How to Calculate EPF, ESI and TDS in India 2026: Step-by-Step HR Payroll Guide

1. CTC, gross and net — the three numbers that matter

Before you calculate anything, you need to lock in the three salary numbers that drive every payroll output. Most calculation errors come from confusing these.

• CTC (Cost to Company). The total annual cost the employer incurs for the employee. Includes employer-side EPF and ESI, gratuity provisioning, and benefits. This is the offer-letter number, not the take-home.
• Gross salary. Sum of all salary components an employee earns before deductions — basic, HRA, special allowance, conveyance, LTA, bonuses. Excludes employer-side statutory contributions.
• Net (in-hand) salary. Gross minus employee-side deductions: employee EPF (12% of basic+DA), employee ESI (0.75% if applicable), TDS, and professional tax.

Under the Labour Codes 2025, allowances cannot exceed 50% of the sum of basic + DA. Excess allowance is treated as part of basic salary. This single rule reshapes most CTC structures designed before November 2025.

2. How to calculate EPF (step-by-step)

EPF (Employees' Provident Fund) is mandatory for all establishments employing 20 or more workers. It applies universally regardless of industry or sector. Even smaller employers can voluntarily register.

Step 1: Eligibility check

• Employee earning basic + DA up to ₹15,000 — mandatory PF deduction.
• Employee earning above ₹15,000 — employer can opt to limit contribution to the wage ceiling, but most employers compute on actual basic+DA.
• An employee already a PF member earlier remains a member regardless of new salary level.

Step 2: The 12% + 12% formula

Step 3: Apply the wage ceiling rule

If basic+DA is at or below ₹15,000: calculate on the actual figure. If basic+DA exceeds ₹15,000: the EPS portion is capped — only ₹1,250 (8.33% of ₹15,000) goes to pension, and the entire balance of the employer 12% goes to the EPF account.

Step 4: Add employer admin charges

Employers also pay a small administrative charge of 0.5% of EPF wages (subject to a minimum of ₹500/month, ₹75/month for non-functional establishments). This is a true employer cost on top of the 12% employer contribution.

Step 5: Voluntary Provident Fund (VPF)

Employees can elect to contribute more than 12% to their EPF — this voluntary contribution earns the same EPF interest. The employer's contribution does not increase. VPF works well for tax-efficient retiral building when Section 80C still has headroom.

Worked mini-example — basic ₹20,000

3. How to calculate ESI (step-by-step)

Employees' State Insurance covers medical, sickness, maternity, disablement and dependent benefits. It is mandatory for establishments employing 10 or more persons (some states notify the threshold differently). The biggest 2026 change is the wage base shift from Gross to Basic + DA.

Step 1: Eligibility check

• Employee monthly wages ≤ ₹21,000 — ESI deductible (₹25,000 for persons with disabilities).
• Employee crossing ₹21,000 mid-contribution-period — ESI continues till the contribution period ends (Apr–Sep, Oct–Mar). Exit only at period boundary.
• Employee already in ESI continues throughout the current contribution period regardless of crossing the threshold.

Step 2: Apply the new wage base (post Labour Codes 2025)

Under the older framework ESI was computed on gross wages. From the new wage definition under the Code on Wages, ESIC's base for both eligibility and calculation has been treated as Basic + DA. This means certain employees previously above the ₹21,000 gross threshold now fall within ESI coverage when the basic + DA component lands inside the threshold.

Step 3: The 0.75% + 3.25% formula

Step 4: Confirm benefit eligibility

An ESI-covered employee is eligible for ESIC dispensary & hospital coverage, sickness benefit, maternity benefit (26 weeks fully paid for the first two confinements), disablement benefit, and dependants' benefit. Employers retain the legal duty even when benefits are not actively claimed.

Worked mini-example — wages ₹18,000 (basic+DA)

4. How to calculate TDS on salary (step-by-step)

TDS (Tax Deducted at Source) on salary is governed by Section 192 of the Income Tax Act. The employer estimates the employee's annual income, applies the tax slab, and deducts proportionate amounts each month. The new tax regime is the default from FY 2023–24 unless the employee elects out.

Step 1: Confirm tax regime

Default is the new tax regime for FY 2025–26 / AY 2026–27. The employee can opt for the old regime by submitting Form 10-IEA at the start of the financial year. Once the salaried employee opts out of the new regime, switching back is restricted to once during their working life (special rule — confirm with current notification).

Step 2: Slabs under the new regime (FY 2025–26)

Standard deduction for salaried employees: ₹75,000 (new regime). Health & education cess of 4% applies on the income tax + surcharge.

Step 3: Standard deduction and rebate

Apply standard deduction of ₹75,000 from gross salary income. Under Section 87A, taxable income up to ₹12,00,000 (new regime) attracts a rebate that effectively makes the tax payable nil at that level — confirm against current circulars at the time of payroll cycle.

Step 4: Collect employee declarations (Form 12BB)

Employees in the old regime must submit Form 12BB declaring deductions: HRA, LTA, home loan interest, Section 80C investments, Section 80D health insurance, Section 80E education loan, etc. Employers compute TDS based on declared and verified deductions. Final reconciliation happens via Form 16 at year-end.

Step 5: Compute monthly TDS

Step 6: Quarterly returns and Form 16

Employers file Form 24Q quarterly for salary TDS. Form 16 (Parts A and B) is issued to employees by 15 June following the financial year. Failure to issue Form 16 attracts penalty under Section 272A(2)(g).

