India payroll, PF, ESI & gratuity explained

Hiring in India can be one of the smartest global expansion moves access to top talent, competitive costs, and a fast-growing workforce.

But payroll in India isn’t just about paying a salary.

Employers must also manage statutory benefits like Provident Fund (PF), Employee State Insurance (ESI), and Gratuity, which are mandatory under Indian labour laws.

If you’re hiring employees in India (especially as a foreign company), understanding these components is critical to staying compliant and budgeting correctly.

1. How Payroll Works in India

Payroll in India is structured into multiple salary components, not just one lump sum.

A typical salary structure includes:

• Basic Salary

• House Rent Allowance (HRA)

• Special Allowance

• Leave Travel Allowance (LTA)

• Bonuses/Incentives

• Employer statutory contributions (PF, ESI, etc.)

Payroll compliance involves:

• Monthly salary processing

• Tax deductions (TDS)

• Social security contributions

• Labour law reporting

This is where PF, ESI, and gratuity come in.

2. Provident Fund (PF) in India

What is PF?

The Employees’ Provident Fund (EPF) is a government backed retirement savings scheme.

Both employer and employee contribute every month.

Who Does PF Apply To?

• Mandatory for establishments with 20+ employees

• Applicable for employees earning up to ₹15,000/month (Basic + DA)

• Many companies voluntarily extend it beyond the threshold

Contribution Breakdown

• Employee Contribution: 12% of Basic Salary

• Employer Contribution: 12% of Basic Salary

Employer’s 12% is split into:

• 8.33% → Pension Scheme (EPS)

• 3.67% → Provident Fund (EPF)

Why PF Matters

PF is one of the most important compliance requirements and is heavily audited.

Missing PF filings can result in penalties and legal exposure.

3. Employee State Insurance (ESI)

What is ESI?

ESI is a social security scheme that provides:

• Medical benefits

• Sick leave payments

• Maternity benefits

• Disability compensation

Who Is Covered Under ESI?

• Applicable to establishments with 10+ employees

• Employees earning up to ₹21,000/month are covered

Contribution Rates

• Employee Contribution: 0.75% of gross salary

• Employer Contribution: 3.25% of gross salary

Why ESI Is Important

ESI is mandatory for eligible employees and ensures healthcare protection for the workforce.

4. Gratuity in India

What is Gratuity?

Gratuity is a lump-sum benefit paid by the employer as a reward for long-term service.

When Is It Paid?

An employee becomes eligible after completing:

• 5 years of continuous service

Gratuity is payable upon:

• Resignation

• Retirement

• Termination

• Death or disability (5-year rule waived)

  
  

Employer Cost Note

Many employers account for gratuity as a long-term liability even though it’s paid later.

5. Other Key Payroll Compliance Elements

Apart from PF, ESI, and gratuity, employers must also manage:

Professional Tax (PT)

• State-specific tax

• Small monthly deduction (₹200–₹2,500)

Income Tax (TDS)

• Deducted based on employee income slab

• Filed monthly and reported annually

Labour Welfare Fund (LWF)

• Mandatory in certain states

• Employer + employee contributions

6. How an EOR Simplifies India Payroll

An Employer of Record handles:

• Payroll processing

• PF + ESI contributions

• Tax deductions

• Employment contracts

• Compliance filings

• Gratuity provisioning

So you can hire talent in India without needing to set up an entity or manage statutory burdens internally.

Final Thoughts

India offers massive hiring potential but payroll compliance is not optional.

Understanding PF, ESI, and gratuity is essential for:

• Accurate cost planning

• Legal compliance

• Employee trust

• Smooth hiring operations

Whether you’re hiring your first employee or scaling a team, getting payroll right is step one.