PF, ESI, gratuity, TDS and professional tax: what overseas employers should know 

Employing staff in India brings monthly and annual obligations: provident fund and insurance contributions, tax deducted from salaries, professional tax in many states, gratuity after long service, and the labour code rules on wages, leave and termination. Each has its own filing, deadline and penalty. Most overseas employers hand this to a partner.

Written in November 2026 from the official sources listed at the end. Rates, thresholds and rules change, so confirm the current position before you rely on any figure here.

Why is hiring in India a compliance job before it is a hiring job?

Finding a good engineer or accountant in India is the easier part. The harder part is everything that has to happen once the offer is accepted. A statutory obligation is a duty set by law, such as a contribution, a deduction or a filing, that an employer must meet whether or not the employee asks for it.

Each obligation comes with its own authority, its own forms and its own calendar. Some run monthly, some quarterly, and some depend on the state where the employee works. A business used to a single payroll system at home can find this surprising. Below we take each obligation in turn: what it is, who it applies to, who files and where it tends to go wrong.

What is provident fund?

Provident fund, or PF, is a retirement savings scheme for employees, run by the Employees' Provident Fund Organisation (EPFO).

According to EPFO, the employee and the employer each contribute 12% of basic wages plus dearness allowance. The employer's share is divided between the EPF, the Employees' Pension Scheme and the Employees' Deposit Linked Insurance scheme. Contributions are mandatory for wages up to Rs 15,000, and higher wages can be covered by voluntary option.

The employer registers the establishment, deducts the employee's share from salary, adds its own share and pays both to EPFO. It also files the monthly return through the EPFO portal. We do not give a registration threshold here, because we could not confirm the current one on an official page. Check it with your Chartered Accountant.

Where it goes wrong: contributions worked out on the wrong wage base, deposits made late, employees left out of the return, and records that do not match payroll. Any of these can lead to interest and penalties, and any of them can leave an employee without a benefit they expect.

What is Employees' State Insurance?

Employees' State Insurance, or ESI, is a social insurance scheme run by the Employees' State Insurance Corporation (ESIC). It provides medical and related benefits for eligible employees.

ESIC states that the employee's contribution rate, with effect from 1 July 2019, is 0.75% of wages, and the employer's is 3.25% of wages paid or payable. ESIC also states that the wage limit for coverage, in force from 1 January 2017, is Rs 21,000 a month, with a higher limit of Rs 25,000 listed for persons with disability. Employees with an average daily wage of up to Rs 176 do not pay the employee share, but the employer still pays its own.

On coverage, ESIC lists factories as covered when they employ ten or more persons. Other establishments are covered where the government has extended the Act to them, and the threshold there is different. Whether your business is covered depends on its type and location, so confirm it instead of assuming either way.

The employer registers, deducts the employee's share, adds its own and pays the contribution. Where it goes wrong: an employee near the wage limit who moves in or out of coverage, mistakes in the wage figure, and late payment.

What is gratuity?

Gratuity is a lump sum an employer pays to an employee in recognition of long service, when the employee leaves after meeting the qualifying conditions.

For many years gratuity was governed by the Payment of Gratuity Act, 1972. With the labour codes now in force, the rules for later service sit in the Code on Social Security, 2020. The qualifying period, the method of calculation, any ceiling and the position of fixed-term employees all matter. We have not confirmed these figures on a page we could open, so we do not state them. Ask your Chartered Accountant for the current position.

Gratuity is a liability that grows quietly. On day one the employer owes nothing, and from then on it owes a rising amount. An employer who ignores it can face a large bill when a long-serving employee leaves. The sensible course is to record the liability in the accounts every year.

What is TDS on salaries?

TDS stands for tax deducted at source. For salary, the employer deducts income tax from each employee's pay and deposits it with the tax department.

The deduction on salary falls under section 192 of the Income-tax Act. The Income Tax Department's guidance shows that employees give the employer particulars of their claims, such as house rent allowance or home loan interest, on Form 12BB. The employer uses these to work out how much tax to deduct. At year end it gives each employee Form 16, a certificate showing salary income, deductions and exemptions, and the tax deducted.

The employer also files returns of the tax deducted and deposited. We do not list the due dates here, because we did not confirm the current ones on an official page. A missed date can bring interest and penalties.

Where it goes wrong: tax worked out on a poor estimate of the year's income, employees who change jobs partway through the year, claims without documents, and late deposits. The employee then sees a different figure in their own tax records, and the employer receives a notice.

What is professional tax?

Professional tax is a tax on professions, trades, callings and employments. Each state sets its own, so it is not the same across India.

State laws such as the Gujarat State Tax on Professions, Trades, Callings and Employments Act, 1976 set a ceiling on the tax one person pays in a year. Other states have their own acts, schedules and ceilings. An employer with staff in more than one state may need to register and file in each of them.

The employer usually deducts the tax from salary and pays it to the state. We give no amounts here, because they differ by state and they change. Where it goes wrong: an employer follows one state's rules and forgets that a remote employee lives in another.

What are the labour codes?

The labour codes are four laws that bring India's older labour laws together: the Code on Wages, the Industrial Relations Code, the Code on Social Security and the Occupational Safety, Health and Working Conditions Code.

The Government of India announced through the Press Information Bureau that the four codes were made effective from 21 November 2025, rationalising 29 existing labour laws. They cover wages, industrial relations, social security and workplace safety. Wage definitions, leave and termination rules are among the points employers have had to look at again.

Exactly what applies to a given employer depends on the establishment, its size, its location and the rules made under the codes, and those rules are still developing. Treat any summary, this one included, as a starting point and not as the answer for your business.

How do the obligations compare at a glance?

Keep a simple calendar of every date that applies to you, sorted by authority and by state, with a named owner for each date. Review it every quarter and after any change in the law. Keep a copy of every challan, return and acknowledgement.

What does one missed filing cost?

The cost is rarely a single number. A missed or late filing can bring interest and penalties from the authority concerned. It can also bring a notice, which needs a reply, and that reply needs someone who reads Indian law and knows your records.

The obligations are also linked. One wrong wage figure can throw out provident fund, insurance and tax deducted all at once. A missed state registration can surface years later, during an audit or a dispute. Fixing a problem late nearly always costs more than filing on time.

For an overseas employer there is one more cost, which is attention. A notice from an Indian authority can land on the desk of someone who has no idea where to begin. That is why the question of who carries these obligations belongs before the first hire, not after it.

Who carries this in a dedicated team model?

In a dedicated team, the partner is the employer. It signs the employment contracts, runs payroll, deducts and pays the statutory amounts, files the returns and complies with labour law. You work with the team, not with the paperwork.

It is still worth asking direct questions. Which obligations does the partner carry? In which states does it file? Can it show you proof of filing? What happens if it makes a mistake? Who replies to a notice? A capable partner will answer each of these without hesitation.

Rules, rates and dates change. Check the current position with your Chartered Accountant before you act.