Payroll taxes in India are the statutory deductions and contributions that employers and employees are
legally required to make from salary — mainly Tax Deducted at Source (TDS) on income, Employees’
Provident Fund (EPF), Employees’ State Insurance (ESI), and Professional Tax. Employers deduct these
from an employee’s gross salary each month and deposit them with the relevant government authority,
while also contributing their own share toward EPF and ESI. Getting this right isn’t optional — it’s the legal
foundation of running payroll in India.
If you’ve ever looked at a payslip and wondered why your “in-hand” salary is noticeably lower than
your offer letter’s CTC, payroll taxes are usually the answer.
For businesses, payroll taxes aren’t just a line item — they’re a legal obligation. Miss a deadline,
misclassify an allowance, or get a deduction wrong, and you’re looking at penalties, interest, and
unhappy employees. And 2026 is not the year to run on autopilot: the Labour Codes took effect in
November 2025, the Income Tax Act, 2025 replaced the six-decade-old 1961 Act from 1 April 2026,
and a brand-new EPF Scheme, 2026 superseded the 1952 scheme on 29 June 2026.
This guide breaks payroll taxes down in plain language — what they are, who pays what, how they’re
calculated, and exactly what changed in 2026
What Are Payroll Taxes in India?
Payroll taxes are the statutory deductions made from an employee’s salary, along with the matching
contributions employers must make, before wages are paid out. In India they’re a bundle of separate
obligations:
• Income tax (TDS) — deducted from salary and deposited with the Income Tax Department
• Employees’ Provident Fund (EPF) — a retirement savings contribution managed by the EPFO
• Employees’ State Insurance (ESI) — a health and social security contribution for lower-wage
employees, managed by the ESIC
• Professional Tax — a small state-level tax on employment income
• Plus state-specific deductions, like the Labour Welfare Fund, that apply in certain states
Each has its own rules, rates, and filing calendar — which is exactly why payroll compliance in India
can feel more complicated than it needs to be.
1. Income Tax (TDS on Salary)
What changed in 2026: From 1 April 2026, salary TDS operates under the new Income Tax Act, 2025,
which replaces the 1961 Act and introduces the simpler “tax year” concept. The mechanics of monthly
salary TDS remain the same for employers.
Who pays: The employee bears the tax; the employer deducts and deposits it.
Current rates (FY 2026-27): The new tax regime remains the default. Budget 2026 kept the slabs
unchanged:
FY 2026-27, new tax regime (default). Standard deduction of ₹75,000 applies; §87A rebate makes tax nil up to ₹12 lakh taxable income. 4% cess extra.
A standard deduction of ₹75,000 applies to salaried employees under the new regime, and the
Section 87A rebate (₹60,000) effectively makes tax payable nil for taxable income up to ₹12 lakh —
meaning salaried employees earning up to roughly ₹12.75 lakh a year pay zero income tax. A 4%
health and education cess applies on top. Employees can still opt for the old regime (basic exemption
₹2.5 lakh, with deductions like Section 80C and HRA exemption) if it works out cheaper. The 87A
rebate does not apply to special-rate income such as equity capital gains.
Due dates: TDS deposited by the 7th of the following month (30 April for March deductions); quarterly
TDS returns filed by the employer.
2. Provident Fund (EPF)
EPF is a mandatory retirement savings scheme, administered by the EPFO, for establishments with 20
or more workers (many smaller businesses opt in voluntarily).
What changed in 2026: On 29 June 2026, the EPF Scheme, 2026 was notified under the Code on
Social Security, 2020, superseding the EPF Scheme, 1952. The core structure — 12% contributions,
the ₹15,000 wage ceiling, UAN as permanent identifier — is retained, but the new scheme sharpens
the line between mandatory contributions (up to the ceiling) and voluntary contributions above it,
tightens electronic returns, and strengthens oversight of exempted PF trusts. Existing members
transition automatically; balances are unaffected.
Two limited-time programmes came with it:
• Employees’ Enrolment Campaign, 2026 (until 31 October 2026): employers can declare and enrol
employees who joined between 1 April 2009 and 31 March 2026 but were never enrolled — with
past employee-share contributions waived where never deducted, and damages limited. If you
have legacy coverage gaps, this is the cheapest exit you will ever get.
• VISHWAS, 2026: a settlement window for damages on contribution defaults relating to periods
before 14 June 2024.
Contribution rate: 12% of wages from the employee, matched by 12% from the employer (10% for
certain notified categories). The employer’s 12% splits: up to 8.33% to the Employees’ Pension
Scheme (EPS, capped at ₹1,250/month) and the remainder to the EPF account, plus a small
administrative charge and EDLI (insurance) contribution.
Wage ceiling: Mandatory only up to ₹15,000/month, though both sides can agree to contribute on full
wages voluntarily. Since the Labour Codes, the contribution base follows the Codes’ uniform “wages”
definition rather than the older “basic wages” concept.