5. Worked examples — three salary bands

Three end-to-end payroll calculations using the post-21-November-2025 wage definition. All figures are illustrative; verify against your specific allowance structure and state professional tax rates.

6. Labour Codes 2025 — what changed for payroll

The four codes implemented on 21 November 2025 introduced one structural change with cascading effect: the uniform definition of "wages." Three takeaways for payroll teams:

• Basic at least 50% of total. If your CTC structures kept basic at 30–35% and loaded special allowance, those break the new test. Excess allowance is now treated as basic for statutory purposes.
• ESIC base shift. ESIC eligibility & calculation are now anchored to Basic + DA, not gross. Employees previously outside coverage may now fall inside it.
• EPF transitional grace. EPF wage definition has transitional provisions, so the impact lands later than ESI/gratuity. Watch EPFO notifications for the cut-over.

Old vs new wage base — at a glance

7. Statutory compliance calendar

Monthly recurring

Quarterly

• Form 24Q — Quarterly TDS return for salary, due by 31 July (Q1), 31 October (Q2), 31 January (Q3), 31 May (Q4).
• Form 26Q — Quarterly TDS return for non-salary payments, same calendar.

Annual

• Form 16 issuance to employees — by 15 June following financial year end.
• EPF annual return — Form 6A.
• ESI half-yearly returns — Form 5 (May for Oct–Mar, November for Apr–Sep contribution period).
• March TDS deposit — by 30 April (special date for the last month of FY).

8. Penalties & damages — what late costs

Statutory non-compliance compounds quickly. The headline numbers below are based on current rules; refer to the underlying notification at the time of action.

EPF

• Section 7Q interest — 12% per annum on the outstanding amount, from due date till payment.
• Section 14B damages — graded penalty: 5% pa for delays up to 2 months, 10% for 2–4 months, 15% for 4–6 months, 25% for delays beyond 6 months.
• Section 14 prosecution — wilful default attracts criminal liability.

ESI

• Section 85B damages — graded similarly to EPF, capped per regulations.
• Section 85 prosecution — for non-payment, falsification, or obstruction.

TDS

• Section 201(1A) interest — 1% per month for failure to deduct, 1.5% per month for failure to pay after deduction.
• Section 234E late filing fee — ₹200 per day for delay in filing TDS return, capped at TDS amount.
• Section 271H penalty — ₹10,000 to ₹1,00,000 for failure to file TDS return.
• Section 272A(2)(g) — ₹100 per day for delayed Form 16 issuance.

10. Top 10 payroll mistakes Indian SMBs make

1. Wrong basic-to-gross ratio. Keeping basic below 50% violates the Code on Wages. Restructure first.
2. Treating allowances as outside wages. Excess allowance over 50% gets re-classified as basic for statutory math.
3. Ignoring ESIC's new Basic+DA base. Many payroll templates still compute on gross — leading to under/over-deduction errors.
4. EPS contribution miscalculation. Capping at ₹1,250/month requires the ₹15,000 wage ceiling — easy to miss in template setups.
5. Wrong UAN linking. Multiple UANs per employee creates downstream withdrawal disputes.
6. Missing ESI exit declaration. When an employee crosses ₹21,000, exit must be filed at the end of the contribution period — not immediately.
7. Short TDS deduction without Form 12BB. Acting on undeclared deductions creates Section 201 exposure.
8. Late TDS deposit on March payroll. Special deadline of 30 April — different from the regular 7th-of-month.
9. Skipping professional tax on contract employees. Several states mandate PT on contractors too — confirm state-specific rules.
10. Manual ECR filing without reconciliation. Mismatches between salary register and ECR file create compliance flags later.

11. Tools & templates for Indian SMB payroll

Three options ranked by team size:

• Excel/Sheets template (under 10 employees). Workable for very small teams; high error rate as headcount scales. Maintain a master register, monthly statutory checklist, and ECR-ready output.
• SalaryBox (10–500 employees). India-native payroll for SMBs and mid-market. Auto-CTC structuring under Labour Codes 2025, EPF/ESI/TDS auto-computation, monthly compliance calendar, payslip and Form 16 generation, and statutory return support.
• Enterprise HRMS (500+ employees). Darwinbox, Keka, Greythr, Zoho Payroll — expanded analytics, multi-entity, and global deployment options.

Whichever you pick, the non-negotiable is: a monthly reconciliation between your salary register, the ECR challan, ESI return, and Form 24Q. Mismatches caught before the deadline are corrections; mismatches caught after are penalties.

12. Salary structure design tips for SMBs (post Labour Codes 2025)

• Anchor basic at 50%. Comply with the wage definition floor without over-shooting — over-shooting raises gratuity provisioning costs.
• Cap allowances at 50%. Keep HRA + special allowance + LTA + conveyance ≤ 50% of (basic + DA).
• Use joining and retention bonuses. These sit outside the wage definition and don't impact statutory calculations.
• Keep variable pay clearly separate. Variable is not part of statutory wages and shouldn't be auto-loaded into PF base.
• Document the structure. Offer letter and CTC sheet must clearly identify basic, DA, allowances, statutory deductions, and net.
• Build a CTC calculator. One internal calculator that flips between offer-build and reverse-engineering from desired in-hand prevents errors.

Frequently asked questions