Paying your team isn’t just about transferring a salary on the 1st of the month. Behind every payslip sits a stack of rules, about how much tax to cut, how much to save for an employee’s retirement, and how much to set aside for their medical cover. Get these right, and nobody notices. Get them wrong, and you’re looking at interest, penalties, and in serious cases, prosecution.
That set of rules is called payroll compliance. And in 2026, it matters more than ever, because India changed two of its biggest rulebooks back to back: a brand-new income tax law and four new labour codes. This guide breaks down the four things every employer must understand PF, ESIC, TDS, and the labour law basics. Whether you run a 5-person startup or a growing company, you’ll know exactly what to deduct, when to pay it, and what’s new this year.
What Is Payroll Compliance in India?
Payroll compliance simply means following every legal rule that applies when you pay your employees. That includes calculating salaries correctly, deducting the right taxes and contributions, depositing them with the government on time, filing the right returns, and keeping proper records.
Here’s a distinction that trips up most business owners:
- Payroll processing = making sure salaries are calculated and paid.
- Payroll compliance = making sure those payments follow the law.
You can process payroll perfectly, everyone gets paid on time and still be non-compliant because you missed a deduction or a filing. Think of compliance as the legal boundary inside which payroll has to operate. Cross that boundary, and the money you saved by “keeping it simple” comes back as fines.
For most Indian employers, payroll compliance rests on four pillars: Provident Fund (PF), Employees’ State Insurance (ESIC), Tax Deducted at Source (TDS), and the broader labour laws that govern wages, bonus, and gratuity. Let’s take them one at a time.
PF (Provident Fund / EPF) Compliance
The Employees’ Provident Fund (EPF) is basically a forced savings account for retirement. A slice of the employee’s salary goes into it every month, the employer matches it, and the money (plus interest) is theirs when they retire or leave.
Who it applies to: Any establishment with 20 or more employees must complete PF registration with the EPFO (Employees’ Provident Fund Organisation). Under the 2025 labour codes, this now applies across all industries, not just a select list of scheduled sectors.
How much is deducted:
- Employee contributes 12% of “wages” (basic pay + dearness allowance).
- Employer contributes another 12%.
- Of the employer’s share, part goes into the pension scheme (EPS) and part into PF, calculated up to a statutory wage ceiling of ₹15,000 a month.
What you must do:
- Register the business with EPFO and generate a UAN (Universal Account Number) for each employee — think of it as a permanent PF ID that follows them job to job.
- Deposit both contributions and complete the monthly PF return filing — the ECR (Electronic Challan cum Return) — by the 15th of the following month.
Miss the deadline, and you owe interest plus damages on top of the unpaid amount.
ESIC Compliance
ESIC (Employees’ State Insurance) is a government-run health and social security scheme. In exchange for a small monthly contribution, covered employees get medical care, plus cash support if they fall sick, have a baby, or get injured at work.
Who it applies to: Establishments with 10 or more employees (20 in a few states) must register. Big 2026 update under the new Code on Social Security, ESIC now applies across all of India; the old rule that limited it to specific “notified areas” is gone.
Who’s covered: Employees earning up to ₹21,000 a month (₹25,000 for employees with disabilities).
How much is deducted:
- Employee contributes 0.75% of wages.
- Employer contributes 3.25%.
- Total: 4%.
What the employee gets: Free treatment at ESIC hospitals and dispensaries, sickness benefit (cash while on medical leave), maternity benefit, disability benefit, and support for dependants if the worst happens.
What you must do: Complete your ESIC registration on the ESIC portal, enrol every eligible employee, and deposit the monthly contribution by the 15th of the following month.
TDS on Salary Compliance
TDS (Tax Deducted at Source) is the income tax your employer cuts from your salary before paying you, and deposits with the government on your behalf. Instead of you paying a big tax bill once a year, a little is taken out every month. Simple idea, but the rulebook behind it changed completely in 2026.
The big 2026 change: On 1 April 2026, the Income Tax Act, 2025 replaced the old Income Tax Act, 1961. A few things every payroll team needs to know:
- Salary TDS now falls under Section 392 of the new Act (it used to be Section 192). Any policy or payslip still quoting “Section 192” for salary paid after April 2026 is out of date.
- The terms “Previous Year” and “Assessment Year” are gone, replaced by a single “Tax Year.” Tax Year 2026-27 simply means 1 April 2026 to 31 March 2027.
