Statutory Deductions — PF, ESIC & Professional Tax

Indian labour law mandates that employers deduct and contribute to several statutory schemes on behalf of their employees. These are not optional — failure to comply results in penalties, interest on delayed payments, and potential prosecution. For manufacturing units, where the workforce often includes a mix of permanent staff, contract workers, and helpers, understanding these deductions is critical for both compliance and accurate payroll processing.

This chapter provides a comprehensive guide to Provident Fund (PF), Employee State Insurance (ESI), Professional Tax, and TDS on salary — how they are calculated, how Udyamo ERP Lite records them on salary slips, and how to verify compliance.

What You Will Learn

• Provident Fund contribution structure: employee share, employer share, EPS, and EPF
• The PF wage ceiling and its impact on deductions
• ESIC contribution rates and the wage ceiling for coverage
• Professional Tax slabs for major states
• TDS on salary under Section 192 — a brief overview
• How these deductions map to salary slip fields in Udyamo ERP Lite
• Step-by-step: verifying statutory deductions on a salary slip
• Monthly and annual compliance calendar

Prerequisites

• Employee records with PF number, UAN, ESI number, and PAN (see Employee Management)
• Understanding of salary slip structure (see Salary Slips & Payroll Processing)
• Your organization's PF and ESI establishment registration details
• Knowledge of the Professional Tax slab applicable in your state

Provident Fund (PF)

The Employees' Provident Fund is a retirement savings scheme governed by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It applies to establishments with 20 or more employees, though many smaller units voluntarily register to provide this benefit.

Contribution Structure

PF contributions have two sides — the employee pays a share and the employer pays a matching share:

Employee Contribution: 12% of basic salary (or basic + dearness allowance, if applicable). This entire amount goes into the employee's EPF (Employee Provident Fund) account.

Employer Contribution: 12% of basic salary, split into two sub-accounts:

• EPS (Employee Pension Scheme): 8.33% of basic salary, subject to a pensionable salary ceiling of Rs 15,000 per month. The maximum EPS contribution is Rs 1,250 per month (8.33% of Rs 15,000).
• EPF (Employee Provident Fund): The remaining portion of the employer's 12%. If basic salary is Rs 15,000 or below, this is 3.67% of basic. If basic salary exceeds Rs 15,000, the EPS is capped at Rs 1,250, and the rest of the employer's 12% goes to EPF.

PF Wage Ceiling

The statutory PF wage ceiling is Rs 15,000 per month. This ceiling affects contributions as follows:

• For employees with basic salary up to Rs 15,000: PF is mandatory, and the contribution is 12% of actual basic salary.
• For employees with basic salary above Rs 15,000: The employer may choose to restrict PF contribution to 12% of Rs 15,000 (i.e., Rs 1,800 per month each for employee and employer), or contribute on the actual basic salary.

Tip: Many manufacturing units contribute PF on actual basic salary even when it exceeds Rs 15,000, as a retention benefit. Confirm your organization's PF policy with management before setting up deductions.

Example Calculation

For an employee with a basic salary of Rs 12,000:

The pf_deduction field on the salary slip records the employee's share — Rs 1,440 in this example. The employer's contribution is an additional cost to the company, not deducted from the employee's salary.

UAN and ECR Filing

Every employee is assigned a Universal Account Number (UAN) that stays with them for life, even when they change jobs. The UAN is linked to the employee's Aadhar, PAN, and bank account.

Employers must file an Electronic Challan cum Return (ECR) every month through the EPFO Unified Portal. The ECR contains employee-wise contribution details and must be filed by the 15th of the following month.

Employee State Insurance (ESI)

The Employee State Insurance scheme, governed by the ESI Act, 1948, provides medical and cash benefits to employees and their dependants. It applies to establishments in notified areas with 10 or more employees.

Contribution Rates

Wage Ceiling

ESI coverage applies to employees with gross wages up to Rs 21,000 per month. Once an employee's gross salary exceeds this ceiling, they are no longer covered under ESI and no ESI deduction is made.

Required: Check each employee's gross salary against the Rs 21,000 ceiling every month. If an employee's gross salary exceeds the ceiling due to overtime, bonus, or an increment, ESI deduction should stop from the next contribution period (April or October, as per half-yearly coverage rules).

Example Calculation

For an employee with a gross salary of Rs 25,000:

• Gross salary exceeds Rs 21,000 — check whether the employee was already covered in the current contribution period.
• If the employee was earning Rs 18,000 when the contribution period started (April or October) and is already enrolled for the current half-year, ESI continues for the entire half-year regardless of a mid-period salary increase.

For an employee with a gross salary of Rs 18,000:

The esi_deduction field on the salary slip records the employee's share — Rs 135 in this example.

Coverage and Benefits

ESI provides the following benefits to covered employees:

• Medical benefit -- Full medical care for the employee and dependants at ESI hospitals and dispensaries.
• Sickness benefit -- Cash compensation at 70% of wages for up to 91 days during certified illness.
• Maternity benefit -- Full wages for 26 weeks.
• Disablement benefit -- Monthly payment for employment injury resulting in disablement.
• Dependants' benefit -- Monthly payment to dependants if an employee dies due to employment injury.

Professional Tax

Professional Tax is a state-level tax on employment and professions, levied under Article 276 of the Constitution of India. The maximum Professional Tax that a state can levy is Rs 2,500 per year. The tax is deducted by the employer from the employee's salary and deposited with the state government.

State-Wise Slabs

Professional Tax rates vary significantly by state. Here are the slabs for some major manufacturing states:

Maharashtra:

Karnataka:

Gujarat:

Tamil Nadu:

Warning: Professional Tax slabs are revised by state governments periodically. Verify the current slabs applicable in your state before configuring deductions. Using outdated slabs will result in under-deduction or over-deduction, both of which create compliance issues.

