A single missed PF deposit can cost your business 25% of the arrears in damages - plus 12% annual interest on the delayed amount. Miss your TDS deadline by even one day and you owe ₹200 per day in late fees. These are not hypothetical scenarios. Every month, thousands of Indian employers receive penalty notices because they miscalculated a deduction, missed a filing date, or simply did not know which payroll laws applied to them.
Payroll compliance in India involves four major statutory obligations: Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), and Tax Deducted at Source (TDS). Each has its own threshold, contribution rate, deposit deadline, and penalty structure. Get any one of them wrong and you face financial penalties, legal notices, or both.
This guide breaks down each obligation in plain language - who it applies to, how much you pay, when you pay, and what happens if you do not.
Why Payroll Compliance Got More Complex in 2026
Two major changes hit Indian employers simultaneously in 2026.
First, the four new Labour Codes - the Code on Wages, Code on Social Security, Industrial Relations Code, and Occupational Safety, Health and Working Conditions Code - are now active. The most impactful change for payroll: basic pay (including Dearness Allowance) must now be at least 50% of total CTC. Since PF and ESI contributions are calculated on basic + DA, this rule has increased the actual contribution amounts for many employers who were previously structuring salary with a low basic component.
Second, the Income Tax Act, 2025 replaced the Income Tax Act, 1961, effective 1 April 2026. This brought new TDS return forms (Form 138 replaces Form 24Q) and renamed the annual employee tax certificate from Form 16 to Form 130.
If your payroll processes were set up before these changes, they need updating now.
Provident Fund (EPF): Rates, Thresholds, and Deadlines
The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (now replaced by the EPF Scheme, 2026, notified on 29 June 2026) mandates provident fund contributions for eligible establishments.
Who Must Comply
PF is mandatory for every establishment employing 20 or more persons. Once an establishment crosses the 20-employee threshold, it remains covered even if employee count drops below 20 later.
Establishments with fewer than 20 employees can voluntarily register with EPFO.
Contribution Rates
Both employer and employee contribute 12% of basic salary plus Dearness Allowance. Here is how the employer's 12% breaks down:
- 3.67% goes to the employee's EPF account
- 8.33% goes to the Employees' Pension Scheme (EPS)
- Additionally, the employer pays 0.50% towards EDLI (Employees' Deposit Linked Insurance) and 0.50% as EPFO administrative charges
The real employer cost is approximately 13% of basic + DA.
For establishments notified by the Central Government (typically those with fewer than 20 employees in certain sectors), the contribution rate is 10% instead of 12%.
Wage Ceiling
The statutory wage ceiling for mandatory PF contributions is ₹15,000 per month. Employees earning basic + DA above ₹15,000 can choose to contribute on their actual basic or limit it to ₹15,000. Employers must contribute on the same base.
The EPS contribution of 8.33% is calculated on a maximum of ₹15,000 per month regardless of actual salary.
EPF Interest Rate
The EPF interest rate for FY 2025-26 is 8.25% per annum, credited to employee accounts.
Deposit Deadline
PF contributions must be deposited by the 15th of the following month. June 2026 salary deductions must reach EPFO by 15 July 2026.
Penalties for Late Deposit
Late PF deposits attract:
- Interest at 12% per annum on delayed amounts
- Damages ranging from 5% to 25% of arrears depending on the delay period
- Delay up to 2 months: 5% damages
- Delay of 2 to 4 months: 10% damages
- Delay of 4 to 6 months: 15% damages
- Delay beyond 6 months: 25% damages
Monthly Filing
Employers must file the Electronic Challan cum Return (ECR) on the EPFO Unified Portal when depositing contributions. This captures member-wise contribution details.
Employee State Insurance (ESI): Coverage, Rates, and Returns
The Employees' State Insurance Act, 1948 provides medical, sickness, maternity, and employment injury benefits to employees. Under the new Labour Codes, ESI coverage has expanded to all geographic areas of India.
Who Must Comply
ESI is mandatory for establishments with 10 or more employees (in most states). The employee must earn a gross salary of ₹21,000 per month or below to be covered. For employees with disabilities, the threshold is ₹25,000 per month.
Once an employee's salary crosses ₹21,000 during a contribution period, they remain covered until the end of that contribution period.
Contribution Rates
- Employee contribution: 0.75% of gross salary
- Employer contribution: 3.25% of gross salary
- Total: 4% of gross salary
Contribution Periods and Benefit Periods
ESI works on a six-monthly cycle:
- Contribution Period 1: April to September → Benefit Period: January to June (following year)
- Contribution Period 2: October to March → Benefit Period: July to December
Deposit Deadline
ESI contributions must be deposited by the 21st of the following month.
