How does India payroll tax work in 2026?
India's new default tax regime has seven bands. The top rate is 30%, and zero tax applies on income up to ₹400,000/year. On top of that, both employer and employee each pay 12% EPF on basic salary. The EPF base is not the full cost-to-company figure. That distinction is where India payroll cost calculations go wrong.
· India guide
Illustration · Mumbai, India
Employer and employee each pay 12% EPF on the employee's basic salary and dearness allowance. EPF applies to that component only, not the full package.
Income tax follows seven bands under the new default regime for FY 2026-27. No tax on income up to ₹400,000/year. The top rate is 30% on income above Rs. 24 lakh.
India runs monthly payroll. The employer deducts TDS each month and deposits it by the 7th of the following month. Quarterly Form 24Q returns and an annual Form 16 complete the filing cycle.
What does an employer pay in India EPF and ESI contributions?
The employer pays 12% of each employee's basic salary plus dearness allowance into EPF each month.
A separate Employees' State Insurance (ESI) contribution also applies for employees earning below the ESI wage ceiling. Both obligations run in parallel each month.
| Contribution | What it covers | Employer rate | Base |
|---|---|---|---|
| EPF (Employees Provident Fund) | Retirement savings | 12% | Basic salary and dearness allowance |
| EPS (from EPF share) | Monthly pension from age 58 | 8.33% (funded from employer EPF) | Up to statutory wage ceiling |
| EDLI (from EPF admin) | Group life cover | 0.5% | Up to statutory wage ceiling |
| ESI (Employees State Insurance) | Healthcare, sickness, maternity | 3.25% | Gross wages below ESI ceiling |
The standard EPF employer contribution rate is 12% of basic salary and dearness allowance. Of this, 8.33% is routed to the Employees Pension Scheme and the remainder (3.67%) to the employee's EPF savings account. A reduced rate of 10% applies only to notified categories of establishment. Every establishment with 20 or more employees must register under the Employees Provident Funds and Miscellaneous Provisions Act 1952, now consolidated into the Code on Social Security 2020.
The EPF wage ceiling
EPF contributions are calculated on basic salary plus dearness allowance. The statutory wage ceiling for mandatory EPF coverage is currently Rs. 15,000 per month, but the Supreme Court directed a review in January 2026. A possible increase to Rs. 21,000 or higher is expected. The 12% rate would not change, but a higher ceiling would widen the contribution base for many employees.
What does an employee pay in India EPF and ESI contributions?
The employee contributes 12% of basic salary and dearness allowance to EPF each month. This mirrors the employer rate.
Employees covered by ESI also pay 0.75% of gross wages into the ESI scheme. Both deductions reduce take-home before income tax is calculated.
| Deduction | Employee rate | Base |
|---|---|---|
| EPF employee contribution | 12% | Basic salary and dearness allowance |
| ESI employee contribution | 0.75% | Gross wages below ESI ceiling |
The employee's full 12% goes into their EPF savings account. The employer's matching contribution is split: 8.33% to the Employees' Pension Scheme and 3.67% to the EPF account. The combined monthly credit to the employee's EPF savings account is therefore 15.67% of basic plus DA (the employee's 12% plus the employer's 3.67%).
ESIC membership gives covered workers access to free medical care, a sickness cash benefit of 70% of average daily wages for up to 91 days per year, and maternity benefit. Workers above the ESI wage ceiling do not contribute to or draw from ESI.
India income tax bands for FY 2026-27
The new default regime has seven bands. No tax on income up to ₹400,000/year. The top rate is 30% above Rs. 24 lakh.
