India Payroll Decoded: PF, ESI, TDS, and Gratuity Explained

Open any Indian payslip for the first time and you'll encounter a set of acronyms that can feel impenetrable: PF, EPF, ESI, TDS, PT, LWF, HRA, LTA, gratuity. Each represents a statutory obligation — some deducted from the employee's salary, others contributed by the employer over and above it. Getting any of them wrong carries penalties ranging from interest charges to criminal liability.

This guide breaks down each component in plain English, with the rates, thresholds, and compliance obligations that apply in financial year 2025–26.

Provident Fund (PF / EPF)

The Employees' Provident Fund is a retirement savings scheme governed by the EPF & MP Act, 1952. Both employer and employee contribute 12% of the employee's basic salary (plus Dearness Allowance, if applicable) each month.

• Employee contribution: 12% of basic + DA — deducted from salary
• Employer contribution: 12% of basic + DA — paid by employer on top of salary
• Threshold: Mandatory for employees earning up to ₹15,000/month in basic salary; employers may choose to apply it to all employees regardless
• Registration: Required with EPFO within 30 days of reaching 20 employees

Of the employer's 12%, 8.33% goes to the Employees' Pension Scheme (EPS) and 3.67% to the EPF account — subject to a salary ceiling of ₹15,000 for the EPS component.

Employees' State Insurance (ESI)

ESI provides health, maternity, disability, and dependent benefits to covered employees. It applies to establishments with 10 or more employees (20 in some states).

• Employee contribution: 0.75% of gross salary
• Employer contribution: 3.25% of gross salary
• Coverage threshold: Employees earning up to ₹21,000/month gross

Tax Deducted at Source (TDS)

TDS on salaries is deducted by the employer at the time of payment and remitted to the government. The rate is determined by the employee's projected annual tax liability under the applicable tax regime (old or new). Employers must issue Form 16 annually and file quarterly TDS returns (Form 24Q).

Gratuity

Under the Payment of Gratuity Act, 1972, employees who complete five or more years of continuous service are entitled to gratuity on separation (resignation, retirement, or death/disability). The formula: 15 × last drawn basic salary × years of service ÷ 26. This is an employer liability that must be provisioned from month one — it is not a deduction from the employee's salary.