Half-Yearly Returns
ESI half-yearly returns are due on:
- 11 May (for the October-March contribution period)
- 12 November (for the April-September contribution period)
Penalties for Non-Compliance
Failure to pay ESI contributions attracts:
- Simple interest at 12% per annum on delayed payments
- For persistent default, imprisonment up to 2 years and a fine up to ₹5,000 under the ESI Act
Professional Tax (PT): State-Wise Rates and Deadlines
Professional Tax is a state-level tax on employment, trade, and profession. It is levied under Article 276 of the Constitution, which caps the annual amount at ₹2,500 per person. Not all states levy PT - currently, 14 states and union territories collect it.
States That Levy Professional Tax
Maharashtra, Karnataka, West Bengal, Tamil Nadu, Gujarat, Telangana, Andhra Pradesh, Kerala, Assam, Meghalaya, Odisha, Jharkhand, Madhya Pradesh, and Tripura.
If your business operates in any of these states, you must register as an employer and deduct PT from employee salaries.
Key State-Wise Rates (2026)
Maharashtra:
Monthly Salary | Male PT/month | Female PT/month
Up to ₹7,500 | Nil | Nil
₹7,501 – ₹10,000 | ₹175 | Nil
Above ₹10,000 | ₹200 (₹300 in Feb) | Nil
Above ₹25,000 | ₹200 (₹300 in Feb) | ₹200 (₹300 in Feb)
Maharashtra is one of the few states with gender-specific slabs. Women earning up to ₹25,000/month are exempt.
Karnataka:
Monthly Salary | PT/month
Below ₹25,000 | Nil
₹25,000 and above | ₹200 (₹300 in February)
Karnataka's annual maximum is ₹2,400.
Gujarat:
Monthly Salary | PT/month
Up to ₹5,999 | Nil
₹6,000 – ₹8,999 | ₹80
₹9,000 – ₹11,999 | ₹150
₹12,000 and above | ₹200
Multi-State Employers
If your company has employees in multiple states, you must register for PT in each state separately. Rates, slabs, filing frequency, and due dates vary. Maharashtra requires monthly filing, Karnataka requires monthly deposit by the 20th of the following month, and some states allow quarterly filing.
PT Is Tax Deductible
Professional tax paid is deductible from gross salary under Section 16(iii) of the Income Tax Act. This applies under both the old and new tax regimes.
Penalties
Penalties vary by state. In Maharashtra, late registration attracts ₹5 per day, and non-payment attracts a 10% penalty on the tax due. In Karnataka, late payment attracts 1.25% monthly interest plus up to 50% penalty on the total amount due.
TDS on Salary: Calculation, Deposit, and Returns
Every employer paying salary must deduct income tax at source under the Income Tax Act. With the new Income Tax Act, 2025 taking effect from 1 April 2026, several forms and procedures have changed.
How TDS on Salary Works
The employer estimates each employee's total annual income from salary, factors in eligible deductions and exemptions based on the tax regime chosen by the employee, and deducts tax in equal monthly instalments.
New Tax Regime Is the Default
For FY 2026-27, the new tax regime is the default. Under this regime, income up to ₹12 lakh is effectively tax-free for resident individuals (via the ₹60,000 rebate under Section 87A). Employees must specifically opt for the old regime if they want to claim deductions under Section 80C, 80D, HRA, etc.
Key Changes Under the Income Tax Act, 2025
- Form 24Q has been replaced by Form 138 for quarterly TDS returns on salary
- Form 16 has been renamed to Form 130 (employee TDS certificate)
- The underlying calculation methodology remains the same
Deposit Deadlines
- TDS must be deposited by the 7th of the following month
- For the month of March, the deadline is 30 April
- Government employers deducting TDS must deposit on the same day (no extension)
Quarterly Return Filing (Form 138)
Quarter | Period | Due Date
Q1 | April – June | 31 July
Q2 | July – September | 31 October
Q3 | October – December | 31 January
Q4 | January – March | 31 May
Form 130 (Annual TDS Certificate)
The employer must issue Form 130 to each employee by 15 June every year. This is the certificate employees use for filing their income tax returns.
