Employee State Insurance)

ESI provides medical, disability, maternity, and sickness benefits to employees earning up to ₹21,000/month gross. The employer contributes 3.25% and the employee 0.75% of gross salary. Employers must register with ESIC within 15 days of the 10th employee joining.

ESI is state-administered, so the actual coverage and benefits vary slightly across states. Once an employee's salary crosses ₹21,000, they exit the ESI scheme and should be covered by a group health insurance policy instead — which most Indian employers provide regardless.

TDS on Salary (Tax Deducted at Source)

Employers must deduct income tax monthly from employees' salaries and remit it to the government by the 7th of the following month. At year-end, employees receive Form 16, which is their salary tax certificate. The employer files quarterly TDS returns (Form 24Q).

India operates a dual tax regime since FY 2020-21: the old regime (with deductions and exemptions) and the new regime (lower slabs, no deductions). Employees choose their regime at the start of the year. The employer defaults to the new regime unless the employee explicitly opts for old.

India Income Tax Slabs 2026 (New Regime)

A rebate under Section 87A makes income up to ₹7,00,000 effectively tax-free under the new regime.

India Salary Structure — How It Works

Indian salaries are structured very differently from Western payrolls. The total package — called CTC (Cost to Company) — includes both the employee's take-home and the employer's statutory contributions. Understanding this is critical to avoid over- or under-offering.

Typical India Salary Structure

The New Labour Codes — What Changed in 2026

India consolidated 29 labour laws into 4 codes, which came into full effect in November 2025. The key changes relevant to payroll and HR compliance:

Code on Wages

The definition of "wages" is now standardised across all labour laws. Wages must include at least 50% of total remuneration as basic wages — meaning allowances cannot exceed 50% of CTC. This directly impacts PF and gratuity calculations since both are based on basic wages.

Code on Social Security

Gratuity eligibility has been extended. Under the new code, the 5-year continuous service requirement may be reduced to 1 year for fixed-term contract employees. Maternity benefits have been enhanced and now apply to establishments with 10 or more employees (down from 30).

Code on Industrial Relations

The threshold for requiring government approval before mass layoffs has been raised from 100 to 300 employees. For most foreign companies building small India teams, this is less relevant — but it does affect EOR providers managing larger workforces.

Code on OSH (Occupational Safety, Health and Working Conditions)

Working hours, overtime rules, and leave entitlements are now standardised. Maximum working hours remain 48/week. Employees are now entitled to one paid leave day for every 20 days worked (down from 1 in 30 under the old Factories Act for manufacturing).

Payroll Compliance Calendar — Key Deadlines

Why Foreign Companies Use EOR for India Payroll

Managing India payroll compliance requires registrations with EPFO, ESIC, Income Tax Department, and multiple state authorities — plus monthly filings, quarterly returns, and annual reconciliations. For a foreign company with 2–20 employees in India, the overhead of managing this directly is prohibitive.

An Employer of Record (EOR) handles all of this as part of the service. The EOR employs your Indian staff, runs a fully compliant payroll, handles all statutory filings, and provides employees with their payslips and Form 16. You get a single monthly invoice covering salaries plus compliance costs. No registrations, no filings, no penalties.

XMS EOR starts from ₹8,000 per employee per month, and employees can be onboarded in 5–7 days. Learn about XMS EOR services →

Frequently Asked Questions