The new regime is now the default for all salaried employees. The old regime remains available on election but offers fewer incentives for most tech and professional hires.
| Income band (FY 2026-27, new regime) | Rate |
|---|---|
| Up to ₹400,000/year | 0% (nil) |
| ₹400,000/year to ₹800,000/year | 5% |
| ₹800,000/year to ₹1,200,000/year | 10% |
| ₹1,200,000/year to ₹1,600,000/year | 15% |
| ₹1,600,000/year to ₹2,000,000/year | 20% |
| ₹2,000,000/year to ₹2,400,000/year | 25% |
| Above ₹2,400,000/year | 30% |
The Section 87A rebate
A separate Section 87A rebate applies to taxpayers whose net taxable income does not exceed Rs. 12 lakh under the new regime. The rebate can offset up to Rs. 60,000 of tax liability. Most salaried employees earning up to Rs. 12 lakh pay no income tax in practice, though this is a rebate mechanism rather than a zero-rate band. The rebate does not apply to income above Rs. 12 lakh.
Additional levy on high incomes
An extra tax levy applies at higher income levels under both regimes. Under the new default regime this levy is capped at 25% on income above Rs. 5 crore. It pushes the effective rate above the nominal 30% band rate for very high earners. Plan senior India hires accordingly.
How does India's TDS payroll filing system work?
Tax Deducted at Source (TDS) is the Indian payroll tax mechanism. The employer deducts income tax from salary each month and deposits it with the government by the 7th of the following month.
Quarterly Form 24Q returns report all TDS deductions. Every employee receives a Form 16 certificate by 15 June after the financial year closes.
Every employer must deduct TDS from salary each month under Section 192 of the Income Tax Act. Deposit the deducted amount with the Income Tax Department by the 7th of the following month using Challan ITNS 281. File quarterly Form 24Q returns (due 31 July, 31 October, 31 January, and 15 May). Issue Form 16 to every employee by 15 June following the financial year end.
Source: India Payroll Guide: Monthly Cycle, TDS and Compliance Deadlines (Asanify)
Key TDS compliance deadlines for an India payroll run:
- Monthly TDS deposit: due by the 7th of the following month (30 April for the March payroll)
- Quarterly Form 24Q: filed within 31 days of each quarter end; Q4 (January to March) due 31 May
- Annual Form 16: issued to each employee by 15 June
- EPF monthly return (ECR): filed by the 25th of the following month via the EPFO employer portal
- ESI monthly return: filed by the 21st of the following month via the ESIC employer portal
Late TDS deposit attracts interest at 1.5% per month. Late filing of Form 24Q attracts a penalty of Rs. 200 per day up to the TDS amount. Both charges stack, so missed deadlines compound quickly for active payrolls.
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Collect pay components
Gather basic salary, dearness allowance, variable pay, and approved leave or loss-of-pay adjustments for the month. The split between basic and allowances drives EPF and ESI contribution bases.
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Calculate gross pay and EPF deductions
Compute gross salary. Deduct the employee's EPF contribution at 12% of basic plus DA, and the ESI employee share at 0.75% for eligible workers, to reach a pre-tax net figure.
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Deduct TDS for income tax
Apply the employee's declared tax regime to their projected annual income. Deduct the proportionate monthly TDS amount and reflect it on the payslip.
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Calculate employer contributions
Add the employer EPF contribution at 12% of basic plus DA, the ESI employer share at 3.25% for eligible workers, and EDLI at 0.5%. These employer costs sit on top of salary.
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Deposit TDS and statutory contributions
Transfer the deducted TDS to the Income Tax Department by the 7th of the following month using Challan ITNS 281. Remit EPF via the EPFO portal by the 25th and ESI via the ESIC portal by the 21st.
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File quarterly and annual returns
File Form 24Q with all TDS details within 31 days of each quarter end. Issue Form 16 to every employee by 15 June after the financial year closes.
EPF pension and ESI social cover in the payroll stack
Both employer and employee contribute 12% of basic salary and DA to EPF each month. Within the employer's share, 8.33% funds the Employees' Pension Scheme.
ESI adds healthcare, a sickness benefit of 70% of wages for up to 91 days per year, and maternity benefit for workers below the ESI wage ceiling.