- The forms were renumbered. The annual salary TDS certificate (the document that proves how much tax was cut from your salary) is now Form 130, it used to be Form 16. The quarterly salary TDS return is now Form 138, it used to be Form 24Q.
How TDS is worked out: The employer estimates the employee’s yearly income, applies the income tax slabs under the regime the employee has chosen (old or new), and divides the tax across 12 months. Investment declarations for the new tax year must reference the new law.
What you must do:
- Get a TAN (Tax Deduction Account Number) — you can’t deduct or deposit TDS without it.
- Deposit the TDS you’ve cut by the 7th of the following month.
- File the quarterly return in Form 138.
- Issue the annual certificate in Form 130 to every employee.
Labour Law Basics Every Employer Must Know
This is the part that changed the most in 2026. For decades, India had dozens of separate labour laws. On 21 November 2025, the government merged 29 of them into four labour codes:
- Code on Wages, 2019 — minimum wages, timely payment, bonus.
- Code on Social Security, 2020 — PF, ESIC, gratuity.
- Industrial Relations Code, 2020 — unions, layoffs, disputes.
- Occupational Safety, Health and Working Conditions Code, 2020 — workplace safety and working hours.
A few basics that directly affect your payroll:
- The 50% wage rule. Under the Code on Wages, an employee’s basic pay (the “wages” used for PF, gratuity and similar calculations) must be at least 50% of their total salary. Many companies used to keep basic pay low and pile on allowances to reduce PF and gratuity costs — that loophole is closing. The result: a slightly higher base for benefits, which can mean marginally lower take-home pay but a bigger retirement corpus.
- Minimum wages and timely payment. You must pay at least the applicable minimum wage and release salaries on time (typically by the 7th of the following month).
- Bonus. Eligible employees are entitled to a statutory bonus between 8.33% and 20% of wages.
- Gratuity. A thank-you payment for long service — usually after 5 years of continuous service. Under the new codes, fixed-term employees can get pro-rata gratuity even before five years.
- Professional Tax (PT). A small tax some states charge on salaries. It’s state-specific — rates, returns and due dates vary, so check the rules for every state you operate in.
- Digital record-keeping. The new codes push employers toward maintaining records and registers digitally.
One honest caveat: the four codes are legally in force, but the detailed central and state rules are still being rolled out through 2026 (a kind of “stabilisation phase”). The ₹21,000 ESIC threshold and existing structures continue to apply in the meantime. Keep an eye on notifications for the states where your employees work.
What Is the New 2-Working-Day Full and Final Settlement Rule?
When an employee leaves — whether they resign, are let go, or are retrenched — the employer has to clear their final dues. This is called the full and final (F&F) settlement, and it covers things like unpaid salary, leave encashment, and pending reimbursements.
Here’s the big 2026 shift: under Section 17(2) of the Code on Wages, 2019 (in force since 21 November 2025), employers must pay these wages within two working days of the employee’s last working day. For decades, the unofficial norm was 30 to 45 days — sometimes longer. That practice is now over.
Two points to keep this accurate:
- The two-day clock applies to the wages owed on exit. Gratuity has its own separate deadline (within 30 days under the gratuity rules), and PF withdrawal follows EPFO’s processing timelines.
- The exact scope of “wages” here is still being clarified through the new rules, so treat two working days as the safe target for clearing salary dues.
Miss the deadline and it’s treated as a legal violation, the departing employee can approach the Labour Department and even claim interest on the delayed amount. In practice, this means your payroll setup must be able to calculate exit dues quickly, not push them to the next monthly cycle.
Payroll Compliance Calendar
Most penalties happen for one boring reason: a missed deadline. Here are the dates to live by.
| Task | Due date | Form / action |
| Deposit TDS | 7th of the following month | Tax challan |
| Deposit PF (EPF) | 15th of the following month | ECR upload on EPFO portal |
| Deposit ESIC | 15th of the following month | ESIC portal |
| Professional Tax | Varies by state | State PT portal |
| Salary TDS return (quarterly) | Q1: 31 Jul · Q2: 31 Oct · Q3: 31 Jan · Q4: 31 May | Form 138 (was Form 24Q) |
| Annual TDS certificate | Once per tax year | Form 130 (was Form 16) |
Tip: set automated reminders a few days before each date. The government does not send you a warning — it sends you a penalty.
Penalties for Non-Compliance
Non-compliance isn’t just a fine on paper. It can mean interest, back-payments, damage to your reputation, and in the worst cases, criminal action.
