Payroll Management for Small Businesses in India

For a small business, payroll feels deceptively simple: calculate salaries, transfer the money, done. In India, that surface hides a web of statutory obligations — provident fund, state insurance, professional tax, income-tax deduction at source, and a compliance calendar with real penalties for missed dates. Get any of it wrong and you risk notices from the EPFO, ESIC, or the tax department, along with interest and fines that dwarf the amounts involved.

The stakes rose sharply in late 2025. India's four new Labour Codes came into force, consolidating twenty-nine older laws and changing how salaries themselves must be structured. Every business that pays wages — however small — is affected.

This guide walks through what payroll management actually involves, the statutory deductions you must handle, what the Labour Codes changed, the deadlines that matter, and the mistakes that most often trip up small businesses.

What payroll management actually involves

Payroll is far more than a monthly bank transfer. Done properly, it covers a repeatable cycle — and for a growing business, it also feeds directly into budgeting, cash flow, and hiring decisions.

StructureDefine each employee's salary structure
CalculateWork out gross pay, deductions, and net pay
ContributeAdd the employer's share of statutory dues
DepositPay the right authorities by the right dates
PayslipsIssue itemised payslips to every employee
ReturnsFile periodic returns on time
RecordsKeep records that stand up to inspection

Understanding the salary structure

Before you can run payroll, you need a clean salary structure. Three figures matter most, and confusing them is a common source of disputes.

Cost to Company (CTC)

The total annual cost of employing someone, including the employer's statutory contributions and benefits — not what the employee takes home.

Gross salary

Pay before deductions — typically basic pay plus allowances such as house rent allowance (HRA), dearness allowance (DA), and special or other allowances.

Net (take-home) salary

What actually reaches the employee's account after provident fund, professional tax, and tax deducted at source.

The single most important component is basic pay, because most statutory contributions — provident fund, gratuity, and bonus — are calculated on it. As you will see, the Labour Codes now put a floor under how large basic pay must be.

The statutory backbone: what you must deduct and contribute

Four obligations form the core of Indian payroll compliance. Some are deducted from the employee, some are an additional employer cost, and several are both.

EPF

Employees' Provident Fund

12% + 12%

Employee + employer, on basic pay + DA

A retirement savings scheme run by the EPFO. The employer's share is split — 8.33% goes to the Employees' Pension Scheme (capped at ₹1,250 a month, based on the ₹15,000 wage ceiling), and the balance to the provident fund account. With EDLI (insurance) and administrative charges on top, the true employer cost runs closer to 13% of PF wages.

Mandatory once you reach 20 employees; voluntary below that

ESI

Employees' State Insurance

0.75% + 3.25%

Employee + employer, on gross wages (4% total)

A medical and cash-benefit scheme for lower-paid workers. It applies to employees earning up to ₹21,000 a month (₹25,000 for employees with disabilities), in areas where ESI operates — which now covers most of the country.

Generally mandatory at 10 or more employees (20 in a few states)

Professional Tax

Up to ₹2,500

Per year, deducted from the employee

A state-level tax on employment, deposited with the state government. Rates and rules vary by state. Several states — including Delhi, Haryana, and Uttar Pradesh — do not levy it at all, so your obligation depends entirely on where your employees work.

Only in states that levy it

TDS

Tax Deducted at Source

Slab rates

Section 192, old or new tax regime

Employers must deduct income tax from salaries each month based on the employee's projected annual income and chosen regime. You deposit the TDS, file a quarterly return (Form 24Q), and issue each employee a Form 16 after year-end. Get each employee's declarations (Form 12BB) on record before allowing any deductions or exemptions. Our tax advisory team can help with regime choices and TDS workings.

Applies above the basic exemption limit

Also on the radar

Gratuity15 days' wages per year of service, payable after five years, for establishments with 10 or more employees.

Statutory bonusBetween 8.33% and 20% of eligible wages, for employees earning up to ₹21,000 a month.

Both are now governed by the Code on Social Security.