Penalties for TDS Non-Compliance
- Late deposit: Interest at 1.5% per month from the date of deduction to the date of deposit
- Failure to deduct: Interest at 1% per month from the date tax was deductible to the date of deduction
- Late filing of returns: ₹200 per day under Section 234E, capped at the total TDS amount
- Non-issuance of Form 130: Penalty of ₹100 per day per certificate, up to the TDS amount
Monthly Payroll Compliance Calendar
Here is every deadline you need to track each month:
Date | Obligation | Details
7th | TDS deposit | Deposit TDS deducted from previous month's salary
15th | PF deposit + ECR filing | Deposit PF contributions and file Electronic Challan cum Return
20th | PT deposit (Karnataka) | Deposit Professional Tax for previous month
21st | ESI deposit | Deposit ESI contributions for previous month
Last day of month | PT deposit (Maharashtra, some states) | Varies by state
Quarterly and Annual Deadlines
- TDS quarterly returns (Form 138): 31 July, 31 October, 31 January, 31 May
- ESI half-yearly returns: 11 May and 12 November
- Form 130 to employees: 15 June
- PF annual return: 30 April
Common Mistakes That Trigger Penalty Notices
Knowing the rules is not enough. Most penalties come from operational errors, not ignorance.
1. Calculating PF on gross salary instead of basic + DA (or vice versa)
PF is calculated on basic + DA, not gross salary. Under the new Labour Codes, basic + DA must be at least 50% of CTC. If your payroll software is still using old salary structures, your PF calculations could be wrong.
2. Not updating ESI coverage when hiring new employees
An employee earning ₹20,000 is covered under ESI. The same employee getting a raise to ₹22,000 remains covered until the end of the current contribution period. Many employers stop ESI deductions immediately after a salary increase - this is incorrect.
3. Missing the PT registration in a new state
Opening a branch in Karnataka but not registering for PT there is a common oversight. Each state requires separate PT registration.
4. Using old TDS forms
From FY 2026-27, you must use Form 138 (not Form 24Q) for quarterly TDS returns and issue Form 130 (not Form 16) to employees. Filing on old forms will result in rejection.
5. Depositing PF after the 15th
Even a one-day delay triggers the 12% interest and minimum 5% damages. There is no grace period.
Action Checklist for Indian Employers
Use this checklist to audit your current payroll compliance:
- Verify your salary structure complies with the 50% basic + DA rule under the Code on Wages
- Confirm PF contributions are calculated at 12% of basic + DA (not gross, not CTC)
- Check if ESI applies - do you have 10+ employees with any earning ₹21,000 or below?
- Register for Professional Tax in every state where you have employees
- Update your payroll software to use Form 138 and Form 130 instead of the old forms
- Set up automated reminders for the 7th (TDS), 15th (PF), and 21st (ESI) of each month
- Assign a specific person to track quarterly and annual filing deadlines
- Retain all payroll records, TDS working sheets, and certificates for a minimum of 7 years
Frequently Asked Questions
1. Is PF mandatory for companies with fewer than 20 employees?
No, PF is mandatory only for establishments with 20 or more employees. However, establishments with fewer than 20 employees can voluntarily register with EPFO. Once registered (voluntarily or mandatorily), coverage continues even if employee count drops below 20.
2. What happens if an employee's salary crosses ₹21,000 during an ESI contribution period?
The employee remains covered under ESI until the end of the current contribution period (either September or March). ESI coverage is reviewed at the start of each new contribution period, not monthly.
3. Do I need to pay Professional Tax if my business operates in Delhi or Rajasthan?
No. Delhi and Rajasthan do not levy Professional Tax. PT is applicable only in the 14 states that have enacted PT legislation. However, if you have employees working remotely from a PT-applicable state, you may need to register there.
4. Can an employee opt out of the new tax regime for TDS calculation?
Yes. The new tax regime is the default, but employees can opt for the old regime by informing their employer. Under the old regime, deductions under Sections 80C, 80D, HRA, and others are available, which may result in lower TDS for some employees.
5. What is the penalty for not issuing Form 130 on time?
The penalty for late or non-issuance of Form 130 (previously Form 16) is ₹100 per day per certificate, subject to a maximum of the TDS amount. The deadline is 15 June every year.
6. How does the 50% basic + DA rule under the Code on Wages affect my PF liability?
If you were previously structuring salary with basic + DA at 30-40% of CTC, the new rule requires you to increase it to at least 50%. Since PF is calculated on basic + DA, this directly increases your PF contribution amount. For example, an employee with ₹50,000 CTC previously getting ₹15,000 basic would now need at least ₹25,000 as basic + DA - increasing the PF base significantly.
7. Are there different EPF contribution rates for different industries?
The standard rate is 12% for both employer and employee. A reduced rate of 10% applies to establishments notified by the Central Government, typically those in specific sectors or with fewer than 20 employees that have voluntarily registered.
Stop Tracking Deadlines Manually
Four different deposit dates, quarterly returns, half-yearly filings, state-wise PT variations - payroll compliance in India demands constant attention. One missed date and the penalties start compounding.
Compliance Radar gives you a complete timeline of every obligation that applies to your business, with real-time alerts when deadlines approach or regulations change. Describe your business once and know exactly what you owe, when you owe it, and what happens if you miss it.
Check your compliance posture free at complianceradar.in.