Payroll Processing and PF/ESI Services

Payroll processing is the monthly work of calculating each employee's salary, deducting tax and statutory contributions, paying the net amount, depositing PF, ESI, professional tax and TDS, and filing the returns and records the law requires. IMAK Advisory, an ICAI-registered CA firm in Bengaluru, provides payroll services and payroll compliance for startups, small businesses, companies and LLPs across India, including PF and ESI registration, salary structure design, Form 16 (now Form 130), full and final settlement and the changes brought by the new labour codes.

Payroll processing mistakes reach employees directly. A missed PF deposit shows up in the employee's passbook; a wrong TDS calculation becomes a tax notice for the employee; a late full and final settlement can mean a complaint to the labour department. Since 21 November 2025, the four labour codes have changed the definition of wages, and from 17 September 2026 the wage ceiling for PF was raised from ₹15,000 to ₹25,000 a month. This page explains what our payroll processing covers, how PF and ESI work, salary structure under the 50% wage rule, professional tax, TDS and Form 16, full and final settlement, and how we work.

• Monthly payroll processing: salary, deductions, payslips and bank file
• PF and ESI registration, monthly challans and returns
• Professional tax and labour welfare fund where applicable
• TDS on salary, quarterly returns and Form 16 (Form 130)
• Salary structure design under the new labour codes
• Full and final settlement and gratuity calculations
• Registers, records and payroll compliance calendar

Our payroll processing runs on a fixed monthly calendar. You send attendance, leave and changes; we send back payroll for approval, payslips, a bank upload file and the compliance challans.

1. Collect attendance, leave, new joiners, exits, salary revisions and reimbursements by a fixed date
2. Calculate gross salary, overtime, arrears, bonus and incentives
3. Calculate PF, ESI, professional tax, labour welfare fund and TDS
4. Share the payroll register and variance report for approval
5. Prepare the bank upload file and payslips
6. Deposit PF, ESI, professional tax and TDS by their due dates with your approval
7. File PF and ESI returns, TDS returns and state returns
8. Keep registers, records and payroll reports, and answer employee queries on deductions

We run payroll processing in your payroll software or ours, and integrate with your accounting so salary entries, provisions and statutory dues match the books every month.

Payroll processing follows the same steps every month, and most errors come from skipping one of them under time pressure. A disciplined monthly cycle looks like this:

1. Day 20 to 25: cut-off for attendance, leave, overtime, new joiners, exits and salary changes
2. Day 25 to 27: payroll processing run – gross pay, deductions, arrears, variable pay
3. Day 27 to 28: variance report comparing this month with last month, reviewed line by line
4. Day 28 to 30: approval by the authorised person and release of the bank file
5. By the 7th of the next month: salary credited and TDS deposited
6. By the 15th: PF and ESI deposited and returns filed
7. State due dates: professional tax and labour welfare fund
8. Month-end: payroll entries posted in the books and reconciled

The variance report is the most useful control in payroll processing. Any change in an employee's net pay that is not explained by an approved change – a new joiner, a revision, an exit, a variable payment – is investigated before the bank file is released.

Many businesses use a mix: payroll software for employee self-service and payslips, with our team running payroll processing and compliance on it. The right choice depends on headcount, complexity and how often rules change in your states.

The four labour codes replaced 29 central labour laws, including the Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, the EPF Act, the ESI Act and the Payment of Gratuity Act. They came into force on 21 November 2025. The central government notified its rules on 8 May 2026, and states are notifying their own rules, so some details still depend on the state where employees work.

For most employers, the biggest effect is the wages definition. A salary structure with a low basic and high allowances – common for reducing PF – now has its allowances above 50% treated as wages for PF, gratuity and other benefits.

A salary structure decides how the cost to company is split into basic pay, allowances, reimbursements and employer contributions. Under the labour codes, it also decides the wage base for PF, gratuity and bonus. A good salary structure is compliant, easy to explain and tax-efficient for the employee within the rules.

