Indian payroll compliance means getting five things right every month: Provident Fund (PF), Employee State Insurance (ESI), Professional Tax (PT), Tax Deducted at Source (TDS), and the state-level Shops & Establishments rules that govern how you employ people. Miss any of them and penalties can compound through interest, damages, and avoidable notices.
This guide explains what each obligation is, who it applies to, and where small companies most often get it wrong. Rates and thresholds can change by notification and state, so confirm current figures with your compliance partner before relying on them.
What is Provident Fund (PF) and who must comply?
The Employees' Provident Fund is a mandatory retirement savings scheme administered by the EPFO. Registration is generally required once an establishment employs 20 or more people, and once registered, contributions apply to eligible employees. Contributions must be deposited monthly, with returns filed electronically through the EPFO portal.
Where small companies go wrong: computing PF on the wrong wage base, missing the monthly deposit deadline, and failing to register new joiners with UAN promptly.
What is ESI and when does it apply?
Employee State Insurance provides medical care and cash benefits to lower-wage employees. It generally applies to establishments with 10 or more employees, covering employees earning up to the notified wage ceiling per month. The employee and employer contributions are deposited monthly.
The common mistake is boundary tracking: employees crossing the wage ceiling mid-contribution-period must still be covered until the period ends, and companies frequently stop deductions early or fail to start them for eligible new joiners.
What is Professional Tax and why does it vary?
Professional Tax is a state tax on employment. It exists in many states and not in others. Rates are slab-based on salary and capped annually, but registration, slabs, and filing frequency differ state by state. If you employ people in multiple states, you may need registration and filings in each PT state.
How does TDS on salaries work?
Employers deduct income tax from salaries every month based on each employee's projected annual income and chosen tax regime, deposit it on the statutory calendar, file quarterly TDS returns, and issue Form 16 annually. Getting monthly deductions right requires investment declarations, regime choices, salary revisions, and year-end proof collection.
What do Shops & Establishments rules cover?
Every state's Shops & Establishments Act governs the basics of employment: registration of the establishment, working hours, overtime, leave entitlements, holidays, and employment records. The leave and hours rules feed directly into payroll because unpaid leave, overtime, and encashment all have statutory floors.
What does a compliant monthly payroll cycle look like?
A repeatable cycle has a fixed order: lock inputs by a cutoff date, compute gross-to-net with correct statutory deductions, deposit PF, ESI, PT, and TDS by their respective due dates, file the associated returns, issue payslips, and reconcile against the general ledger and prior month with every exception explained.
Should a small company run payroll in-house or outsource it?
The realistic threshold is bandwidth, not headcount. In-house payroll needs someone who knows the statutory calendar, tracks regulatory changes across every state you employ in, and does not go on leave during the first week of the month. Outsourced payroll makes sense when you want the statutory risk handled by people who do it every day, with your team retaining approval control over inputs and outputs. See what LightSapien covers.
Frequently asked questions
At what headcount do PF and ESI become mandatory?
PF generally applies at 20 employees and ESI generally at 10, subject to law and state-specific notifications. Voluntary registration below thresholds is possible.
What happens if we miss a deposit deadline?
Interest, damages, and late-return consequences can apply. TDS delays can also attract interest and filing fees.
Do remote employees in other states change our obligations?
Yes. Professional Tax and Shops & Establishments obligations can follow the employee's work state, which is a common remote-work compliance gap.
Can compliance be fully delegated?
The work can be delegated, but management should still review proof of deposits, returns, and filings each month.
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