PF, ESI and Gratuity: Employer Obligations in India Explained

Statutory benefits are the part of employment cost that nobody budgets for properly and everybody gets audited on eventually. A company crosses twenty employees in March, registers for provident fund in September, and discovers it owes six months of contributions plus damages and interest. Another splits salaries into a dozen allowances to keep provident fund wages at ₹15,000, then finds the labour codes’ wage definition has closed that route.

This guide sets out what employers in India owe under EPF, ESI and gratuity — who is covered, at what rates, on what wage base, by when, and what happens when you get it wrong. It also covers professional tax, which varies materially by state, and the mistakes that generate most of the demand notices we see. As a recruitment agency in Mumbai that has worked with over 500 client companies since 2001, we watch employers underestimate this cost by 15-20% of payroll at exactly the moment they scale.

EPF: who has to register and contribute

The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 applies to establishments in scheduled industries employing 20 or more persons. Coverage is triggered from the date the threshold is crossed, not from the date you notice. Once covered, an establishment generally stays covered even if headcount later falls below twenty. Smaller employers can opt in voluntarily.

All employees drawing PF wages up to the statutory ceiling must be enrolled. Employees drawing above the ceiling who were never previously EPF members may be treated as excluded employees, though most employers enrol everyone for consistency.

Two points employers routinely get wrong. First, EPS eligibility: employees joining on or after 1 September 2014 with wages above the ceiling are generally not eligible for the pension scheme, so the full employer 12% goes to EPF. Second, contributing above the ceiling is a choice — an employer may restrict contributions to ₹15,000 of wages, or contribute on actual basic. Whichever you choose, apply it consistently and state it in the offer letter, because it changes CTC by tens of thousands of rupees a year.

Operationally: every employee needs a Universal Account Number, Aadhaar-seeded and KYC-verified, with e-nomination completed. Monthly compliance is the Electronic Challan-cum-Return — upload wage data, generate the challan, pay, and retain the acknowledgement. Filing the ECR without paying does not discharge the obligation.

ESI: medical cover for lower-wage employees

The Employees’ State Insurance Act, 1948 applies to establishments employing 10 or more persons in most states, though some states and establishment categories apply a threshold of 20. It is also geographically limited to notified implemented areas, so a branch in one district may be covered while another is not.

ESI covers medical treatment for the insured person and dependants, sickness benefit, maternity benefit, disablement benefit, dependants’ benefit and funeral expenses. A quirk that catches employers out: if an employee’s wages cross ₹21,000 mid-contribution-period, contributions continue until the end of that period rather than stopping immediately.

Gratuity: the 15/26 formula and when it is payable

The Payment of Gratuity Act, 1972 applies to establishments with 10 or more employees. Gratuity is payable on resignation, retirement, superannuation, death or disablement, after five years of continuous service — with an important exception: the five-year condition does not apply where service ends due to death or disablement.

The formula for covered employees is:

Gratuity = last drawn (basic + DA) × 15/26 × completed years of service

Worked example: an employee with a last drawn basic and DA of ₹60,000 per month and 12 years of service receives ₹60,000 × 15 ÷ 26 × 12 = ₹4,15,385.

Service beyond six months in the final year is generally rounded up to a full year, so 12 years 7 months counts as 13. The statutory ceiling is ₹20 lakh; an employer may pay more voluntarily, with tax consequences for the excess. Payment is due within 30 days of gratuity becoming payable, with interest applying on delay. Employers must collect a Form F nomination from each employee and maintain it — chasing a nomination after a death in service is exactly when you do not want to be doing it.

On the accounting side, most employers provide for gratuity at roughly 4.81% of basic each year, and many fund it through a group gratuity scheme with an insurer. The provision typically appears as a line in the employee’s CTC even though it does not vest until year five.

Professional tax by state

Professional tax is a state levy deducted from salary and deposited by the employer. Rates, thresholds and filing frequency differ by state, and several states do not levy it at all. Figures below are indicative and change with state budgets.

Multi-state employers must register in each state where they have an establishment and deduct according to that state’s rules — not the rules of the head office state.

Penalties and the mistakes that trigger them

Late deposit of EPF attracts interest under Section 7Q, currently 12% per annum, plus damages under Section 14B — the damages regime was rationalised in recent years to a per-month basis, so confirm the applicable rate. ESI delays attract interest at 12% per annum, and both statutes carry prosecution provisions for wilful default. Deducting an employee’s share and failing to deposit it is treated far more seriously than an employer-side shortfall, because it is money held on the employee’s behalf.

• Misclassifying employees as contractors or consultants. Issuing a professional-services invoice does not change the substance if the person works fixed hours, uses your systems and reports to your manager. Authorities look at control and integration, not the label.
• Splitting salary to suppress PF wages. Historically employers created conveyance, education and special allowances to keep PF wages at ₹15,000. Courts have held that allowances universally paid to all employees form part of basic wages, and the labour codes’ wage definition — which caps excluded allowances at half of total remuneration — narrows this further.
• Ignoring contractor employees. As principal employer you can be held responsible for contributions in respect of contract workers where the contractor defaults. Take proof of contribution before releasing every contractor invoice.
• Late registration after crossing the threshold. Coverage is retrospective to the date the threshold was crossed. Registering “from now” leaves an uncovered period that will be assessed later.
• Trainees and interns. Whether a trainee is excluded depends on the specific engagement and the applicable rules; a blanket “interns are not covered” policy is a common source of demand notices.
• Missing UAN or e-nomination data. Cheap to fix in onboarding, expensive to reconstruct at exit or on a death claim.

A monthly and annual compliance calendar

Where a due date falls on a holiday, do not assume an extension. Set internal cut-offs two working days ahead of every statutory date and reconcile the challan against the payroll register each month rather than at year end.

Budgeting statutory cost into your hiring plan

For a role at ₹8 LPA with a 40% basic and PF on actual wages, employer PF, EDLI, admin charges and the gratuity provision add roughly 14-16% on top of the fixed salary. At lower wage levels ESI adds a further 3.25% of gross. Employers who approve headcount on fixed salary alone and discover the loaded cost at payroll run consistently end up either freezing the requisition or squeezing the offer — both of which cost you candidates.

Build the loaded figure into the requisition at approval stage, and confirm the PF treatment before the offer letter goes out, so the CTC on paper matches what payroll will actually process. This matters most in high-volume permanent staffing and talent sourcing programmes, where a 15% miscalculation across fifty hires is a material budget variance.

Frequently asked questions

Getting statutory compliance right from the first hire

Compliance failures rarely come from ignorance of the law. They come from crossing a threshold quietly, hiring across states without registering in each, or building a salary structure that made sense before the wage definition changed. All three are avoidable with a review before you scale, rather than after.

Ace Corporate Services has completed 5,000+ placements across 15+ industries for more than 500 client companies since 2001, and we build realistic loaded-cost figures into every mandate so approved budgets survive contact with payroll. Explore our recruitment services, see how we work with employers, or call +91-22-67554705, email info@acecorpsers.com, or contact us to plan your hiring for the coming quarter.