How the employer's 12% EPF contribution is allocated each month:
- Employees Pension Scheme (EPS): 8.33% of basic plus DA goes here, up to the statutory wage ceiling. This provides a monthly pension from age 58 after at least 10 years of pensionable service.
- EPF savings account: 3.67% goes into the employee's own account alongside the full employee contribution of 12%.
- EDLI: 0.5% funds the group life insurance scheme, providing a lump sum to the nominee on the employee's death in service.
Total monthly credit to the employee's EPF savings: 15.67% of basic plus DA (the employee's 12% plus the employer's 3.67% share).
Gratuity
Gratuity is not a monthly payroll deduction. It is an employer liability that accrues after five years of continuous service. The formula is: last drawn salary multiplied by 15, multiplied by years of service, divided by 26. Gratuity paid to an employee covered under the Payment of Gratuity Act is tax-free up to Rs. 20 lakh. Many employers fund the liability via an approved gratuity trust or LIC group gratuity policy.
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Key sources: EPF Contribution Rate 2026, ESI Contribution Rate 2026, and Income Tax Slabs FY 2025-26 (ClearTax).
Frequently asked questions
What is the EPF employer contribution rate in India in 2026?
The employer pays 12% of each employee's basic salary plus dearness allowance into EPF each month. Of this, 8.33% funds the Employees Pension Scheme and 3.67% goes to the employee's EPF savings account. A reduced rate of 10% applies only to notified categories of establishment. The statutory wage ceiling for mandatory coverage is under Supreme Court review in 2026 and may rise, widening the contribution base without changing the rate.
What does an employee pay into EPF in India?
The employee contributes 12% of basic salary and dearness allowance to their EPF savings account each month. Employees covered by ESI also pay 0.75% of gross wages into the ESI scheme. Both deductions appear on the payslip and reduce take-home pay before income tax is calculated.
What are the India income tax bands for FY 2026-27?
Under the new default regime there are seven bands. No tax on income up to ₹400,000/year. Then 5% from Rs. 4 lakh to Rs. 8 lakh, 10% from Rs. 8 lakh to Rs. 12 lakh, 15% from Rs. 12 lakh to Rs. 16 lakh, 20% from Rs. 16 lakh to Rs. 20 lakh, 25% from Rs. 20 lakh to Rs. 24 lakh, and 30% above Rs. 24 lakh. A Section 87A rebate can eliminate liability for those earning up to Rs. 12 lakh.
When must TDS on salary be deposited in India?
TDS deducted from salary must be deposited with the Income Tax Department by the 7th of the following month. For March deductions the deadline is 30 April. Quarterly Form 24Q returns are due within 31 days of each quarter end. Every employee receives a Form 16 certificate by 15 June after the financial year closes. Late deposit attracts interest at 1.5% per month.
Does India have mandatory pension contributions?
Yes. India's mandatory retirement saving runs through the Employees Provident Fund. Both employer and employee each contribute 12% of basic salary and dearness allowance. Within the employer's share, 8.33% is redirected to the Employees' Pension Scheme, which provides a monthly pension from age 58 after at least 10 years of pensionable service. There is no separate opt-in or enrolment trigger; EPF membership is mandatory from day one for employees of covered establishments.
The most common India payroll mistake we see is an offer letter that quotes cost-to-company and then applies EPF to the whole number. EPF applies to basic salary and dearness allowance only. If the employer has structured the salary with a low basic component, both sides end up confused about the contribution. Get the component split right before the offer is signed. It sets the EPF base for the entire employment.
India's 12% EPF rate only looks simple. The contribution base is basic salary and DA, not the full package. Most hiring mistakes start with that misread.
Add seven income-tax bands, a Section 87A rebate, monthly TDS filing, quarterly returns, and ESI for lower-wage workers. Each layer is correct on its own.
Teamed runs every layer end to end. You see the total cost, itemised.
