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 statutory compliance wrapped around it - PF, ESI, TDS and professional tax - each with its own rate, deadline and return. Get it wrong and the penalties are real. And in 2026 the rules shifted, because the four Labour Codes finally came into force. Here is the plain-English version.

What changed in 2026: the Labour Codes

The four Labour Codes became operational in April 2026, the biggest change to Indian payroll in years. The headline for employers: under the Code on Wages, 'wages' must now be at least 50% of total CTC (basic pay plus dearness allowance). Because PF, ESI and gratuity are calculated on this base, redrawing salary structures changes contributions and take-home across the board. Other changes include a wider ESI footprint (coverage extended across all of India), revised contribution bases, and Form 16 being replaced by Form 130. Penalties for non-compliance also rose sharply.

If your salary structures still treat basic pay as a small slice of CTC, they likely need restructuring - and your payroll software should already reflect the new definition.

The four statutory deductions, in plain English

Provident Fund (PF / EPF)

Both employee and employer contribute 12% of basic + DA each. It applies to establishments with 20+ employees (and is mandatory for employees earning up to the wage ceiling). PF dues are payable by the 15th of the following month.

Employees' State Insurance (ESI)

ESI applies to employees earning up to Rs.21,000/month. The employee contributes 0.75% and the employer 3.25% of wages, payable by the 15th of the following month. Under the new codes, ESI coverage now extends across all areas of India.

TDS on salary

You must deduct tax at source on salaries based on each employee's estimated annual income. In practice: estimate annual income, apply the (default) new-regime slabs, allow the standard deduction, apply the Section 87A rebate where eligible, add 4% cess, and divide by 12 for the monthly deduction. TDS is deposited monthly and reported in quarterly returns.

Professional Tax (PT)

Professional tax is a state-level tax (so rates and rules vary by state, and some states do not levy it at all), typically a small monthly amount deducted from salary and deposited with the state. Because it is state-specific, this is one of the easiest things to get wrong manually.

Why this is a software problem, not a spreadsheet problem

Each deduction has its own rate, threshold, deadline and return, and they interact (the wage definition feeds PF and ESI; the regime choice feeds TDS). Doing this in a spreadsheet across a growing team is how mistakes - and penalties - happen. India-built payroll software computes every deduction, generates the challans and returns, and files on time, while keeping up with rule changes like the 2026 Labour Codes.

If you are choosing a tool, our guide to the best payroll & HR software for small business in India compares RazorpayX Payroll, Keka, greytHR, Zoho People, factoHR and Darwinbox by business size, and you can browse every option in the HR & Recruiting category.

Statutory rates, thresholds and deadlines change, and the Labour Code rollout has transition details. Confirm current rules with an official source or your CA before running payroll.