Payroll Tax in India — Complete Employer Compliance Guide 2026

EPF — Employer Contribution Breakdown

While both employee and employer contribute 12% of basic+DA, the employer's 12% is split as follows:

• 3.67% — towards EPF (Employee Provident Fund account)
• 8.33% — towards EPS (Employee Pension Scheme) — capped at ₹15,000 basic
• 0.5% — towards EDLI (Employees' Deposit Linked Insurance)
• 0.5% — EPF administration charges

Total employer outgo: 12% (PF contribution) + 0.5% (EDLI) + 0.5% (admin charges) = 13% of basic+DA.

ESI — Key Rules

• Applicable only when employee gross salary is ₹21,000/month or less (₹25,000 for differently abled employees)
• Provides comprehensive medical benefits to the employee and their entire family
• Not applicable in all states/areas — check ESIC area coverage list at esic.gov.in
• Contribution period: April–September and October–March (6-month blocks)

TDS on Salary — How It Works (Section 192)

The employer computes the employee's estimated annual tax liability at the start of the year, then deducts 1/12th every month:

• Employee must declare: regime choice (old/new), investments (80C, 80D), HRA receipts, home loan certificate
• Employer must issue Form 16 (Part A: TDS certificate + Part B: salary break-up) by 15 June each year
• Quarterly TDS return: Form 24Q — Q1 by 31 July, Q2 by 31 Oct, Q3 by 31 Jan, Q4 by 31 May
• Excess TDS deducted? Employee claims refund while filing ITR

Gratuity Provision

Gratuity is not a monthly deduction but employers must provision it as a liability:

• Provision rate: approximately 4.81% of basic salary per month
• Actual formula: (Last drawn basic × 15 × completed years of service) ÷ 26
• Payable after 5 years of continuous service on resignation/retirement/death
• Tax-exempt up to ₹20 lakh for private employees (fully exempt for government employees)