Indian payroll rules, in plain English

Provident fund (PF)

Employers with 20 or more people must register with EPFO. Both employer and employee pay 12% of the PF wage (basic pay plus dearness allowance). Contributions are compulsory up to the wage ceiling of ₹25,000 a month from 17 September 2026, up from ₹15,000. Above the ceiling, PF is voluntary.

For September 2026 the month is split: the old ₹15,000 ceiling applies for 1 to 16 September and the new one for 17 to 30 September.

Under the labour codes, wages for PF must be at least half of total pay. If allowances are more than 50% of an employee's remuneration, the excess is added back to wages. Payment is due by the 15th of the following month.

ESI

Employees State Insurance covers employees earning up to ₹21,000 a month (₹25,000 for persons with disabilities). The employee pays 0.75% of gross wages and the employer pays 3.25%. Employees whose daily average wage is ₹176 or less pay nothing; the employer share still applies.

The ESI Act is now part of the Code on Social Security. Existing ESI rules and rates continue during the transition. Payment is due by the 15th of the following month.

Professional tax

Professional tax is set by each state, deducted from salary every month and capped at ₹2,500 a year by the Constitution. Deduct it for the state the employee works in, not where the company is registered. Some states, including Delhi, do not charge it. See professional tax by state for each state’s rules.

Labour welfare fund (LWF)

Several states, including Karnataka, Maharashtra, Tamil Nadu, Telangana, West Bengal and Gujarat, run a labour welfare fund. Both employer and employee pay a small fixed amount, usually once or twice a year, and the employer's share is larger. Amounts and due dates differ by state and are revised from time to time, so check the state welfare board before you file.

Income tax on salary (TDS)

Employers deduct income tax from salary every month, based on the employee's projected income for the year and the regime they choose. The new regime is the default. The rates below are for FY 2026-27 (assessment year 2027-28), for resident individuals below 60. Budget 2026 left the slabs unchanged.

Add 4% health and education cess on the tax. A surcharge applies above ₹50 lakh. TDS is paid by the 7th of the following month (30 April for March), and the quarterly return is Form 24Q. Employees get Form 16 by 15 June.

House rent allowance (HRA)

Under the old regime, part of HRA is tax-free. The exempt amount is the lowest of three: the HRA actually received; 50% of salary in 8 cities (Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Pune, Hyderabad, Ahmedabad) or 40% elsewhere; and rent paid minus 10% of salary. Salary here means basic pay plus dearness allowance. HRA is not exempt under the new regime.

Gratuity

Gratuity is paid when an employee leaves after at least 5 years of continuous service, or earlier on death or disablement. Under the Code on Social Security, fixed-term employees qualify after 1 year and are paid pro rata.

Wages are basic pay plus dearness allowance, subject to the 50% rule. A part year of more than six months counts as a full year. The ceiling remains ₹20,00,000 until the government notifies a new one, and gratuity up to that amount is tax-free for private-sector employees. It must be paid within 30 days of becoming due. Many employers set aside about 4.81% of basic pay every month as a provision.

Full and final settlement

Under the Code on Wages, wages due to an employee who resigns, is removed, dismissed or retrenched must be paid within two working days of the last day. A full and final settlement usually covers unpaid salary, leave encashment, bonus, reimbursements, notice pay recovery or payout, and recovery of loans and advances. Gratuity follows its own 30-day deadline. The full and final settlement guide has a worked example and a checklist.