Payroll Compliance in India 2026: PF, ESI, TDS & Professional Tax (+ the New Labour Codes)

Paying your team is the easy part. The hard part of Indian payroll is the compliance wrapped around it: PF, ESI, TDS and professional tax, each with its own rate, ceiling, due date and return. The rules have also moved in the last year. The four Labour Codes came into force on 21 November 2025, the Code on Wages (Central) Rules followed on 8 May 2026, and the new Income-tax Act, 2025 renamed the salary TDS forms from April 2026. Here is what an employer actually has to do, in plain English. It is a guide for founders and finance leads, not legal advice.

What changed: the Labour Codes and the new tax forms

The Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 took effect on 21 November 2025, replacing 29 older labour laws. Rules are still arriving in stages. The Ministry of Labour says that during the transition the old rules stay in force to the extent they are consistent with the Codes. The Code on Wages (Central) Rules, 2026 were notified on 8 May 2026 and apply from that date. States notify their own rules, so the position for your establishment can depend on where it is.

The 50% wage rule, stated correctly

You will often read that "basic pay must now be 50% of CTC". That is not what the law says. Under the Code on Wages, "wages" means basic pay, dearness allowance and retaining allowance. If everything else you pay (allowances and similar components) comes to more than 50% of total remuneration, the excess is added back to wages for statutory calculations. You are free to keep basic pay low. The law simply raises the base that PF, gratuity and other dues are worked out on.

A simple example: an employee earns ₹50,000 a month, with ₹15,000 as basic plus DA and ₹35,000 as allowances. Half of total remuneration is ₹25,000, so allowances exceed the limit by ₹10,000. That ₹10,000 is added back, and statutory wages become ₹25,000.

The Ministry's FAQs add some detail:

• Overtime counts as part of remuneration for this test.
• Employer PF and pension contributions and statutory bonus count towards total remuneration. Gratuity and ESI do not.
• Annual performance incentives, ESOPs, variable pay and reimbursements are not wages.
• The new definition applies to gratuity from 21 November 2025, and to ESI coverage from the same date.

Whether this raises your PF bill depends on how you contribute today. If you pay PF on the ₹15,000 wage ceiling, the change may not move the number. If you pay on actual wages, it probably will. How EPFO applies the new definition while its own schemes are being moved under the Code on Social Security is still settling, so confirm your treatment with your CA.

Two other changes worth knowing: fixed-term employees become eligible for gratuity after one year of service under the contract, and the Code on Social Security removes the old restriction that limited ESI to notified areas.

Form 16 is now Form 130, and Form 24Q is now Form 138

This change came from the tax side, not the Labour Codes. Under the Income-tax Act, 2025 and the Income-tax Rules, 2026, the annual salary TDS certificate is Form 130 (it replaces Form 16) and the quarterly salary TDS return is Form 138 (it replaces Form 24Q). The Income Tax Department says the new Act applies where the earlier of payment or credit happens on or after 1 April 2026, and that TDS rates and monetary thresholds were carried over unchanged. Salary paid up to 31 March 2026 stays under the old Act and the old forms.

The four statutory deductions, in plain English

Provident Fund (PF / EPF)

PF applies to establishments with 20 or more employees. The employee contributes 12% of basic plus DA, and the employer matches with 12%. PF is mandatory for employees earning up to the ₹15,000 wage ceiling. Employers can contribute on higher wages, but many cap it at ₹15,000.

The employer's 12% is split. 8.33% goes to the Employees' Pension Scheme (EPS), worked out on wages of up to ₹15,000, and the rest goes to the employee's EPF account. On top of that the employer pays 0.5% for EDLI (the insurance scheme) and 0.5% as EPF administrative charges. New members who joined after 1 September 2014 on wages above ₹15,000 can join PF but not EPS.

At the ₹15,000 ceiling, that works out to:

• Employee share: ₹1,800, deducted from salary.
• Employer share: ₹1,250 to EPS plus ₹550 to EPF.
• EDLI: ₹75. Admin charges: ₹75.
• Total employer cost: ₹1,950 a month on top of salary.

You file the Electronic Challan cum Return (ECR) and pay by the 15th of the following month.

Employees' State Insurance (ESI)

ESI covers employees earning up to ₹21,000 a month (₹25,000 for employees with disabilities). The employee contributes 0.75% of wages and the employer 3.25%, 4% in total. Contributions are due within 15 days of the end of the month, so by the 15th of the following month. With the notified-area restriction gone, check with ESIC whether your location is now covered even if it was not before.

TDS on salary

Employers must deduct income tax from salary every month based on each employee's estimated tax for the year. In practice:

• Estimate annual taxable salary and ask the employee which regime they want. The new regime is the default.
• Under the new regime, income up to ₹4,00,000 is taxed at nil, rising in slabs to 30% above ₹24,00,000.
• Allow the ₹75,000 standard deduction under the new regime.
• Apply the rebate of up to ₹60,000, which means no tax on taxable income up to ₹12,00,000 (about ₹12,75,000 of salary once the standard deduction is counted).
• Add 4% health and education cess, then spread the result over the remaining months.

Deposit the tax by the 7th of the following month. Tax deducted in March is due by 30 April for non-government employers. File Form 138 every quarter: by 31 July, 31 October, 31 January and 31 May. Issue Form 130 to each employee by 15 June after the end of the tax year.

Professional Tax (PT)

Professional tax is a state tax, allowed by Article 276 of the Constitution. The Constitution caps it at ₹2,500 per person per year, so no state can charge more than that. Within that cap, each state sets its own slabs, due dates and registration rules, and some states and union territories do not levy it at all. You deduct it based on the state where the employee works, which is why multi-state teams trip on it so often. Check the current rules with the commercial tax department of each state you employ people in.

Your monthly compliance calendar

• By the 7th: deposit last month's TDS (30 April for March).
• By the 15th: file the PF ECR and pay PF, EDLI and admin charges. Pay ESI contributions.
• State-specific dates: deposit professional tax and file PT returns.
• Quarterly: file Form 138 by 31 July, 31 October, 31 January and 31 May.
• Annually: issue Form 130 to employees by 15 June.

Why this is a software problem, not a spreadsheet problem

Each deduction has its own rate, ceiling, deadline and return, and they feed each other. The wage definition drives PF and gratuity, the employee's regime choice drives TDS, and the work location drives PT. A spreadsheet can handle five people. Past that, a missed ceiling or a late challan turns into interest and notices. Good India-built payroll software computes every deduction, generates the challans and returns, and gets updated when rules change, as they did twice in the last year.

If you are choosing a tool, our guide to the best payroll & HR software for small business in India ranks the leading India-built options by fit and business size, and you can browse every option in the HR & Recruiting category.

Rates, ceilings and deadlines change, and Labour Code rules are still being notified by the Centre and the states. We last checked the figures here against government sources in September 2026. Confirm current rules with an official source or your CA before running payroll.