Running Payroll Compliantly in India: PF, ESI, PT, and TDS Explained
Indian payroll has four statutory pieces that trip up every new employer. Understand PF, ESI, PT, and TDS once and the monthly run stops being scary.
When we hired our first employees in India, the salary math was the easy part. The hard part was the alphabet soup, PF, ESI, PT, TDS, each with its own rules about who it applies to, how much, who pays it, and when it has to reach the government. Getting any of them wrong is not a rounding error; these are statutory obligations with deadlines and penalties.
The reassuring truth is that these four are well defined and stable in structure, even when specific rates and thresholds change. Once you understand what each one is and where it sits in the calculation, Indian payroll becomes a routine rather than a monthly anxiety. This guide explains all four in plain language so you know what your run should contain.
One important caveat before we start: this is general explanation, not tax or legal advice, and the rates, wage ceilings, and thresholds for these schemes change. Always verify the current numbers with an authoritative source or a qualified advisor before you run payroll. What stays stable is the structure, and that is what is worth learning.
PF: Provident Fund
The Employees Provident Fund is a retirement savings scheme. Both the employee and the employer contribute a percentage of the employee wages into the fund, where it accumulates with interest for the employee retirement. The employee contribution is deducted from their pay; the employer contribution is an additional cost on top.
PF applicability depends on the size of the establishment and wage levels, and there are rules about wage ceilings that affect how the contribution is calculated. Because both sides contribute, PF is a clear example of why cost to company is higher than gross pay: the employer share is a real expense that never appears as a deduction on the payslip.
- A retirement savings fund for the employee
- Both employee and employer contribute a percentage of wages
- Employee share is deducted; employer share is an added cost
- Applicability and ceilings depend on establishment size and wages
ESI: Employees State Insurance
Employees State Insurance is a health and social security scheme that provides medical care and certain benefits to covered employees and their dependents. Like PF, it is funded by contributions from both employee and employer, with the employer share being the larger one and an additional cost to the business.
ESI is wage-threshold based: it generally applies to employees earning up to a specified monthly wage limit, so your higher-paid staff may fall outside it while lower-paid staff are covered. This means your run can have some employees with ESI and some without, which is normal and expected, not an error.
PT: Professional Tax
Professional Tax is a state-level tax on income from employment. The key thing that catches founders out is that it is a state subject, so whether it applies, how much it is, and the slabs all depend on the state where the employee works. Some states levy it; others do not.
Because it is state-specific, a company with employees across several states has to handle several PT rules at once. PT is usually a modest amount, deducted from the employee, but the administrative point is that you cannot assume one rule covers everyone. The employee location, which your employee record already holds, drives which rule applies.
- A state-level tax on employment income
- Applicability, rates, and slabs vary by state
- Deducted from the employee; usually a modest amount
- Driven by the employee work location, not the company headquarters
TDS: Tax Deducted at Source
TDS on salary is income tax withheld by the employer on behalf of the employee and paid to the government. Instead of the employee paying their whole annual tax in one go, the employer estimates the annual liability, divides it across the year, and deducts a portion each month. At year end it reconciles against the employee actual income and declared investments.
This is the most judgment-heavy of the four, because it depends on the employee projected annual income, their chosen tax regime, and any declared deductions or exemptions. Good payroll collects those declarations, computes the monthly TDS consistently, and produces the year-end statements the employee needs to file their return. Getting TDS roughly right each month avoids a painful correction in the final months.
Keeping the monthly run clean
The way to stay compliant is not heroics, it is structure. Each of these has a remittance and filing rhythm, and the discipline that matters most is hitting those dates. Calculate correctly, deduct in the right order, remit to the right authority, and keep the record that proves you did.
Because PT depends on state and ESI depends on wage level, the cleanest setup ties every statutory rule to the employee record rather than to a manual checklist. When the system knows where someone works and what they earn, it can apply the right rules automatically, which is exactly where manual processes fail as you add people and states.
- Apply PF, ESI, PT, and TDS based on the employee actual data
- Deduct in the correct order and record the calculation
- Remit and file each item by its own deadline
- Produce payslips and year-end statements employees can rely on
- Re-verify current rates and thresholds before each cycle
Atlas Payroll ships with India statutory rules, PF, ESI, PT, and TDS, pre-loaded and tied to the same employee record that holds each person location and wage, so the right rule applies to the right person without a manual lookup. Always confirm current rates yourself; the structure is what the software keeps consistent.