Payroll Compliance

EPF (Employees' Provident Fund) under the EPF & MP Act 1952 is mandatory for: (1) All establishments with 20+ employees; (2) Employees earning up to ₹15,000/month basic+DA at the time of joining — they must contribute 12% of basic+DA, and the employer matches with 12%. Employees earning above ₹15,000 basic+DA at the time of joining can opt to not join EPF (they are "excluded employees"). However, once enrolled in EPF, an employee cannot withdraw from the scheme even if their salary increases above ₹15,000. International workers on Social Security Agreement (SSA) countries may be exempt. Self-employed, proprietors, and partners are not eligible for EPF. For small establishments (below 20 employees), PF is optional but many companies voluntarily enrol to attract talent. Voluntary PF above the mandatory 12% is allowed — the excess contribution by employee goes to VPF (Voluntary Provident Fund) earning the same EPF rate (8.25% for 2023-24).

EPF (Employees' Provident Fund): Mandatory for employees ≤ ₹15,000 basic+DA; employer contributes 12% (8.33% to EPS + 3.67% to EPF); withdrawal (Form 19) after 2 months of unemployment, retirement, or death; interest rate 8.25% for 2023-24; completely tax-free on withdrawal if > 5 years of contribution; employer's contribution exempt under Section 10(12). NPS (National Pension System): Voluntary for private sector employees; employer can contribute up to 10% of basic+DA under Section 80CCD(2) — this is a business expense AND exempt from employee's taxable income (no upper limit!); employee can contribute up to ₹50,000 additionally under 80CCD(1B) — deductible over and above 80C limit; on maturity (age 60), 60% withdrawal is tax-free, 40% must be used for annuity purchase. Strategy: Large employers often offer NPS employer contribution (10% of basic) — this is extremely tax-efficient as it's over and above Section 80C ₹1.5 lakh limit. A senior employee on ₹2 lakh/month basic can save ₹24,000/year in tax through employer NPS alone.

Salary TDS (Section 192) is deducted monthly based on projected annual income: (1) Project annual salary as of April (or joining month); (2) Apply deductions employees declare in Form 12BB — HRA exemption under 10(13A), LTA under 10(5), Section 80C up to ₹1.5 lakh, 80D health insurance, NPS 80CCD(1B), home loan interest 24(b), etc.; (3) Compute taxable income after standard deduction (₹50,000 for old regime) or flat taxable (no deductions for new regime); (4) Apply income tax slab: Old regime: 0% up to ₹2.5L, 5% ₹2.5L–5L, 20% ₹5L–10L, 30% above ₹10L (+ 4% health/education cess). New regime (default from AY 2024-25): 0% up to ₹3L, 5% ₹3L–7L, 10% ₹7L–10L, 15% ₹10L–12L, 20% ₹12L–15L, 30% above ₹15L (standard deduction ₹50,000 available); (5) Divide annual tax by 12 = monthly TDS; (6) Adjust in subsequent months if salary changes. Employees must submit Form 12BB with actual rent receipts, LTA bills, and investment proofs by February for accurate TDS. If proofs not submitted, employer deducts TDS at maximum applicable rate.

ESIC (Employees' State Insurance Corporation) covers employees earning ≤ ₹21,000/month gross wages (₹25,000 for persons with disability). Contribution rates: Employee 0.75% of gross wages; Employer 3.25% of gross wages (total 4% pooled into ESIC fund). ESIC provides: Sickness benefit (70% of average daily wages for 91 days/year); Maternity benefit (100% wages for 26 weeks); Disablement benefit (90% wages for permanent disablement); Dependent benefit on death due to employment injury; Medical benefit for insured person + family (free outpatient and hospitalisation at ESIC dispensaries/hospitals); Funeral expenses ₹15,000. When salary increases above ₹21,000: ESIC continues for 6 more months from the wage increase month (continuation benefit period). Then the employee is excluded from ESIC coverage. Example: If employee's salary is ₹20,000 in April and increases to ₹22,000 in July, ESIC continues until December (6 months from July). New threshold from March 2023 announcement pending: Government is considering increasing to ₹25,000 for all employees, but not yet enacted.

Gratuity is payable under the Payment of Gratuity Act 1972 when an employee completes 5 years of continuous service (except death/disability — no minimum years). Applicable to establishments with 10+ employees. Formula: (15 × last drawn basic+DA × completed years of service) ÷ 26. "Years of service" — if > 6 months in last year, round up (e.g., 5 years 7 months = 6 years). Maximum gratuity: ₹20 lakhs (revised ceiling). Taxation for private sector employees: Tax-free up to ₹20 lakhs (lifetime exemption across all employments). Amount above ₹20 lakhs is fully taxable. For government employees: Fully exempt. For death of employee: Gratuity paid to nominees is fully tax-free regardless of amount. Example: Last basic ₹80,000, 8 years service: Gratuity = 15 × 80,000 × 8 ÷ 26 = ₹3,69,231 — fully tax-free (below ₹20 lakh exemption). Employers with 10+ employees are required to have a gratuity fund. Larger companies typically obtain Group Gratuity insurance from LIC. Failure to pay gratuity within 30 days of becoming payable attracts 10% per annum interest.