The change affects take-home pay where PF is calculated on the full wage, and it raises gratuity provisions. Employers can keep cost to company the same and accept lower take-home pay, raise cost to company, or – where employees agree and the law allows – contribute PF on a capped wage. We model each option and its effect on employees before you decide.

• Check every component against the wages definition
• Test the 50% limit for each employee, not only the template
• Decide the PF contribution approach within the law
• Recalculate gratuity and leave encashment provisions
• Update appointment letters and policies
• Communicate the change clearly to employees

PF and ESI are the two main social security contributions in Indian payroll. Both are now governed by the Code on Social Security, 2020, with the Employees' Provident Fund Organisation (EPFO) and the Employees' State Insurance Corporation (ESIC) running them.

An employee earning above the ESI limit is outside ESI but still in PF. Once in PF, an employee generally stays in it even if pay rises above the ceiling. International workers from countries without a social security agreement with India have special PF rules.

PF registration is compulsory once an establishment employs 20 or more people, and ESI registration once it employs 10 or more in a covered area. Both are done online, and many employers register voluntarily earlier. Registration must be done within the time allowed after crossing the threshold, and contributions are due from the date of coverage, not from the date of registration.

1. Check coverage dates for PF and ESI
2. Collect business registration, PAN, address proof, bank details and employer digital signature
3. Apply for PF registration on the EPFO portal and ESI registration on the ESIC portal
4. Obtain the establishment code and employer code
5. Register existing employees, generate or link UANs and IP numbers
6. Set up monthly challans and returns in the payroll calendar

Late registration usually means paying past contributions with interest and damages. We review the employee count history to fix the correct coverage date.

From 17 September 2026, the wage ceiling for compulsory PF coverage and contributions was raised from ₹15,000 to ₹25,000 a month under the Code on Social Security, 2020. Employees whose PF wages are up to ₹25,000 are now compulsorily covered, and contributions for many employees are calculated on a higher base. Employers whose policy was to contribute on ₹15,000 for higher-paid staff need to review it.

• Identify employees newly covered by the higher ceiling
• Recalculate PF for employees whose contributions were capped at ₹15,000
• Review pension scheme contributions as per EPFO instructions
• Update payroll software settings and salary letters
• Explain the change in take-home pay to affected employees

EPFO instructions on implementation, including pension scheme treatment, continue to be issued. We follow the latest instructions and apply them from the correct date.

Professional tax is a state tax on employment, deducted by the employer from salary and paid to the state. It applies in states such as Karnataka, Maharashtra, West Bengal, Tamil Nadu, Andhra Pradesh, Telangana, Gujarat and others, but not in every state. Employers register, deduct as per the state's salary slabs, deposit by the state's due date and file returns. Employers in some states also pay professional tax on their own registration.

Labour welfare fund contributions are a separate state requirement, usually small amounts paid by employer and employee once or twice a year. Both depend on where employees work, not where the company is registered, so a company with staff in several states needs registrations in each.

The employer must deduct income tax from salary each month based on the employee's estimated annual income and chosen tax regime, deposit it, file quarterly returns and issue the annual certificate. From 1 April 2026, under the Income-tax Act, 2025, the quarterly salary TDS return is Form 138 (earlier Form 24Q), the annual certificate is Form 130 (earlier Form 16), and the employee's declaration of deductions and exemptions is Form 124 (earlier Form 12BB).

The new tax regime is the default; employees choose the old regime if it suits them. Under the new regime, income up to ₹12 lakh is effectively not taxed for resident individuals because of the rebate, and the standard deduction is ₹75,000. Payroll must project annual income each month, include perquisites and previous employer income, and adjust TDS so the employee does not face a large demand at year-end.

