Payroll in India Made Simple: Salaries, PF, ESI, Professional Tax, TDS and Compliance

Why payroll deserves care

Few business processes matter more to employees than payroll. A late or incorrect salary damages trust instantly, and mistakes in statutory deductions can lead to interest, penalties and uncomfortable conversations with authorities and staff.

Payroll in India involves more than calculating salaries. Depending on the organisation, it includes Provident Fund (PF), Employees’ State Insurance (ESI), professional tax, labour welfare fund, tax deducted at source (TDS) on salaries, reimbursements, bonuses, leave, gratuity, full and final settlements and year-end tax documents. Each has its own rules and deadlines.

This guide explains how payroll services work in plain language. It is general information, not legal or tax advice. Labour and tax laws are updated regularly, including through India’s Labour Codes, which consolidate many older labour laws and affect definitions such as wages, so confirm current requirements with official sources such as EPFO and ESIC, or a qualified professional.

Getting the foundations right

Most payroll problems begin before the first salary is processed. Three foundations prevent them.

First, a clear salary structure: basic pay, allowances, reimbursements and variable pay defined consistently, with an understanding of how each component affects PF, ESI, gratuity and tax. Second, clean employee master data: correct PAN, Aadhaar where required, bank details, UAN for PF, ESI numbers, joining dates, locations and tax regime choices. Third, documented policies for leave, attendance, overtime, bonuses and reimbursements, so payroll applies rules consistently.

The monthly payroll process

Each month starts with inputs: new joiners and leavers, attendance and leave, overtime, salary revisions, bonuses, reimbursement claims and investment declarations. These are validated, payroll is calculated, reviewed against the previous month for unusual changes and approved before salaries are paid.

After payment, statutory dues are deposited, payslips issued and reports shared with management and finance. A fixed monthly calendar, with cut-off dates for inputs, keeps the process predictable for everyone.

Provident Fund (PF)

The Employees’ Provident Fund is a retirement savings scheme administered by EPFO. Establishments covered by the law, generally those with 20 or more employees, must register and contribute. Typically, both employee and employer contribute a percentage of the relevant wages, with part of the employer’s share going to the pension scheme, subject to wage ceilings and rules.

Monthly contributions are filed through an electronic challan-cum-return and deposited by the due date, typically the 15th of the following month. Every employee has a Universal Account Number (UAN) that stays with them across jobs, so accurate UAN linkage at joining is important.

Employees’ State Insurance (ESI)

ESI provides medical and cash benefits to employees earning up to a notified wage limit, in establishments covered by the scheme. Both employer and employee contribute a percentage of wages, deposited monthly, typically by the 15th of the following month.

ESI coverage depends on wages each contribution period, so payroll must track eligibility carefully as salaries change. New employees must be registered promptly so they can access benefits.

Professional tax and labour welfare fund

Professional tax is levied by several states on salaried employees and professionals, with slabs, due dates and registration requirements set by each state. Employers deduct it from salaries and deposit it with the state. Businesses with staff in multiple states must follow each state’s rules.

Some states also require labour welfare fund contributions from employers and employees, usually small amounts at fixed intervals. These are easy to overlook in multi-state payrolls, which is why a compliance calendar by state is valuable.

TDS on salary and Form 16

Employers must deduct income tax from salaries based on each employee’s estimated annual income, chosen tax regime and eligible deductions and exemptions where the old regime applies. TDS is deposited monthly, typically by the 7th of the following month, and reported in quarterly TDS returns.

At year end, employers issue Form 16, summarising salary and tax deducted, which employees use to file their income tax returns. Accurate TDS throughout the year avoids a large deduction in the final months and keeps employees’ tax credits matching in Form 26AS. Our TDS services and ITR guide cover related topics.

Reimbursements, bonuses and variable pay

Reimbursements such as travel or telephone expenses need clear policies, supporting documents and correct tax treatment. Bonuses and incentives must be calculated consistently and taxed appropriately in the month paid. Statutory bonus rules may apply to eligible employees in covered establishments.

Variable pay often causes confusion, so communicating how it is calculated, and showing it clearly on payslips, reduces queries and disputes.

Joiners, leavers and full and final settlement

Onboarding for payroll includes collecting documents, linking or creating UAN, ESI registration where applicable, bank verification and tax regime declarations. Pro-rata salary for the first month must reflect the joining date.

When an employee leaves, the full and final settlement calculates pending salary, leave encashment as per policy, notice period adjustments, bonuses, gratuity where eligible, recoveries and final tax. Settlements should be timely, accurate and clearly explained; they are often the last impression an employee has of the company.

Gratuity and leave encashment

Gratuity is generally payable to employees who meet the eligibility conditions under applicable law, commonly after five years of continuous service, calculated using a statutory formula. Many companies provision for gratuity annually and some fund it through insurance schemes.

Leave encashment depends on company policy and applicable law. Both create liabilities that finance teams should recognise in the accounts, rather than discovering them when employees leave.

Payroll software and data security

Payroll software automates calculations, payslips, statutory reports and bank files, and keeps a history of changes. The right tool depends on headcount, number of states, attendance integration and reporting needs. Integration with HR, attendance and accounting systems removes duplicate data entry.

