Hiring your first employee is an exciting milestone. But in India, it also triggers a chain of statutory compliance obligations that most first-time founders aren't prepared for. Miss one, and you're looking at backdated contributions, penalties, and in some cases, prosecution of directors and founders.

This guide breaks down every payroll compliance requirement — EPF, ESI, TDS on salary, and Professional Tax — with the exact thresholds, contribution rates, and deadlines you need to know.

⚠️ Don't Ignore This Payroll compliance violations in India are treated as criminal offences under EPF Act and ESI Act. Company directors can be personally prosecuted. Non-compliance discovered during investor due diligence has killed funding rounds.

1. EPF — Employees' Provident Fund

EPF

Employees' Provident Fund Organisation (EPFO)

Registration Threshold
20 or more employees (any day in a year triggers registration)

Contribution Rates:

  • Employee contribution: 12% of basic salary + DA
  • Employer contribution: 12% of basic salary + DA — split into:
    • 3.67% to EPF account
    • 8.33% to EPS (Pension Scheme) — capped at ₹1,250/month (on ₹15,000 ceiling)
  • Additional employer contribution: 0.5% to EDLI (insurance scheme)
  • Administrative charges: 0.5% (minimum ₹500/month)
Salary Ceiling for Contributions
₹15,000/month basic salary — contributions are mandatory for employees earning up to this. Above ₹15,000, EPF is optional (employee can opt out if not already a member).

Payment Due Date: By the 15th of the following month. Late payment attracts interest at 12% p.a. (increases to 18% if delayed further).

Monthly Filings: ECR (Electronic Challan cum Return) on the EPFO Unified Portal. Generate challan, pay via net banking, upload ECR.

💡 Startup Tip: Can You Avoid EPF Before 20 Employees? Yes — EPF registration is mandatory only at 20 employees. However, if you voluntarily register, you cannot deregister even if headcount drops. Many investors expect EPF compliance even for smaller teams as a sign of good governance. Some startups proactively register at 10+ employees.

2. ESI — Employees' State Insurance

ESI

Employees' State Insurance Corporation (ESIC)

Registration Threshold
10 or more employees (in most states; some states have 20-employee threshold)
Salary Ceiling
Applicable only for employees with gross salary ≤ ₹21,000/month (₹25,000 for disabled employees)

Contribution Rates:

  • Employee contribution: 0.75% of gross wages
  • Employer contribution: 3.25% of gross wages
  • Total: 4% of gross wages

Benefits Covered: Medical treatment for employee + family, sickness benefits (70% wages for 91 days), maternity benefit, disablement benefit, and dependents' benefit.

Payment Due Date: By the 15th of the following month. Half-yearly returns (April–September and October–March) due within 42 days of period end.

3. TDS on Salary — Section 192

TDS

Tax Deducted at Source on Salary (Income Tax Act)

Every employer is a tax collector. You must calculate the projected annual tax liability of each employee at the start of the year and deduct it proportionately each month from their salary.

How to Calculate TDS on Salary:

  1. Calculate gross annual salary (CTC minus employer PF, gratuity provisioning)
  2. Reduce exemptions (HRA, LTA, standard deduction ₹75,000 under new regime)
  3. Reduce deductions declared by employee (Section 80C, 80D etc. if old regime chosen)
  4. Compute tax on net taxable income at applicable slab rates
  5. Divide annual tax by 12 — deduct this amount monthly

Key Compliance Steps:

  • Collect Form 12BB from each employee at the start of the year (investment declarations)
  • Collect actual proof in January–February before year-end processing
  • Deposit TDS by 7th of the following month (March deadline: April 30)
  • File Form 24Q (quarterly TDS return) — due on 31st of month following each quarter
  • Issue Form 16 to employees by June 15 after year-end
No TDS Required If
Employee's estimated annual income is below the basic exemption limit (₹3 lakh under new regime, ₹2.5 lakh under old regime)

4. Professional Tax

Professional Tax

State-Levied Tax on Employment

Professional Tax (PT) is a state subject — not all states levy it. States that do have different slabs and due dates. Employers must register, deduct from employees, and remit to the state government.

StateMax PT (₹/year)Notes
Maharashtra₹2,500₹200/month; ₹300 in Feb
Karnataka₹2,400₹200/month
West Bengal₹2,400Slab-based monthly
Tamil Nadu₹1,800Half-yearly payments
Gujarat₹2,500Annual payment
Delhi, Haryana, UP—No Professional Tax levied

PT registration must be done with the state's commercial tax / municipal authority within 30 days of hiring the first employee in that state.

Pre-Hire Payroll Compliance Checklist

Before issuing your first salary slip, make sure these are in place:

What Must a Payslip Include?

A legally compliant Indian payslip must show:

✅ Gratuity: Plan From Day 1 Under the Payment of Gratuity Act, an employee completing 5 years of continuous service is entitled to gratuity: 15 days salary for every completed year of service. Even if you have fewer than 10 employees, it's best practice to provision for gratuity monthly. It's a deferred obligation that catches many startups off-guard at the time of payment.

Penalties for Non-Compliance

ViolationPenalty
Not registering for EPF (when due)Equal to contributions due + 18% interest + prosecution
Late EPF depositInterest 12%–18% p.a. + damages 5%–25% of dues
Not registering for ESI₹5,000 fine + civil suit for unpaid contributions
Not deducting / depositing TDSPenalty equal to TDS amount + 1%–1.5%/month interest + potential prosecution
Not filing Form 24Q₹200/day + penalty of ₹10,000–₹1,00,000
Not issuing Form 16₹100/day per employee

Let Us Handle Your Payroll Compliance

From EPF/ESI registration to monthly payslips, TDS calculations, and annual Form 16 — our payroll team handles it all, so you can focus on growing your business.

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