• Collect regime choice and declarations at the start of the year
• Verify rent receipts, investment and loan proofs before the final quarter
• Include perquisites such as company car, accommodation and ESOPs
• Account for income from a previous employer during the year
• Reconcile TDS deposited with the quarterly returns and the tax department's records
• Issue Form 130 (Form 16) on time

Form 16 – now Form 130 – is the certificate of salary paid and tax deducted, which employees use to file their income-tax returns. It has two parts: details of tax deducted and deposited from the tax department's records, and the breakdown of salary, exemptions and deductions. Employees often ask why Form 16 does not match their annual tax statement; the usual reasons are late deposits, wrong PAN or quarter errors in the TDS return, which we correct before issuing the certificate.

Full and final settlement is the payment of all dues to an employee who leaves – salary for days worked, leave encashment, bonus, gratuity if eligible, reimbursements – less recoveries such as notice pay shortfall or advances. Under the Code on Wages, wages due on resignation, removal, dismissal or retrenchment must be paid within two working days. Gratuity is payable within the period set by the law once due.

The two-day timeline is much shorter than many companies' earlier practice of settling in 30 to 45 days. We prepare settlement workings as soon as the exit date is confirmed and help redesign the exit process so documents and approvals are ready in time.

Gratuity is payable on exit after five years of continuous service for permanent employees, and after one year for fixed-term employees under the Code on Social Security. The formula is based on last drawn wages and years of service. Because the labour codes raised the wage base for many employees, gratuity provisions in the books also rise. Companies should carry a provision for gratuity and leave encashment, measured by actuarial valuation where the accounting standards require it, and may fund gratuity through an insurer.

Statutory bonus applies to employees earning up to the eligibility limit in covered establishments, at a minimum and maximum percentage of wages set by law, calculated on the wage base for bonus. It is paid within the time allowed after the accounting year. Many employers pay a fixed monthly amount as advance bonus; it should be checked against the annual calculation.

Payroll processing also covers items that are not fixed salary. Reimbursements of actual business expenses, supported by bills, are generally not taxable. Perquisites – company car, rent-free or concessional accommodation, interest-free loans, ESOPs – are taxable at values set by the tax rules and must be included in TDS. Flexible benefit plans let employees choose components such as meal cards, fuel or telephone reimbursements, but under the new tax regime many of these exemptions are not available, so the benefit depends on the regime each employee chooses.

• Keep a reimbursement policy with limits and documentation
• Value perquisites as the tax rules require
• Check which components are useful under each tax regime
• Make sure reimbursements are not used to hide salary from the 50% wage test

Every payroll processing cycle should end with entries in the accounts: salary expense by department, liabilities for net pay, PF, ESI, professional tax and TDS, and provisions for bonus, gratuity and leave encashment. When the payroll register, the bank payments and the statutory challans all agree with the ledger, audits and tax assessments are straightforward. When they do not, differences surface in the tax audit report and in the annual financial statements.

Payroll software should handle Indian statutory rules – PF, ESI, professional tax by state, TDS under both regimes, the new wages definition – produce payslips and bank files, give employees self-service for declarations and proofs, and export entries to your accounting software. We work with common payroll products and can recommend one based on your size and needs, but we do not sell software or take commissions from vendors.

Startups often begin with a few employees and contractors, and payroll processing and compliance build up as they grow. The thresholds for PF (20 employees) and ESI (10 employees) are crossed quickly, and employers sometimes find later that they owed contributions from an earlier date.

• Track employee count each month against PF and ESI thresholds
• Classify consultants and interns correctly, and deduct TDS on professional fees
• Use written appointment letters from the first hire
• Design a salary structure that meets the 50% rule from the start
• Account for ESOP perquisite tax when options are exercised
• Register for professional tax in each state where staff work

We set up payroll services around these points rather than a single template, so the monthly process reflects how your business actually employs people.

A company headquartered in Bengaluru with remote employees in Pune, Chennai and Hyderabad has professional tax and labour welfare fund obligations in each of those states, and state rules under the labour codes may differ. PF and ESI are central, but ESI applies only where the area is covered. For multi-state payroll processing, we map each employee's place of work and set up registrations and calendars for every state involved.