The professional_tax field on the salary slip records the monthly Professional Tax amount deducted from the employee.

TDS on Salary (Section 192)

Under Section 192 of the Income Tax Act, every employer is required to deduct tax at source (TDS) on salary payments when the employee's estimated annual income exceeds the basic exemption limit.

How TDS is Calculated

1. Estimate annual salary -- Project the employee's total annual income based on current salary and expected bonuses.
2. Apply exemptions -- Deduct exempt allowances (HRA exemption, standard deduction of Rs 75,000 under the new tax regime).
3. Apply deductions -- Under the old tax regime, deduct eligible amounts under Section 80C (PF, LIC, PPF — up to Rs 1.5 lakh), Section 80D (health insurance), and other applicable sections. Under the new tax regime, most deductions are not available.
4. Compute tax -- Apply the applicable income tax slab rates to the net taxable income.
5. Divide by 12 -- The annual tax liability is divided equally across 12 months for monthly TDS deduction.

Tip: Ask employees to submit their investment declarations (Form 12BB) at the start of the financial year. This allows you to compute TDS accurately from month one, avoiding heavy deductions in the last quarter when employees fail to provide proof of investments.

The tds_deduction field on the salary slip records the monthly TDS amount. For employees below the taxable threshold (common for factory floor workers), this will be zero.

How Udyamo Records Statutory Deductions

Udyamo ERP Lite provides dedicated fields on each salary slip for every statutory deduction:

These fields are entered during salary slip creation and are included in the total deductions calculation. The net salary the employee receives reflects all these deductions.

Required: Statutory deductions are not optional. PF, ESI (for eligible employees), and Professional Tax (in applicable states) must be deducted every month without exception. Non-compliance attracts penalties: EPFO charges interest at 12% per annum on delayed PF payments, and damages up to 100% of arrears for persistent default.

Step-by-Step: Verifying Statutory Deductions on a Salary Slip

This example verifies the statutory deductions for Ramesh Jadhav (FAC-0078), a machine operator in Pune, Maharashtra, with the following salary structure:

• Basic Salary: Rs 12,000
• Gross Salary: Rs 25,000

Verification Checklist

1. Open the salary slip for Ramesh Jadhav for the relevant month under HR > Salary Slips.

2. Verify PF deduction:

   • Basic salary: Rs 12,000 (below the Rs 15,000 ceiling)
   • Expected PF deduction: 12% of 12,000 = Rs 1,440
   • Check the pf_deduction field shows Rs 1,440.

3. Verify ESI deduction:

   • Gross salary: Rs 25,000 (exceeds the Rs 21,000 ceiling)
   • If the employee was already covered in the current contribution period (enrolled when gross was below Rs 21,000), ESI continues. Expected: 0.75% of 25,000 = Rs 188
   • If the employee was never covered (always above Rs 21,000), ESI should be Rs 0
   • Check the esi_deduction field matches the applicable amount.

4. Verify Professional Tax:

   • State: Maharashtra
   • Monthly salary above Rs 10,000
   • Expected Professional Tax: Rs 200 (or Rs 300 in February for annual adjustment)
   • Check the professional_tax field shows the correct amount.

5. Verify TDS:

   • Estimate annual gross: Rs 25,000 x 12 = Rs 3,00,000
   • Under the new tax regime with standard deduction of Rs 75,000: Taxable income = Rs 2,25,000
   • This is below the basic exemption limit of Rs 3,00,000 under the new regime
   • Expected TDS: Rs 0
   • Check the tds_deduction field shows Rs 0.

6. Verify totals:

   • Total Deductions = 1,440 + 188 + 200 + 0 + 0 = Rs 1,828
   • Net Salary = 25,000 - 1,828 = Rs 23,172
   • Confirm these match the total_deductions and net_salary fields on the slip.

Tip: Perform this verification for at least a few sample employees every month — one from each salary bracket. This catches systematic errors (such as an outdated Professional Tax slab) before they affect the entire payroll.

Compliance Calendar

Staying on top of filing deadlines prevents penalties. Here is the monthly and annual compliance calendar for payroll-related statutory obligations:

Monthly

Quarterly / Annual

Warning: Late filing of ECR attracts damages ranging from 5% to 25% of total PF contributions depending on the delay period. Late payment of ESI attracts interest at 12% per annum. These penalties are avoidable with disciplined monthly processing.

Tips & Best Practices

Tip: Create a payroll processing checklist that your HR team follows every month: (1) finalize attendance, (2) create salary slips, (3) verify statutory deductions for sample employees, (4) process all slips, (5) initiate bank transfers, (6) mark slips as paid, (7) file PF and ESI challans. A standard checklist eliminates missed steps.

Tip: When an employee's basic salary changes due to an increment, update the employee master immediately. The next salary slip will automatically pick up the revised basic salary, and PF deduction will adjust accordingly.

Warning: The employer's PF and ESI contributions are costs over and above the employee's gross salary. When budgeting for labour costs, remember that the actual cost per employee is the CTC (Cost to Company), which includes both the employee's gross salary and the employer's statutory contributions. For an employee with Rs 12,000 basic and Rs 25,000 gross, the employer additionally pays Rs 1,440 (PF) + Rs 813 (ESI at 3.25%) = Rs 2,253 per month in statutory contributions.

Tip: Keep digital copies of all ECR receipts, ESI challans, and TDS challan counterfoils organized by month. During audits or inspections, being able to produce compliance records quickly demonstrates diligence and can avoid protracted investigations.

Quick Reference: Statutory Deduction Rates