Short answer: Payroll compliance in India means correctly calculating, deducting, depositing and reporting four statutory obligations every pay cycle: Provident Fund (PF), Employees’ State Insurance (ESIC), Professional Tax (PT) and Tax Deducted at Source (TDS) on salaries. Each has its own rules and deadlines. Getting any one wrong creates interest, penalties and audit exposure.

This guide explains each obligation in plain English, where growing companies most often slip, and how to build a payroll that stays penalty-free. Rates, wage ceilings and due dates change, so always confirm current figures with the relevant authority or a qualified adviser.

1. Provident Fund (PF)

PF is India’s mandatory retirement savings scheme for employees of covered establishments, administered by the Employees’ Provident Fund Organisation (EPFO). Both employer and employee contribute a share of wages each month. The employer deducts the employee’s share from salary, adds its own contribution, deposits both and files the monthly return.

Where companies slip: calculating contributions on the wrong wage base, missing new joiners, or depositing late.

2. Employees’ State Insurance (ESIC)

ESIC provides medical care and cash benefits — for sickness, maternity and employment injury — to employees earning up to a notified wage ceiling in covered establishments. As with PF, employer and employee both contribute, and the employer deposits and reports monthly.

Where companies slip: failing to register employees as they cross into or out of eligibility, and gaps when headcount grows quickly across locations.

3. Professional Tax (PT)

Professional Tax is levied by individual states, not the centre, and not every state levies it. Where it applies, the employer deducts PT from salary according to the state’s slabs and remits it on the state’s schedule. Many states also require the employer to hold its own registration.

Where companies slip: opening an office or deploying staff in a new state without registering for that state’s PT — a common gap for companies expanding beyond their home city.

4. TDS on salaries

Employers must deduct income tax at source from salaries, based on each employee’s estimated annual income and declared investments, deposit it with the government and file periodic TDS statements. At year end, employees receive a certificate of tax deducted.

Where companies slip: late deposits, mismatches between deductions and filed statements, and poor handling of mid-year joiners and leavers.

The bigger picture: labour law and the labour codes

Payroll doesn’t sit in isolation. It connects to central and state labour law — Shops and Establishments rules, the Contract Labour Act, POSH obligations and labour licences. India’s four Labour Codes, in force since November 2025, consolidate many older central labour laws and also change how terms such as “wages” are defined, which flows straight into PF and other contributions. Review your salary structures against the codes and the applicable state rules.

If you use contractors or vendor-supplied staff, their compliance matters too. Verifying vendor onboarding documents, agreements and statutory filings — and auditing them periodically — protects you from inheriting someone else’s gaps.

Five habits of a penalty-free payroll

  1. Run payroll on one system. A centralised HRIS keeps salary, attendance, leave and statutory data in one place, so deductions match records.
  2. Keep a compliance calendar. Every PF, ESIC, PT and TDS deadline, for every state you operate in, tracked and owned.
  3. Register before you hire. Check PT and other state registrations before deploying people in a new location.
  4. Clean up the past once. If records are messy, a one-time compliance closure across PF, ESIC, PT and labour licences regularises legacy gaps so you start audit-ready.
  5. Review quarterly. Check performance against agreed SLAs, not just when an auditor calls.

When to outsource payroll and compliance

Building an in-house payroll and compliance team is expensive, and running several vendors for HR, staffing and payroll creates gaps between them. Outsourcing these functions to a specialist typically saves 20–40% compared with in-house teams or multiple vendors.

Novelworx runs full-cycle payroll — salary processing, payslips, statutory deductions, bank transfers and PF, ESIC, PT and TDS filings — through a centralised HRIS. With 3,000+ people on its rolls, Novelworx has recorded zero statutory penalties for the clients whose compliance it manages.

For the month-by-month mechanics, read how a statutory compliance calendar works. Explore Payroll & Compliance or get a tailored proposal.