Statutory deductions in India, explained
Reviewed by Mellow Editorial Team, HR & payroll content team
Statutory deductions in India are amounts an employer is legally required to withhold from an employee's salary and remit to the relevant authority. Getting them right protects both the business and the employee — errors attract penalties, interest and, in some cases, prosecution.
The main deductions every employer must make
Four obligations cover most employers:
Provident Fund (EPF). Both the employee and employer contribute 12% of the employee's basic wages and dearness allowance to the Employees' Provident Fund. The employee's 12% is deducted from their salary. The employer's 12% is an additional cost on top of the salary. Contributions go to the EPFO and build the employee's retirement corpus.
Employees' State Insurance (ESI). ESI applies where an employee's wages fall below the prescribed threshold. It provides medical and sickness benefits. Both employer and employee contribute, with the employer bearing the larger share. If your headcount and wage bill bring you within ESI's coverage, registration is mandatory.
Tax Deducted at Source (TDS) on salary. Under Section 192 of the Income Tax Act, an employer must estimate each employee's annual taxable income, calculate the tax liability, and deduct it proportionately across the year's pay runs. The new tax regime — now the default — has slabs rising to 30%. A section 87A rebate reduces tax for employees with lower incomes. A 4% health and education cess applies on the final tax figure. Employees who prefer the old regime must notify the employer; without that declaration, you apply the new regime.
Professional Tax (PT). This is a state-level levy, not a central one. Not all states impose it, rates and slabs differ, and there is a constitutional cap on the annual amount. Check the rules for each state where you have employees on payroll.
Your compliance calendar
Deductions are only half the job. Remitting what you have withheld, on time, is equally important.
- EPF contributions must be deposited by the 15th of the following month.
- ESI contributions follow a similar monthly cycle; check the ESIC portal for exact due dates.
- TDS on salary must be deposited by the 7th of the month following deduction (with a different deadline for March deductions).
- Form 24Q is the quarterly TDS statement for salary. You file it four times a year, covering each quarter of the financial year 2026/27.
- Form 16 is issued to every employee after the financial year closes. It summarises their gross salary, deductions allowed, TDS deducted and deposited. Employees need it to file their own income tax returns. Issuing it late — or not at all — creates problems for your employees and liability for you.
Professional Tax, where applicable, usually follows a monthly or annual remittance cycle set by the state authority.
Gratuity: not a monthly deduction, but a statutory liability
Gratuity does not appear as a line item in every payslip, but it is a statutory obligation employers must plan for. An employee becomes eligible after completing five years of continuous service. The Payment of Gratuity Act governs the calculation and timing of payment. Even if you do not deduct gratuity from the employee's salary, the liability accrues. Many employers provision for it in their accounts or take a group gratuity policy to manage the outflow when it falls due.
The Labour Codes and what changes in 2026
India's four consolidated Labour Codes have come into force. The Codes reorganise and consolidate older labour legislation, including rules that touch on wages, provident fund, and social security. The definition of "wages" under the Code on Wages has implications for how you compute EPF and gratuity bases — a broader definition can raise the contributory wage if not structured carefully. Review your compensation structures, particularly the split between basic pay and allowances, to make sure your payroll is compliant under the new framework.
Common mistakes to avoid
Under-computing the EPF base. Some employers restrict contributions to a lower figure than the actual basic wage. If the statutory definition of wages applies to a broader pay component under the Codes, this creates a compliance gap.
Applying the wrong tax regime. Defaulting every employee to the new regime without collecting declarations from those who want the old regime is technically non-compliant and can result in incorrect TDS.
Missing Form 24Q deadlines. Late filing attracts a fee per day of delay. Errors in the quarterly statement create mismatches in the employee's Form 26AS, which then affects their personal tax return.
Treating Professional Tax as optional. In states where it applies, PT registration and deduction are mandatory. Ignoring it because the amounts are small does not make it less of a legal requirement.
The safest practice is to document every deduction on the payslip clearly, maintain an audit trail of remittances, and reconcile your payroll ledger against your TDS returns and EPF ECR each month.
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