PF and ESI compliance in India after the Social Security Code: thresholds, contribution rates, monthly deadlines, contractor checks and penalties.

Deducting PF or ESI from salary and failing to deposit it is not a minor payroll delay. Section 133 of the Code on Social Security, 2020 allows imprisonment of one to three years plus a ₹1 lakh fine where an employer withholds an employee's contribution but does not pay it. PF and ESI compliance in India therefore needs a monthly evidence trail, not a last-minute challan.

This employer checklist explains the rules in force in 2026, who must be covered, how to check the wage base, what to reconcile every month and which records can defend the business during an inspection.

What Changed for PF and ESI Compliance in India in 2026?

The legal foundation changed on 21 November 2025. The Central Government brought the Code on Social Security, 2020 into force on that date, replacing the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees' State Insurance Act, 1948. The change is confirmed in the Government's Labour Codes commencement announcement.

The final Social Security (Central) Rules, 2026 were notified on 8 May 2026. However, section 164 of the Code preserves earlier schemes, regulations, notifications and actions to the extent that they do not conflict with the Code. This is why employers still encounter the EPFO and ESIC portals, existing registration numbers and familiar operational processes.

Three points prevent expensive mistakes:

  1. The Code is current law; an old HR manual quoting only the 1952 or 1948 Act is out of date.
  2. The Code, final rules, continuing schemes and later notifications must be read together.
  3. State implementation and related professional tax, labour welfare fund and establishment rules can still vary.

The Ministry keeps the current codes, rules, notifications and FAQs on its Labour Codes resource page. Save the version relied on for each payroll policy.

Does PF Apply to Your Establishment?

Chapter III and the First Schedule of the Code on Social Security apply provident-fund provisions to every establishment employing 20 or more employees. The old restriction to specified classes of establishments has been removed, as the Ministry's Compliance Handbook for Employers explains.

Do not count only people appearing in one payroll file. Build the count from:

An establishment below 20 can seek voluntary coverage. More importantly, coverage does not automatically disappear merely because the headcount later falls below the threshold. Before marking an establishment “not applicable,” record its past coverage, registration status, employee count and any voluntary-coverage decision.

Which employees must be enrolled in PF?

The current EPFO guidance retains ₹15,000 per month as the wage ceiling for mandatory entry into membership. EPFO's current employer and member FAQ also explains that a member continues after wages rise above ₹15,000 and that higher-wage membership can be allowed through the prescribed joint option.

This creates four separate questions:

Do not exclude an existing member simply because current pay exceeds ₹15,000. Do not enrol or exclude a new higher-paid employee based only on gross cost to company. Preserve the joining declaration, Universal Account Number search, previous membership evidence and the decision applied.

Is the PF rate 10% or 12%?

Section 16 of the Code sets a 10% employer contribution and an equal employee contribution, while allowing the Central Government to notify 12% for specified establishments or classes. Existing EPF schemes and notifications continue under section 164 where consistent with the Code. EPFO guidance continues to describe 12% as the statutory rate for the establishments to which that rate applies.

The sensible payroll control is blunt: do not reduce a 12% contribution to 10% merely because someone read section 16 in isolation. Keep the notification, scheme provision or EPFO classification supporting the rate used by that establishment. The employer's share also funds the pension and deposit-linked insurance components in the proportions prescribed by the applicable scheme; it is not simply credited as one undivided amount.

Does ESI Apply to Your Establishment and Employees?

Chapter IV and the First Schedule of the Code apply ESI to every establishment with 10 or more persons, other than a seasonal factory. A notified hazardous or life-threatening activity can be covered even with one employee. Mines, ports and areas where dock work is carried out are also covered by the Code's framework.

The establishment threshold and employee wage ceiling are different tests. An establishment may cross the 10-person threshold while some employees remain outside contribution coverage because of their wages.

The Ministry's March 2026 additional Labour Codes FAQs confirm that the ₹21,000 monthly wage ceiling remains applicable for ESI coverage. The official ESIC overview states a ₹25,000 ceiling for a person with disability.

An insured employee whose wages rise above ₹21,000 after a contribution period begins generally continues until that contribution period ends. Do not stop the deduction mid-period without checking the applicable rule and payroll date.

What are the ESI contribution rates in 2026?

Rule 19 of the Social Security (Central) Rules, 2026 prescribes:

The employer must pay both shares to ESIC and may recover only the employee's share through the permitted wage deduction. Section 31 expressly prohibits recovering the employer's contribution from the employee.

The principal employer remains responsible for contributions for workers engaged through a contractor. The principal employer may recover the permitted amount from the contractor, but a contract saying “vendor handles ESI” does not erase the statutory risk. Obtain employee-wise wage and contribution data before releasing the contractor's bill.

Which Wage Figure Should Payroll Use After the New Code?

The most dangerous PF or ESI spreadsheet in 2026 is one that uses “basic,” “gross” or “CTC” without showing why.

Section 2(88) of the Code on Social Security defines wages around basic pay, dearness allowance and retaining allowance, subject to specified exclusions. If excluded components exceed 50% of total remuneration, the excess is added back to wages. The Ministry's additional FAQs say this wage definition has applied from 21 November 2025 and specifically confirm its use for ESI coverage.