Payroll contributions at a glance
Contribution	Rate	Key threshold
EPF (provident fund)	Employee 12% + Employer 12% of basic + DA	Mandatory at 20+ employees; ₹15,000 wage ceiling
ESI (state insurance)	Employee 0.75% + Employer 3.25% of gross	Wages up to ₹21,000/month; 10+ employees
Professional tax	Varies by state; max ₹2,500 per year	Only in states that levy it
TDS on salary	As per income-tax slabs (old / new regime)	Above the basic exemption limit
Statutory bonus	8.33% to 20% of eligible wages	Employees earning up to ₹21,000/month

Rates and ceilings shown are current as of 2026 and change from time to time — the ₹15,000 PF ceiling, in particular, is under review. Always confirm the latest figures before running payroll.

The big shift: the new Labour Codes and the 50% rule

India's four Labour Codes came into force from 21 November 2025, replacing twenty-nine earlier laws:

Code on Wages
Code on Social Security
Industrial Relations Code
Occupational Safety, Health and Working Conditions Code

Central rules were notified through 2026, with state-level rules rolling out in stages, so the exact picture still depends on where your people work.

For payroll, the headline change is the new, uniform definition of "wages." Under it, basic pay plus DA must make up at least 50% of an employee's total remuneration. Many businesses historically kept basic pay low (often 25–30% of CTC) and loaded the rest into allowances, which reduced provident-fund and gratuity costs. That structure no longer works.

Where basic pay used to sit, and where it must sit now

Basic pay + DA as a share of total remuneration

Common older structure

25–30%

Minimum under the new wage definition

50%

3–15% possible rise in employer statutory costs

Why the 50% rule costs you money, and what to do

Because PF, gratuity, and bonus are all calculated on wages, a higher basic pay raises the base for each of them. Employees may see slightly lower take-home pay even as their retirement savings grow. The businesses hit hardest are those with basic pay currently at 20–30% of CTC. The right move is to model the impact and restructure salaries now — not to wait for the first inspection.

The compliance calendar you can't ignore

Missing a payroll deadline is one of the easiest ways for a small business to attract penalties and interest. These are the recurring dates to build into your routine.

Every month, for the previous month's payroll

Two dates carry most of the risk

By the 7thDeposit TDS on salaries (March payroll by 30 April)

By the 15thDeposit EPF (ECR) and ESI contributions

State-specificProfessional tax, monthly or annually depending on your state

Full payroll due-date list
Obligation	Due date	Frequency
TDS deposit	7th of the following month	Monthly (March by 30 April)
EPF deposit (ECR)	15th of the following month	Monthly
ESI deposit	15th of the following month	Monthly
Professional tax	Varies by state	Monthly or annually
TDS return (Form 24Q)	End of the month after each quarter (Q4 by 31 May)	Quarterly
Form 16 to employees	By 15 June after year-end	Annually

A single late TDS deposit can attract interest plus a penalty, and delayed PF deposits carry both interest and damages. For a small team, the amounts add up fast relative to the payroll itself.

Running payroll, step by step

Onboard each employee properly — collect PAN, Aadhaar, bank details, PF/UAN, and tax-regime and investment declarations.
Define the salary structure in line with the 50% wages rule, and record CTC, gross, and net clearly.
Each cycle, calculate gross pay, then statutory deductions (PF, ESI, PT, TDS) and any others, to arrive at net pay.
Add the employer's contributions (PF, ESI, and provisions for gratuity and bonus) to your cost.
Disburse salaries and issue itemised payslips.
Deposit statutory dues with the EPFO, ESIC, state, and tax department by their due dates.
File returns (Form 24Q, PF/ESI returns) and issue annual Form 16s.
Maintain registers and records — many must be retained for years and produced on inspection.

