Overview: Master statutory payroll deductions in India (FY 2026-27). A complete guide to EPF, ESI, Professional Tax, and Section 192 TDS with clear formulas and practical examples.
What Happens to Your Salary Before It Hits Your Bank Account?
If you have ever looked at a salary slip in India, you probably noticed that the total amount promised in the offer letter (called "Cost to Company" or CTC) is not the exact amount credited to the bank account.
This difference arises from statutory payroll deductions. Under Indian law, every employer is required to deduct specific portions of an employee's earnings for social security, state taxes, and income tax before paying out the net salary.
For small business owners and HR managers, calculating these deductions by hand every month can feel confusing. But once you break down the four main statutory deductions, the math becomes very straightforward.
1. Employee Provident Fund (EPF): Your Long-Term Retirement Savings
The Employee Provident Fund (EPF) is a government-backed retirement savings scheme managed by the Employees' Provident Fund Organisation (EPFO). It applies to companies with 20 or more workers.
Here is how EPF calculation works in simple terms:
The Contribution Split: Both the employee and the employer contribute 12% of the basic salary plus dearness allowance (DA) every month.
Employee Share: 12% is deducted directly from the employee's gross monthly salary.
Employer Share: The employer matches this by contributing another 12%. Out of this 12%, 8.33% goes toward the Employee Pension Scheme (EPS) and 3.67% goes into the EPF account.
The Statutory Ceiling: For mandatory EPF coverage, the statutory wage limit is Rs. 15,000 per month, though companies can choose to deduct 12% on the actual basic salary.
Quick Example:
If an employee has a basic monthly salary of Rs. 25,000:
Employee EPF deduction (12%) = Rs. 3,000
Employer EPF contribution (12%) = Rs. 3,000
Total money saved in the PF account for that month = Rs. 6,000 plus government interest.
2. Employees' State Insurance (ESI): Medical and Health Protection
The Employees' State Insurance (ESI) scheme provides medical care and financial protection to employees during sickness, maternity, or workplace injury.
ESI applies to non-seasonal factories and commercial establishments with 10 or more employees (in some states, 20 employees).
Key rules for ESI deduction:
Eligibility Wage Cap: Employees earning a gross salary up to Rs. 21,000 per month (or Rs. 25,000 for employees with disabilities) are covered under ESI.
Employee Share: 0.75% of the gross salary is deducted from the employee.
Employer Share: 3.25% of the gross salary is paid by the employer.
Total ESI Contribution: 4.00% of the gross wage is deposited with the ESIC department every month.
If an employee earns more than Rs. 21,000 per month, ESI deduction does not apply to them at all.
3. Professional Tax (PT): State-Level Employment Tax
Professional Tax is not a central government tax. It is levied by individual state governments on salaried individuals and professionals.
Because PT is controlled by states, the rules and slab rates differ depending on where your office is registered:
Some states (like Delhi, Rajasthan, and Haryana) do not charge any Professional Tax.
States like Maharashtra, Karnataka, Telangana, Tamil Nadu, and West Bengal have specific monthly salary slabs.
The maximum limit allowed by the Indian Constitution is Rs. 2,500 per employee per year.
For instance, in Karnataka, employees earning above Rs. 15,000 per month pay a flat Rs. 200 per month as Professional Tax. In Maharashtra, the deduction is Rs. 200 for most months and Rs. 300 in February.
4. Tax Deducted at Source (TDS): Income Tax on Salary
Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act requires employers to estimate an employee's annual tax liability and deduct it in equal monthly installments from their paycheck.
How employers compute monthly TDS:
Estimate the employee's total annual taxable income from salary.
Check which tax regime the employee selected (New Tax Regime with revised slabs or Old Tax Regime with exemptions like HRA and 80C).
Subtract allowable deductions and calculate total annual tax.
Divide the total annual tax by the remaining months in the financial year.
Deduct that monthly tax amount as TDS from the paycheck.
Summary of Monthly Salary Deductions
Deduction Type | Managed By | Who Pays? | Calculation Basis |
|---|---|---|---|
EPF | Central Government (EPFO) | Employee (12%) + Employer (12%) | Basic Salary + DA |
ESI | Central Government (ESIC) | Employee (0.75%) + Employer (3.25%) | Gross Salary (if <= Rs. 21,000/mo) |
Professional Tax (PT) | State Governments | Employee | State-specific salary slabs |
TDS (Income Tax) | Income Tax Department | Employee | Annual projected taxable income |
Conclusion
Managing salary deductions in India does not have to be intimidating. By keeping clear records of basic pay, gross earnings, and state-specific tax slabs, employers can make sure employees get paid accurately while staying 100% compliant with government regulations.
Using automated HR software like PrimeHR removes all manual calculation guesswork, calculating EPF, ESI, PT, and TDS in 1-click so paydays remain smooth and error-free.
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