Payroll processing and compliance need records as well as payments. Under the labour codes, registers of employees, wages, deductions, overtime, leave and advances are maintained in the prescribed formats, increasingly in electronic form, and kept for the period required. Payslips must be issued. PF and ESI records, TDS records and professional tax returns are separate. We keep these in order so that an inspection, audit or due diligence can be answered quickly.

1. Onboarding: review current payroll processing, registrations, salary structures and past filings
2. Set the monthly cut-off dates and approval flow
3. Run a parallel payroll for the first month to check differences
4. Monthly payroll processing, approval and payments
5. Statutory deposits and returns by due dates
6. Quarterly TDS returns and annual Form 130
7. Quarterly review of salary structures, thresholds and new rules
8. Year-end reconciliation with the books and the tax department's records

You keep control of payments; we prepare the files and challans, and your authorised signatory approves them.

We do not publish fees. The cost depends on the number of employees, the number of states, the complexity of pay components, whether we use your software or ours, and any catch-up work. Statutory contributions, interest and damages are paid by you directly to the authorities. Our team shares the exact total after reviewing your requirements.

A Startup That Crossed 20 Employees

A startup grew from 12 to 26 employees in eight months without registering for PF. We fixed the coverage date, registered, generated UANs, calculated past contributions with the interest due, and set up monthly payroll so the next filings were on time.

A Services Company With a Low-Basic Structure

A company paid basic at 30% of gross. After the labour codes, its allowances exceeded 50% of pay. We modelled three options, the company chose to restructure salaries with the same cost to company, and updated letters and payroll from the next month.

A Business With Staff in Four States

A distributor had employees in Karnataka, Maharashtra, Tamil Nadu and Telangana but professional tax registration only in Karnataka. We registered in the other states, regularised past deductions and added state due dates to the payroll calendar.

• Payroll processing without a monthly variance check
• Registering for PF or ESI late and paying contributions only from registration
• Low-basic salary structures that ignore the 50% wage rule
• Not applying the new ₹25,000 PF ceiling from 17 September 2026
• TDS calculated without previous employer income or perquisites
• Professional tax not registered in states where remote staff work
• Full and final settlement taking weeks instead of two working days
• No written appointment letters
• Treating employees as consultants to avoid PF and ESI
• Payroll not reconciled with the books and statutory dues

International Workers

Foreign nationals working in India are generally covered by PF without the ceiling, unless a social security agreement with their home country applies.

Contract Labour

The principal employer must ensure contractors pay wages and contributions, and can be liable if they do not.

Interns and Apprentices

Stipends to apprentices under the apprenticeship law are treated differently from salaries; interns' status depends on the arrangement.

Directors on Payroll

Whole-time directors' remuneration is subject to the Companies Act limits and approvals as well as payroll rules.

Expatriates and Tax Equalisation

Employees on foreign assignments need residency analysis, treaty relief and sometimes shadow payroll.

• We do not hold your bank passwords or make payments without your approval
• We do not design structures to avoid PF, ESI or tax unlawfully
• We do not treat employees as consultants to escape coverage
• We do not represent you in labour court disputes; an advocate should
• We do not quote government contributions, interest or damages as our fees

If you have only a few employees, are not yet covered by PF or ESI, have staff only in a state without professional tax and pay simple salaries, payroll software and your accountant may be enough. If you have an in-house HR and payroll team, you may need us only for a compliance review, the salary structure redesign or year-end TDS. We will tell you if that is the case.

1. How many employees, and in which states?
2. Are you registered for PF, ESI and professional tax where needed?
3. What is your current salary structure, and does it meet the 50% rule?
4. Which payroll software do you use?
5. Who approves payroll and payments?
6. Are there past gaps in PF, ESI or TDS?
7. How are exits and full and final settlements handled today?