Common payroll mistakes small businesses make

Keeping basic pay too lowUnder the new wage definition this is now non-compliant and understates your PF and gratuity liability.
Calculating PF on the wrong baseThe EPS portion must be capped correctly, and contributions must sit on the right wage figure.
Missing the ESI exit ruleWhen an employee crosses the ₹21,000 threshold, the exit must be filed at the end of the contribution period, not immediately.
Ignoring the special March TDS deadlineMarch payroll TDS is due by 30 April, not the usual 7th of the month.
Overlooking professional tax on contractorsSeveral states require PT even on contract staff — check your state's rules.
Misclassifying employees as contractorsDoing this to avoid statutory dues is a frequent trigger for disputes and back-payment demands.

Manual, software, or outsourced?

How you run payroll should scale with your team.

Spreadsheets

Can work for a handful of employees, but they are error-prone and offer no audit trail as rules change.

Best forA handful of employees and simple pay

Payroll software

Automates calculations, deductions, payslips, and filings, and updates as statutory rates change.

Best forOnce you pass a few employees

A payroll or compliance partner

Hands the whole cycle — calculations, deposits, returns, and record-keeping — to specialists. Often the most cost-effective route for a small business.

Best forBusinesses that would rather focus on their core work

Practical next steps

Five moves that put a small business's payroll on a sound footing.

Restructure salaries

Review your salary structures against the 50% wages rule and restructure where basic pay falls short.
Confirm registrations

Confirm which registrations apply to you today — PF, ESI, PT — based on headcount and location.
Set a compliance calendar

Build the compliance calendar into a monthly checklist so no deposit or return is missed.
Keep records inspection-ready

Keep employee declarations and records complete and inspection-ready.
Get the right support

If payroll is eating time or creating risk, move to reliable software or a compliance partner.
Talk to NDS Advisor

The bottom line

Payroll is where a small business's legal, financial, and people responsibilities meet. The mechanics are manageable, but the compliance layer — now reshaped by the Labour Codes — leaves little room for guesswork.

Get the salary structure right, respect the deadlines, and keep clean records, and payroll becomes a quiet, dependable system rather than a recurring source of risk.

The businesses that treat payroll as a compliance discipline, not an afterthought, are the ones that avoid nasty surprises and build the trust of their teams along the way.

Frequently asked questions

What statutory deductions apply to payroll in India?

The core payroll obligations are Employees' Provident Fund (12% of basic pay plus DA from the employee, matched by 12% from the employer), Employees' State Insurance (0.75% employee and 3.25% employer on gross wages, for employees earning up to ₹21,000 a month), professional tax where the state levies it (capped at ₹2,500 a year), and TDS on salary under Section 192 of the Income-tax Act. Gratuity and statutory bonus also apply, and are now governed by the Code on Social Security.

When does a small business need to register for EPF and ESI?

EPF registration is mandatory once a business reaches 20 employees and voluntary below that. ESI registration is generally mandatory once a business has 10 or more employees (20 in a few states) in areas where ESI operates, which now covers most of India.

What is the 50% wages rule under the new Labour Codes?

Under the uniform definition of wages in the Labour Codes, in force from 21 November 2025, basic pay plus dearness allowance must make up at least 50% of an employee's total remuneration. Because PF, gratuity, and bonus are calculated on wages, businesses that kept basic pay low may see employer statutory costs rise by roughly 3% to 15%, and should model the impact and restructure salaries.

What are the monthly payroll compliance due dates in India?

TDS deducted from salaries must be deposited by the 7th of the following month (March payroll TDS by 30 April). EPF and ESI contributions are due by the 15th of the following month. Professional tax due dates vary by state. Form 24Q is filed quarterly, and Form 16 must be issued to employees by 15 June after the financial year ends.

Should a small business run payroll manually, use software, or outsource it?

Spreadsheets can work for a handful of employees but are error-prone and offer no audit trail. Payroll software makes sense once a business passes a few employees, since it automates calculations and filings and updates with rate changes. Outsourcing to a payroll or compliance partner hands over the whole cycle and is often the most cost-effective route for small businesses that want to focus on their core work.

This article is for general information only and does not constitute tax, legal, or accounting advice. Payroll rates, thresholds, and Labour Code rules change and vary by state; confirm current requirements with a qualified professional before acting.