Due date: By the 15th of the following month, with the Electronic Challan-cum-Return (ECR).
3. Employee State Insurance (ESI)
ESI, administered by the ESIC, provides medical care, sickness, maternity and related benefits at
establishments with 10 or more employees (20 in a few states, such as Maharashtra).
Contribution rate: A combined 4% of gross wages — 3.25% employer, 0.75% employee. Employees
whose daily average wage is ₹176 or less are exempt from their own share; the employer still
contributes.
Wage ceiling: Applies only when gross monthly wages don’t exceed ₹21,000 (₹25,000 for employees
with disabilities). Once covered at the start of a contribution period, coverage continues to the
period’s end even if a raise crosses the ceiling.
Due date: Both shares by the 15th of the following month via the ESIC portal.
4. Professional Tax
A small, state-level tax on income from salary, trade, or profession (Article 276(2) of the Constitution).
Employees pay it; employers deduct it monthly. Capped at ₹2,500/year nationally, but slabs vary
widely — Maharashtra charges nothing up to ₹7,500/month, ₹175/month from ₹7,501–₹10,000, and
₹200/month above (with a ₹300 February adjustment). Delhi, Uttar Pradesh, Haryana, Punjab Rajasthan, and Uttarakhand don’t levy it at all. Typically monthly; a few states (like Tamil Nadu) collect
half-yearly.
5. Labour Welfare Fund & Other State Deductions
States such as Maharashtra, Karnataka, Gujarat, and Tamil Nadu require small Labour Welfare Fund
contributions from employer and employee, usually half-yearly or annually — nominal amounts, but
applicability varies by state. Multi-state payroll setups should also check state cesses,
shops-and-establishments registrations, and industry welfare funds.
Worked Example: ₹15,00,000 Annual Salary (FY 2026-27)
Gross ₹1,25,000/month, structured per the Labour Codes’ 50% wage rule; employee in Karnataka,
new tax regime, PF at the statutory ₹15,000 ceiling
TDS working (annual, new regime): ₹15,00,000 gross − ₹75,000 standard deduction = ₹14,25,000
taxable. Tax: Nil (to ₹4L) + ₹20,000 (5% on next ₹4L) + ₹40,000 (10% on next ₹4L) + ₹33,750 (15%
on remaining ₹2.25L) = ₹93,750. 87A rebate not applicable (income exceeds ₹12 lakh). Add 4% cess
₹3,750 → ₹97,500/year → ₹8,125/month.
The employer separately contributes 12% EPF (₹1,800 at the ceiling) and 3.25% ESI where applicable —
additional employer costs, not deductions from pay.
Payroll Compliance Checklist
• Salary structure aligns with the Labour Codes’ 50% wage definition
• Employee tax regime declaration on file; TDS calculated accordingly
• PAN and Aadhaar verified for every employee
• EPF calculated correctly; ECR filed by the 15th
Legacy EPF enrolment gaps reviewed against the Enrolment Campaign, 2026 (closes 31 October
2026)
• ESI checked against the ₹21,000 ceiling; contributions filed by the 15th
• Professional tax applied per work-location state (not registered-office state)
• Labour Welfare Fund paid where the state requires it
• TDS deposited by the 7th of the following month
• Payslips issued and archived every cycle
• Form 16 issued annually; TDS returns filed quarterly
• Full & final settlements completed within two working days of exit
Common Payroll Tax Mistakes
• Late filing of TDS, EPF, or ESI returns — interest and penalties
• Incorrect PF wage base — applying old “basic wages” logic instead of the Codes’ uniform
definition
• Wrong TDS regime applied because the employee’s declaration wasn’t captured or updated
• Missing declarations or investment proofs — excess or short deduction
• Professional tax by registered office instead of work location
• Manual spreadsheet errors as headcount grows
• Ignoring the 50% wage rule after 21 November 2025 — understating PF and gratuity liability
How the Labour Codes Change Payroll (2026)
India’s four Labour Codes came into force on 21 November 2025, replacing 29 older central laws. For
payroll, the key change is the uniform “wages” definition: Basic + DA (and retaining allowance) must
be at least 50% of total remuneration; excess exempted allowances are added back for EPF, gratuity
and other statutory dues. Fixed-term employees now earn pro-rata gratuity after one year (permanent
staff remain on the five-year rule), and full & final settlements are due within two working days of exit.
Central rules were notified on 8 May 2026; state rules are still phasing in — check MoLE notifications
before large-scale restructuring
Conclusion
Payroll taxes in India aren’t a single tax — they’re interconnected obligations, each with its own rate,
ceiling, and deadline. With the Labour Codes reshaping “wages,” a new Income Tax Act in force, and
the EPF Scheme, 2026 now live, this is the year to revisit your payroll setup rather than assume last
year’s structure still complies.
Payleute handles payroll calculations, statutory deductions, tax compliance, and salary processing end to
end. Schedule a free consultation at payleute.com/contact