Payroll data is highly sensitive: salaries, bank details, identity numbers. Access should be restricted, changes logged, files encrypted and data handled in line with data-protection laws. Our Data Protection policy describes the standards we apply.

Controls that prevent errors and fraud

These simple controls catch most mistakes, and the occasional deliberate error, before money leaves the account.

• Separate the people who change employee data from those who approve payroll
• Compare every payroll with the previous month and investigate unusual changes
• Reconcile payroll totals with bank payments and accounting entries
• Reconcile statutory deposits with returns each month
• Verify new bank details independently before paying
• Review leavers to ensure they are removed from payroll promptly

An example: fixing a growing company’s payroll

A company grows from 40 to 180 employees across three states. Payroll still runs on spreadsheets, PF and ESI deposits are occasionally late, professional tax is missed in one state and employees complain about inconsistent payslips.

The fix starts with cleaning employee master data and documenting the salary structure. Payroll moves to software integrated with attendance and accounting. A compliance calendar covers PF, ESI, TDS and each state’s professional tax and labour welfare fund. Monthly reviews compare each payroll with the last, and statutory deposits are reconciled with returns. Within two months, payroll runs on time, queries fall and compliance is current.

Payslips that reduce questions

A clear payslip answers most employee questions before they are asked. It should show earnings by component, deductions including PF, ESI, professional tax and TDS, reimbursements, net pay, year-to-date totals and leave balances where relevant, in plain language.

Self-service portals where employees can download payslips, tax documents and submit investment declarations reduce HR workload and give employees confidence that their records are accurate.

Year-end payroll activities

Planning these steps from January onwards avoids a rush in March and surprises for employees when their final tax deductions are calculated.

• Collect and verify investment proofs from employees using the old tax regime
• Recalculate annual tax and adjust TDS in the final months
• File the final quarterly TDS return and issue Form 16
• Reconcile annual PF and ESI contributions with deposits
• Review gratuity and leave liabilities for the accounts
• Archive payroll records securely for the required retention period

Common payroll mistakes

Most of these are caught by a monthly checklist and simple reconciliations, which is why a disciplined process matters more than sophisticated software.

• Incorrect or missing PAN, UAN and bank details
• Late deposit of PF, ESI or TDS
• Missing professional tax in some states
• Wrong tax regime applied to employees
• Leavers remaining on payroll after exit
• No reconciliation between payroll, bank and accounts

Contractors, consultants and interns

Not everyone paid by a business is an employee. Contractors and consultants are usually paid against invoices with TDS deducted under the applicable provisions, and they are not part of salary payroll. Interns may receive stipends with their own treatment. Classifying people correctly matters, because misclassification can create tax and labour law exposure. When in doubt, take professional advice and document the basis for each arrangement.

Communicating with employees

Good payroll is also good communication. Employees appreciate advance notice of changes, clear explanations of tax regime choices and investment declaration deadlines, and a single contact for payroll queries with a promised response time. Short guides for new joiners on reading their payslip, PF and tax reduce repetitive questions and build confidence in the process.

Choosing payroll inputs cut-off dates

A fixed monthly cut-off, for example the 20th or 25th, for attendance, joiners, exits and changes gives payroll enough time to calculate, review and pay on time. Changes after the cut-off roll into the next month, which keeps the process stable and predictable for everyone.

Should you outsource payroll?

Outsourcing makes sense when payroll takes significant management time, when the business operates in several states, when compliance has slipped, or when confidentiality is a concern within a small team. A specialist provider brings up-to-date knowledge, software, a compliance calendar and continuity when staff change.

Our Accounts & Finance team runs payroll alongside accounting & bookkeeping, TDS and compliance, so salary costs, statutory dues and accounts always agree. Read our complete finance guide, or talk to our payroll team.

Frequently asked questions

• How do you handle employees choosing different tax regimes?

  We record each employee’s choice, calculate TDS accordingly, and help explain the implications so employees can choose with confidence.

• Can payroll integrate with our attendance system?

  Yes. We integrate attendance and leave data so payroll inputs flow automatically and accurately each month.

• Is PF registration mandatory for my company?

  Generally, establishments covered under the EPF law, commonly those with 20 or more employees, must register. Smaller establishments may register voluntarily. Confirm current thresholds with EPFO or an adviser.

• Who is covered by ESI?

  Employees earning up to the notified wage limit in establishments covered by the ESI scheme. Coverage depends on wages and location, so payroll must track eligibility.

• When are PF, ESI and TDS due?

  PF and ESI contributions are typically due by the 15th of the following month, and TDS deposits by the 7th, with returns on their own schedules. Always check current due dates.

• What is a full and final settlement?

  The final calculation for a departing employee, covering pending salary, leave encashment, bonuses, gratuity where eligible, recoveries and tax, paid within a reasonable time after exit.

• Can you run payroll for employees in several states?

  Yes. We manage state-specific professional tax and labour welfare fund rules alongside PF, ESI and TDS, with a compliance calendar for each state.

• Is our payroll data kept confidential?

  Yes. Access is restricted to the assigned team, data is stored and transferred securely, and confidentiality agreements apply.

• Do you issue Form 16 and handle TDS returns?

  Yes. We calculate TDS monthly, file quarterly returns and issue Form 16 to employees at year end.

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