PF, ESI, professional tax and TDS on salary: a simple guide for small employers

Hiring your first employees means running payroll correctly every month. Four deductions come up again and again. Here is what each one is, when it applies and when the money is due.

Provident Fund (PF)

• When it applies: establishments with 20 or more employees must register with EPFO. Smaller businesses can join voluntarily.
• Who is covered: employees earning up to ₹15,000 a month in basic pay must be members. Employees above that limit at joining can choose not to join.
• How much: the employee contributes 12% of basic pay plus DA. The employer also contributes 12%: 8.33% goes to the pension scheme (on a wage of up to ₹15,000) and the rest to the employee's PF account. The employer also pays small administration and insurance charges.
• When it's due: by the 15th of the following month, through the monthly ECR file on the EPFO portal.

Employees' State Insurance (ESI)

• When it applies: establishments with 10 or more employees in areas where ESI is in force.
• Who is covered: employees with gross pay up to ₹21,000 a month.
• How much: 0.75% of gross pay from the employee and 3.25% from the employer.
• When it's due: by the 15th of the following month.
• What employees get: medical care for them and their family, sickness and maternity benefits.

Professional tax (PT)

• What it is: a state-level tax on employment. Not every state levies it.
• How much: depends on the state and the salary slab. The total can never be more than ₹2,500 a year for one person.
• In Tamil Nadu: it is collected half-yearly by the local body (corporation, municipality or panchayat), based on the salary earned in each half-year.
• Who deducts it: the employer deducts it from salary and pays it to the local body.

TDS on salary

• What it is: income tax that the employer deducts from salary every month, based on each employee's estimated income for the year.
• Tax regime: the new regime is the default. An employee can tell you they prefer the old regime, with its deductions, and you calculate on that basis.
• How much: under the new regime, salaried employees with income up to about ₹12.75 lakh a year (₹12 lakh plus the ₹75,000 standard deduction) owe no tax because of the rebate. Budget 2026 kept these rates unchanged. Above that, slab rates apply.
• When it's due: deposit by the 7th of the following month (30 April for tax deducted in March), file quarterly TDS returns and give each employee their annual TDS certificate.
• Note: the Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. Section and form numbers changed (for example, the salary TDS certificate known as Form 16 becomes Form 130), but the basic payroll duties are the same.

Gratuity

Not a monthly deduction, but plan for it: permanent employees qualify for gratuity after five years of continuous service, and under the new labour codes fixed-term employees qualify after one year (pro rata). Gratuity is 15 days' wages for each year of service.

The labour codes

The four labour codes took effect on 21 November 2025. One important change is a common definition of wages: wages must make up at least half of total pay, so if allowances are more than half, the excess is counted as wages for benefits such as gratuity. Some rules are still being finalised, so review salary structures with your CA or payroll consultant.

A simple monthly payroll calendar

How Dervo HR & Payroll helps

Dervo HR & Payroll calculates PF, ESI, professional tax and TDS for each employee, emails payslips, prepares the PF ECR file and keeps a compliance calendar so nothing is missed. See it in the live demo.