- PF: Late deposits attract interest and damages. Failing to deposit the employee’s own share — money that already belongs to them — is treated as a serious offence and can lead to prosecution.
- ESIC: Delays attract interest, and the ESIC can prosecute employers under the penalty provisions of the law, with fines and possible imprisonment.
- TDS: Late deduction or late deposit attracts interest, and failure to deposit tax you’ve already collected can also lead to penalties and prosecution under the Income Tax Act, 2025.
The common thread: the law comes down hardest when you’re holding money that legally belongs to the employee or the government.
Quick Payroll Compliance Checklist
Run through this every month and every year to stay on the right side of the law.
Every month:
- Finalise attendance and approved leave
- Calculate salaries with correct deductions (PF, ESIC, TDS, PT)
- Deposit TDS by the 7th
- Deposit PF and ESIC by the 15th, and file the PF ECR
- Pay Professional Tax as per your state’s schedule
- Issue compliant payslips
- Clear full-and-final dues within 2 working days for any employee who has exited
Every quarter / year:
- File the quarterly salary TDS return (Form 138)
- Issue the annual TDS certificate (Form 130) to employees
- Reconcile PF and ESIC records and fix any mismatches
- Check that basic pay meets the 50% wage rule
- Maintain statutory registers and digital records
How LegalJini Can Help
Read this far and one thing becomes clear: payroll compliance in India isn’t about any single rule — it’s about keeping dozens of moving parts in sync. Deadlines, deductions, returns, and rules that now vary state by state and are still settling into place through 2026. For a growing business, that’s a lot to track on top of actually running the company.
This is usually the point where employers decide to hand the work to specialists rather than carry the risk in-house. LegalJini has done exactly that since 2004 — a team of lawyers, chartered accountants, and company secretaries who handle payroll processing, statutory contributions, and labour-law compliance for businesses of every size, from startups to MNCs, on an outsourcing model. The practical upside is simple: PF, ESIC, and TDS get calculated and filed on time, your records stay audit-ready, and someone is tracking the regulatory changes so you don’t have to.
If payroll compliance is starting to feel like more than your team should be carrying, it’s worth a conversation — no pressure, just a clear picture of where you stand.
Frequently Asked Questions
1. PF is being deducted from my salary but not showing in my EPFO passbook. What should I do?
Check your EPFO passbook on the member portal or UMANG app and keep your salary slips as proof. If the amount is deducted but not deposited, raise it with HR in writing. If unresolved, file a complaint on the EPFO grievance portal using your UAN.
2. Will my take-home salary go down because of the new labour codes?
It may reduce slightly if your basic salary was earlier kept low. Since PF is calculated on basic pay, a higher basic can increase PF deduction. However, your CTC remains the same and the amount moves into PF and gratuity savings.
3. What is the salary limit for PF and ESIC?
For PF, the wage ceiling is ₹15,000 per month on basic plus DA. For ESIC, the wage limit is ₹21,000 gross salary per month, or ₹25,000 for employees with a disability.
4. Can an employee opt out of PF?
Usually no. PF is mandatory for eligible employees in a covered establishment. Only an excluded employee, whose basic salary is above ₹15,000 and who was never a PF member earlier, may opt out at the time of joining through Form 11.
5. Why is TDS cut from my salary, and can I get it back?
TDS is income tax deducted in advance from your salary. If excess tax is deducted, you can claim a refund while filing your income tax return. Your Form 16 shows the total TDS deducted by your employer.
6. What happens if an employer misses a PF, ESIC, or TDS deadline?
Late payment can lead to interest, penalties and damages. Repeated failure to deposit employee deductions may also lead to prosecution. Employers should deposit TDS by the 7th and PF and ESIC by the 15th of every month.
7. Can LegalJini handle PF, ESIC and TDS compliance for my business?
Yes. LegalJini manages PF, ESIC and TDS compliance — calculations, deposits, return filing, certificates and statutory records — as part of its payroll and HR outsourcing services, so businesses can stay compliant without handling everything in-house.
Related Reading
Just starting out or setting up in India? Payroll compliance usually follows right after you register the business — these guides cover that first step:
- What Is Startup India Registration and How to Get One (2026 Guide) — for founders setting up a new venture before they hire and run payroll.
- How to Set Up a Wholly Owned Subsidiary in India: Step-by-Step Guide (2026) — for foreign companies that will take on PF, ESIC and TDS obligations once their India entity is live.