Payroll software in India: how payroll is calculated
A worked example from gross pay to take-home, the statutory rates behind it, the monthly and yearly due dates, and what payroll software has to get right.
Last updated 21 October 2026
How is payroll calculated in India?
Indian payroll starts from gross pay, works out statutory wages under the Labour Codes, then deducts the employee’s PF (12% of wages up to the ₹25,000 ceiling), ESI (0.75% where pay is up to ₹21,000 a month), state Professional Tax and TDS on salary. The employer adds its own PF and ESI shares and deposits everything by fixed monthly dates.
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Sign upHow does gross pay become take-home pay?
Two monthly salaries for employees in Karnataka, in an establishment covered by PF and ESI. The first step is the one most often missed: working out statutory wages. Under the Labour Codes, wages are basic pay, dearness allowance and retaining allowance; if the other allowances exceed 50% of total remuneration, the excess is added back (MoLE FAQ).
| Line | Employee A | Employee B |
|---|---|---|
| Basic pay + DA | ₹9,000 | ₹20,000 |
| HRA and other allowances | ₹11,000 | ₹20,000 |
| Gross pay | ₹20,000 | ₹40,000 |
| Allowances above 50% of gross, added back | ₹1,000 | — |
| Statutory wages (Code on Wages) | ₹10,000 | ₹20,000 |
| Employee PF: 12% of wages, up to the ₹25,000 ceiling | ₹1,200 | ₹2,400 |
| Employee ESI: 0.75% if gross is up to ₹21,000 | ₹150 | Not covered |
| Professional Tax (Karnataka) | ₹0 (below ₹25,000) | ₹200 |
| TDS on salary | Per annual estimate | Per annual estimate |
| Take-home before TDS | ₹18,650 | ₹37,400 |
| Employer PF: 12%, of which 8.33% to pension | ₹1,200 (₹833 pension) | ₹2,400 (₹1,666 pension) |
| Employer ESI: 3.25% | ₹650 | Not covered |
Where each rate comes from:
- PF: 12% each from employee and employer, 10% in notified establishments, under the EPF Scheme, 2026 (All India Radio report). The mandatory wage ceiling rose from ₹15,000 to ₹25,000 a month from 17 September 2026, and the maximum employer pension share is now 8.33% of ₹25,000, or ₹2,083 (PIB, Cabinet decision).
- ESI: employee 0.75% and employer 3.25% of wages since 1 July 2019; employees with an average daily wage of ₹176 or less pay no employee share (ESIC). Coverage is for wages up to ₹21,000 a month, and the Code’s definition of wages applies to ESI from 21 November 2025 (MoLE FAQ). This example uses gross pay as the ESI base; check how each allowance you pay is treated.
- Professional Tax: Karnataka’s schedule charges ₹200 a month on salary of ₹25,000 and above (schedule). Other states use other slabs.
- TDS: under section 392 of the Income-tax Act, 2025, the employer deducts tax each month at the average rate on the employee’s estimated salary income for the tax year (section text). Section 392 replaced section 192 when the new Act came into force on 1 April 2026 (Income Tax Department).
When are salaries, PF, ESI and TDS due?
Payroll is a monthly cycle with a few quarterly and yearly deadlines. Missing one usually means interest or late fees, so payroll software should show what is due next.
| What | Due | Source |
|---|---|---|
| Salary payment (monthly wage period) | Before the end of the 7th day of the next month | Code on Wages (MoLE handbook) |
| TDS on salary deposit | 7th of the next month; deductions made in March by 30 April | Income-tax Rules, 2026, r.218 |
| PF contributions and ECR | Within 15 days of the close of the month | EPFO via PIB |
| ESI contributions | Within 15 days of the end of the month | ESIC |
| Form No. 138 (formerly 24Q), quarterly | 31 July, 31 October, 31 January and 31 May | r.219 |
| Form No. 130 (formerly Form 16) to employees | By 15 June after the end of the tax year | r.215 |
| Final dues on exit | Wages within 2 working days; gratuity within 30 days of becoming payable | MoLE handbook |
| Professional Tax and Labour Welfare Fund | Set by each state | State rules |
The PF date comes from EPFO’s rule under the 1952 scheme, which the EPF Scheme, 2026 has since replaced; check the EPFO employer portal for any change. Note also that wages must reach employees by the 7th, while the PF and ESI deductions from those wages are deposited by the 15th.
What must payroll software do in India?
| Capability | Why it matters |
|---|---|
| Statutory wage calculation | PF and gratuity follow the Labour Codes’ wage definition, not basic pay alone |
| Ceilings and thresholds as settings | The PF ceiling changed in September 2026; ESI, bonus and state limits change too |
| State-wise Professional Tax and LWF | Each state sets its own slabs and periods |
| TDS under the new Act | Section 392 deductions, regime choice, declarations and proofs, Form No. 138 and Form No. 130 |
| Attendance and leave inputs | Loss of pay, overtime at twice the normal rate and leave encashment come from these records |
| Arrears and revisions | Back-dated increments and ceiling changes recalculate past months correctly |
| Wage slips and registers | Issued on or before payment, with registers kept for five years |
| Bank file and accounting | One run produces the bank upload and the salary journal |
How do you choose payroll software?
- Run the two employees above through a demo and compare the numbers line by line.
- Ask how the software handled the September 2026 PF ceiling change and back-dated arrears.
- Check it produces Form No. 138 and Form No. 130 data, not the retired Form 24Q and Form 16.
- Add a second state and confirm Professional Tax changes with it.
- Confirm attendance and leave flow in without re-typing, and that salary journals post to your accounts.
- Ask for a full data export and where payroll data is hosted.
Spreadsheets work until thresholds and state rules multiply; standalone payroll tools still need attendance, leave and accounting data fed in. For what a full HR system covers, see HRMS software, and for multi-state and data rules, the HRMS software India guide.
What is ERPStack planning for payroll?
ERPStack is an ERP for Indian small and mid-sized businesses that Perimattic is building. Payroll is a planned part of its HR module. The plan:
- Statutory wages under the Labour Codes, with the 50% add-back shown on every calculation.
- PF, ESI, Professional Tax and TDS worked out from one salary structure, with ceilings kept as settings.
- Attendance and leave feeding loss of pay and overtime automatically.
- Payslips, bank salary files and the data for Form No. 138 and Form No. 130.
- The salary journal posted to the ledgers from the same run.
Status: ERPStack is in development and nothing on this page is available to use yet. Sign up to tell us how you run payroll today.
This page is general guidance, not legal or tax advice. Rules and rates were checked on 22 October 2026.
More on HR and payroll
Payroll in India, answered
Is PF calculated on basic salary or gross salary?
On wages as the Labour Codes define them: basic pay, dearness allowance and retaining allowance, plus any amount by which other allowances exceed 50% of total remuneration. Mandatory contributions are capped at a wage of ₹25,000 a month from 17 September 2026, or actual wages if lower.
What changed in payroll on 1 April 2026?
The Income-tax Act, 2025 replaced the 1961 Act. Salary TDS moved from section 192 to section 392, the quarterly salary TDS statement became Form No. 138 (formerly Form 24Q) and the employee certificate became Form No. 130 (formerly Form 16). The deposit and filing dates stayed the same.
When must salary be paid in India?
Under the Code on Wages, monthly wages must be paid before the end of the seventh day of the following month. When someone leaves, whether by resignation, dismissal or termination, their due wages must be paid within two working days.
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