Payroll processing involves every employee's salary, bank account and personal details. As chartered accountants we follow ICAI's confidentiality rules. Access is limited to named team members, files are shared through secure channels, and personal data is used only for payroll.

Use this list in every payroll processing cycle to keep payroll compliance in order.

• Attendance and changes received by cut-off
• Salary structure meets the 50% wage rule
• PF on the correct wage and ceiling
• ESI for employees within the wage limit
• Professional tax in each state
• TDS projected for the year and deposited
• Salaries paid by the 7th
• PF and ESI deposited and filed by the 15th
• Exits settled within two working days
• Payroll reconciled with the books

Our only office is in Whitefield, Bengaluru, where clients can meet us in person. Payroll processing is done online, so we serve employers with staff in every state, with state-specific rules applied for each employee. We do not have offices outside Bengaluru.

What is payroll processing?

Calculating salaries, deducting tax and contributions, paying employees, depositing PF, ESI, professional tax and TDS, and filing the related returns and records.

What do payroll services include?

Monthly payroll processing, payslips, bank files, statutory deposits and returns, Form 16 (Form 130), full and final settlement and compliance records.

When is PF registration required?

When an establishment employs 20 or more people. Smaller establishments can register voluntarily.

When is ESI registration required?

When a notified establishment in a covered area employs 10 or more people.

What are PF and ESI contribution rates?

PF is 12% from employee and 12% from employer on PF wages; ESI is 0.75% from employee and 3.25% from employer on gross wages.

What is the new PF wage ceiling?

₹25,000 a month from 17 September 2026, up from ₹15,000, under the Code on Social Security, 2020.

What is the 50% wage rule?

Under the labour codes, if allowances excluded from wages exceed 50% of total pay, the excess is treated as wages for PF, gratuity and bonus.

How should a salary structure be designed now?

Keep wages – basic, DA and retaining allowance – at least half of total pay, or account for the add-back, and model the effect on take-home pay and costs.

What is professional tax?

A state tax on employment deducted from salary in states that levy it, such as Karnataka and Maharashtra.

What is Form 16 called now?

From 1 April 2026, the salary TDS certificate is Form 130, and the quarterly salary TDS return is Form 138 instead of Form 24Q.

When must full and final settlement be paid?

Within two working days of resignation, removal, dismissal or retrenchment under the Code on Wages.

Are fixed-term employees eligible for gratuity?

Yes, after one year of service under the Code on Social Security.

What is payroll compliance?

Meeting all legal requirements in payroll: wages, PF, ESI, professional tax, TDS, bonus, gratuity, registers and returns.

What happens if PF is paid late?

Interest and damages apply, and employees see missing credits. Contributions are due from the date of coverage.

Can you run payroll in our software?

Yes. We run payroll processing in your payroll software or provide ours, and reconcile with your books.

How much do payroll services cost?

We do not publish fees. The cost depends on employees, states, pay components and catch-up work, and our team shares the exact total after reviewing your requirements.

TDS and TCS · Bookkeeping and Accounting · Income Tax Return · Virtual CFO Services · Startup India Registration · Company and LLP Setup

To start payroll processing, share your employee count by state, current salary structure, registrations and the last payroll register. Our team will review the position and suggest the monthly calendar.

Contact Details

Office Address

IMAK Advisory, ITPL Main Rd, Pattandur Agrahara, Whitefield, Bengaluru, Karnataka 560066, India

Phone

+91 79798 50684 (call or WhatsApp)

Email

imakadvisoryteam@gmail.com

Sources: Code on Wages, 2019; Code on Social Security, 2020; Industrial Relations Code, 2020; Occupational Safety, Health and Working Conditions Code, 2020 (in force 21 November 2025; central rules 8 May 2026); notification of 17 September 2026 raising the PF wage ceiling to ₹25,000; Income-tax Act, 2025 and Income-tax Rules, 2026 (Forms 124, 130 and 138). Checked 2 November 2026.