Build a component map for every salary structure:

  1. List basic pay, dearness allowance and retaining allowance.
  2. List each excluded component separately, such as house-rent allowance, conveyance-related payment, overtime and commission, only where the statutory wording supports exclusion.
  3. Test whether the relevant exclusions exceed 50% of remuneration.
  4. Add the excess back to statutory wages where required.
  5. Apply the PF and ESI scheme rules, ceilings and membership history to the resulting figure.
  6. Save the calculation and reviewer approval with the payroll file.

Do not assume that renaming basic pay as an allowance removes it from the contribution base. Equally, do not force every employee's basic salary to exactly 50% of CTC; that slogan is not the statutory formula. The outcome depends on actual remuneration components and the Code's inclusions, exclusions and add-back rule.

Run a sample calculation before changing the full payroll. Exclusions above the 50% boundary may be added back to wages even when the employee's CTC does not change.

What Is the Monthly PF and ESI Compliance Calendar?

For a normal monthly wage cycle, use the 15th of the following month as the operational deposit deadline for both systems unless an official extension or portal instruction applies. EPFO's FAQ uses 15 August as the due date for July contribution. Regulation 31 of the continuing ESI framework requires payment within 15 days after the end of the calendar month; the current ESI General Regulations retain that rule.

A practical monthly sequence is:

When the 15th is a holiday or the portal is unavailable, check the official portal or extension circular and capture the evidence.

The seven-part monthly reconciliation

For each employee, compare these seven fields:

  1. Employee identifier, UAN and ESI insurance number
  2. Paid days and contribution days
  3. Statutory wages used for PF
  4. Statutory wages used for ESI
  5. Employee deduction in payroll
  6. Employer contribution and scheme allocation
  7. Amount reported and paid on the portal

The totals must match the payroll register, bank file, contribution return, challan and accounting ledger. Investigate rounding differences, arrears, negative adjustments and employees missing from one system. “The portal accepted it” proves only that a file was accepted, not that the wage base or workforce was correct.

How Should You Control Contractor PF and ESI Risk?

Contract labour is where clean-looking principal-employer records fall apart. Sections 17 and 31 of the Code let an employer recover specified contributions from a contractor, but they keep responsibility with the employer for covered workers.

Before paying a monthly contractor invoice, collect:

Do not accept a single combined challan as proof for your site. A contractor may serve ten clients using one registration; the total challan does not show that your 18 deployed workers were included. Match employee-level data and keep a right to withhold the invoice until mismatches are cured.

For factories, connect this control to the broader Factories Act compliance checklist and the 2026 labour-law employer action plan. PF and ESI are two controls inside a much larger labour and safety file.

What Records Should an Employer Keep Ready for Inspection?

Create one evidence folder per wage month. It should contain:

Also maintain a threshold register for every establishment: employee count, person count, date first crossed, coverage number, current status and evidence. Recheck it on every hire, branch opening, acquisition or contractor change.

Under section 133, failure to pay contributions in a case other than withheld employee contributions can mean two to six months' imprisonment and a ₹50,000 fine. Failing to submit a required return, deducting the employer's share from wages or failing to produce a required register can also attract penalties. Section 134 raises exposure for repeat offences, including imprisonment of two to three years and a ₹3 lakh fine for a repeated contribution-payment default.

The defence is not a colourful compliance dashboard. It is a complete line from attendance to wages, deduction, filing, payment and ledger.

Frequently Asked Questions

Is PF mandatory for every company with 20 employees?

Chapter III of the Code applies to an establishment with 20 or more employees. Count the full establishment correctly, review branches and contractor-linked employees, and check past or voluntary coverage before concluding that PF is not applicable.

Is ESI mandatory at 10 employees in every state?

The Code's First Schedule applies ESI to establishments with 10 or more persons, excluding seasonal factories, and can cover a notified hazardous activity with one employee. Confirm the notified implementation, benefits availability and any state-specific procedure for the establishment.

Does an employee leave PF when salary crosses ₹15,000?

No. An existing member normally continues even after PF wages rise above ₹15,000. The ceiling is important for entry and contribution treatment, not an automatic exit switch.

Does ESI stop immediately when wages cross ₹21,000?

Not usually when the increase happens during a contribution period. The employee generally continues until that period ends. Payroll should record the increase date and apply the current ESIC rule before stopping deductions.

Can an employer deduct its PF or ESI share from salary?

No. Sections 17 and 31 prohibit recovering the employer's contribution from the employee. Only the employee's permitted contribution may be deducted in the prescribed manner.

Are PF and ESI both due on the 15th?

For the normal monthly cycle, employers use the 15th of the following month as the operational deadline. Check official EPFO and ESIC instructions for an extension, holiday treatment or portal-specific change; never rely on an informal grace period.

Is a contractor's challan enough evidence for the principal employer?

No. Reconcile the challan and contribution file to the specific workers deployed at your establishment, their wages and their UAN or ESI numbers. A consolidated challan alone cannot prove employee-level coverage.

Make PF and ESI Compliance in India a Monthly Control

PF and ESI compliance in India is not “file two challans by the 15th.” The real job is to determine applicability, calculate statutory wages under the 2026 framework, preserve membership history, verify contractors and prove that every payroll deduction reached the correct authority.

Check your compliance posture free at Compliance Radar. Describe your business once to identify the Central, state, labour and sector obligations that apply, then track the deadlines and regulatory changes that matter to your establishment.

This article is general information, not legal advice. Confirm current schemes, notifications, portal instructions and state procedures before changing payroll or statutory filings.