A glossary of Indian payroll terms
Reviewed by Mellow Editorial Team, HR & payroll content team
Indian payroll comes with its own set of terms, abbreviations and statutory references that can be genuinely confusing — especially if you are new to hiring in India or managing compliance across multiple countries. This glossary covers the terms you will encounter most often, in plain language.
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Statutory deductions and contributions
EPF (Employees' Provident Fund): A retirement savings scheme mandatory for eligible employees. The employee contributes 12% of basic wages, and the employer contributes a matching 12%. A portion of the employer's share goes to the EPS (Employees' Pension Scheme). Administered by the EPFO (Employees' Provident Fund Organisation).
ESI (Employees' State Insurance): A health and social security scheme for employees whose wages fall below the prescribed threshold. Both employer and employee contribute. Covers medical treatment, maternity, disability and related benefits. Administered by ESIC (Employees' State Insurance Corporation).
TDS (Tax Deducted at Source): The mechanism by which an employer deducts income tax from an employee's salary before paying it out. The deducted amount is deposited with the government on the employee's behalf. Employers file Form 24Q quarterly to report these deductions and issue Form 16 to employees annually — Form 16 is the employee's official record of salary paid and tax deducted for the year.
Professional Tax: A state-level tax levied on salaried employees in several Indian states. Rates and applicability vary by state. Employers are responsible for deducting it from salaries and remitting it to the relevant state authority.
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Pay components
Basic Salary: The fixed core component of a salary, before allowances or deductions. Many statutory calculations — EPF contributions, gratuity, and others — are based on basic salary, so its structure matters.
HRA (House Rent Allowance): An allowance paid to employees towards rental expenses. Employees living in rented accommodation can claim a tax exemption on HRA, subject to conditions. The taxable portion depends on actual rent paid, salary level and city of residence.
LTA (Leave Travel Allowance): An allowance for travel expenses during leave. Employees can claim a tax exemption on LTA twice in a block of four calendar years, for travel within India.
Special Allowance: A residual, fully taxable component often used to fill the gap between CTC and the sum of other pay components. Has no statutory basis — it is simply a structuring tool.
CTC (Cost to Company): The total annual cost an employer bears for an employee. It includes gross salary, employer's EPF contribution, gratuity provisioning and any other benefits. CTC is not the amount an employee receives in hand — it is the total outflow for the employer.
Gross Salary: Total salary before deductions, but typically excluding employer-side statutory contributions. It includes basic salary plus all allowances.
Net Salary (Take-Home Pay): What the employee actually receives after all deductions — employee EPF, ESI, TDS, professional tax and any other applicable deductions.
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End-of-service and leave
Gratuity: A lump-sum payment made by an employer to an employee on leaving the organisation, provided the employee has completed at least five continuous years of service. It is governed by the Payment of Gratuity Act and calculated on the basis of last drawn salary and years of service.
Full and Final Settlement (FnF): The process of calculating and paying all outstanding dues when an employee exits — including unpaid salary, leave encashment, gratuity (if applicable) and any deductions for notice period shortfall or advances.
Leave Encashment: Payment made to an employee in lieu of unused earned leave, either during service or at the time of separation. Tax treatment differs depending on whether it is paid during employment or at exit.
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Tax and compliance terms
New Tax Regime: India's default income tax structure for individuals, with slabs rising to 30% at higher income levels. A Section 87A rebate reduces or eliminates tax liability for lower-income earners. A 4% health and education cess applies on the computed tax. Most employees are now assessed under this regime unless they explicitly opt for the old regime.
Form 16: The certificate of TDS that employers must issue to employees after the financial year ends. It shows total salary paid and total tax deducted. Employees need it to file their personal income tax returns.
Form 24Q: The quarterly TDS return that employers file with the Income Tax Department, reporting salary payments and deductions made during the quarter.
Payslip: A monthly document issued to each employee showing gross earnings, all allowances, all deductions and net pay. Employers are legally required to provide this.
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Labour law framework
Four Labour Codes: India consolidated 29 central labour laws into four codes — the Code on Wages, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety, Health and Working Conditions Code. These came into force in 2025 and affect how wages are defined, how EPF and ESI are calculated, and how compliance is structured. The definition of "wages" under the new codes is broader than before, which directly affects the base on which several statutory contributions are calculated.
PAN (Permanent Account Number): A unique ten-character identifier issued by the Income Tax Department. Employers need an employee's PAN to deduct and deposit TDS correctly. Without it, TDS must be deducted at a higher rate.
UAN (Universal Account Number): A twelve-digit number assigned to each EPF member. It stays with the employee across jobs, making it easier to transfer or withdraw PF balances when changing employers.
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