Payroll in India 2026: TDS, EPF, ESI and payslips

In India the employer deducts income tax at source (TDS) from each salary, together with the employee's 12% Employees' Provident Fund (EPF) contribution and, for lower-paid staff, 0.75% Employees' State Insurance (ESI). On top of salary the employer pays its own 12% to EPF, about 1% for insurance and administration charges, and 3.25% ESI where it applies.

Indian payroll at a glance

EPF, ESI and other contributions

The new EPF wage ceiling. Notification S.O. 5109(E) of the Ministry of Labour and Employment, issued under the Code on Social Security, 2020 and in force from its publication on 17 September 2026, raised the EPF wage ceiling from ₹15,000 to ₹25,000 a month. The rates did not change, but the maximum mandatory contribution rises from ₹1,800 to ₹3,000 a month for each side. Employees whose EPF wages are within the ceiling must be enrolled in EPF, EPS and EDLI. For September 2026, EPFO splits the month: contributions for 1 to 16 September use the ₹15,000 ceiling and those for 17 to 30 September the ₹25,000 ceiling, in a single ECR return. Employees above the ceiling can join with the employer's consent, and existing contributions on higher wages continue.

EPF counts EPF wages, broadly basic pay and dearness allowance, not the whole gross salary. Both shares are paid to EPFO by the 15th of the following month.

ESI. The ESI scheme covers employees earning up to ₹21,000 a month (₹25,000 for persons with disabilities). An employee whose average daily wage is ₹176 or less pays no employee share, but the employer still pays 3.25%. Contributions run in two periods, April to September and October to March; an employee whose pay rises above the limit during a period stays covered until it ends.

Professional tax. Several states levy a professional tax on salaries, which the employer deducts and pays to the state. Amounts, slabs and deadlines differ from state to state.

Income tax on salaries: TDS under the 2025 Act

The Income-tax Act, 2025 applies to salary paid or credited from 1 April 2026, and TDS on that salary falls under section 392(1). Salary for 2025-26 paid up to 31 March 2026 stays under section 192 of the Income-tax Act, 1961. The employer works out the tax on the employee's estimated salary for the tax year under the employee's regime and spreads it over the salary payments of the year.

New regime (the default). The Finance Bill 2026 left the section 202 rates unchanged for tax year 2026-27:

Salaried employees deduct a standard deduction of ₹75,000. A resident individual whose total income does not exceed ₹12 lakh gets a rebate of up to ₹60,000 (section 156 of the 2025 Act, formerly section 87A), so a salary of up to ₹12.75 lakh a year pays no income tax. Health and education cess of 4% is added to the tax, and a surcharge applies above ₹50 lakh of income: 10%, 15% above ₹1 crore and at most 25% above ₹2 crore. Most deductions and exemptions, including the house rent allowance exemption, are not available in the new regime; the employer's NPS contribution of up to 14% of salary is.

Old regime (on request). The old rates are nil up to ₹2.5 lakh, 5% up to ₹5 lakh, 20% up to ₹10 lakh and 30% above, with higher nil bands for residents aged 60 or more, a standard deduction of ₹50,000 and a rebate of up to ₹12,500 when total income does not exceed ₹5 lakh. In exchange it keeps the deductions and exemptions the new regime drops. An employee who wants the old regime must tell the employer during the year; otherwise the employer deducts TDS at the new-regime rates. Telling the employer is not the formal choice, which is made in the tax return.

Minimum wage, working time and mandatory pay

India has no single national minimum wage for payroll purposes. Minimum wages are notified by the central government for its own sphere and by each state, by industry, skill level and area, so the rate depends on where and in which sector the employee works. Check the current notification for your state and sector before you set pay, and the state rules on working hours and overtime.

There is no statutory 13th-month salary. The bonus legislation requires an annual statutory bonus for eligible lower-paid employees; check whether your staff fall within its wage limits.

The September 2026 EPF ceiling was set under the Code on Social Security, 2020, one of the four Labour Codes; check how their definition of wages applies to your salary structure.

Monthly payroll calendar and filings

Before the first payroll: obtain a TAN to deduct and deposit TDS, register with EPFO (and with ESIC where the ESI Act covers your establishment), register for professional tax in states that levy it, and collect each employee's PAN and choice of tax regime.

Late deposit of TDS costs interest of 1.5% a month from the date of deduction to the date of payment. The deposit timelines are carried over unchanged into Rule 218 of the Income-tax Rules, 2026.

Worked example: ₹1,25,000 a month

Priya is a resident employee in the new regime with a gross salary of ₹1,25,000 a month (₹15,00,000 a year). She is an existing EPF member and her employer pays EPF on the ₹25,000 wage ceiling. Her pay is above the ESI limit, and professional tax depends on the state, so both are left out.

Tax for the year: ₹15,00,000 − ₹75,000 standard deduction = ₹14,25,000 taxable. Tax: 5% × ₹4,00,000 = ₹20,000, plus 10% × ₹4,00,000 = ₹40,000, plus 15% × ₹2,25,000 = ₹33,750, total ₹93,750. With 4% cess (₹3,750) the tax is ₹97,500 a year, or ₹8,125 a month. Her EPF contribution does not reduce taxable income in the new regime.

Common mistakes

1. 1Keeping the ₹15,000 EPF ceiling after 17 September 2026, which under-enrols employees earning up to ₹25,000.
2. 2Deducting TDS under the old regime without the employee's request, or ignoring a request the employee made.
3. 3Quoting section 192 and Form 24Q for 2026-27 salary instead of section 392 and Form 138.
4. 4Missing the 7th: TDS paid late costs 1.5% interest a month.
5. 5Dropping ESI for employees who are still within the ₹21,000 limit or within a running contribution period.
6. 6Forgetting state rules: professional tax and the state or sector minimum wage.

For a smooth month-end, see our month-end close checklist.

How Clientlly helps

Clientlly ships a built-in payroll profile for India: the new-regime slabs for tax year 2026-27 with the standard deduction, the section 156 rebate and the 4% cess, EPF at 12% for the employee and 13% for the employer (EPF, EPS, EDLI and administration charges) on wages up to the ₹25,000 ceiling, checked against official sources on 1 October 2026. It calculates gross to net and the employer contributions, produces payslips, supports recurring payroll adjustments, and imports employees and payroll data; an administrator can adjust the rates in the payroll tax settings. The profile models one employee in a primary job, single, without dependants, at national level, so ESI, state professional tax and minimum wages, the old regime, the surcharge and personal circumstances must be checked.

The Clientlly HR module also handles leave requests and approvals with a leave calendar and keeps HR documents in one place, and attendance and time tracking records hours and overtime for you to review before payroll.