Payroll with PF, ESI and TDS for a small team (2026 guide)

With 8 employees, payroll is simpler than it feels: PF becomes compulsory at 20 employees and ESI at 10, so for now they apply only if you have registered voluntarily (or, for ESI, if your work is notified as hazardous), while TDS applies to anyone whose salary is taxable and professional tax applies in states that levy it. Each month the job is the same five steps: confirm paid days, work out gross pay, deduct PF, ESI, professional tax and TDS where they apply, pay salaries and deposit the deductions, then give everyone a payslip. All figures below are as of November 2026; confirm your setup with your CA, because several rules changed in the last twelve months.

This guide covers when each deduction applies, the current rates, a worked payslip, a monthly checklist and how KutrimBots' Team & HR plugin runs it.

Why is monthly payroll such a headache for a small team?

Because four different deductions follow four different rulebooks, and three of them changed recently. India's four Labour Codes came into force on November 21, 2025, replacing 29 central labour laws. The Income-tax Act, 2025 replaced the 1961 Act from April 1, 2026, so salary TDS for April 2026 onwards falls under section 392 of the new Act, according to the Income Tax Department. And the PF wage ceiling rose from ₹15,000 to ₹25,000 a month on September 17, 2026 (notification S.O. 5109(E)), as BDO India summarised. A spreadsheet built last year is probably wrong somewhere.

When do PF, ESI, professional tax and TDS apply to a small business?

Each one has its own trigger. In summary:

The sources: PF applies to establishments employing 20 or more people under the Codes, as the Labour Ministry states. The 12% contributions, with 8.33% of the employer's share going to the pension scheme and 0.5% to EDLI, come from the EPFO's FAQ. ESI coverage is now pan-India, voluntary for fewer than 10 employees and mandatory for even a single worker in hazardous occupations, according to the government's Code on Social Security factsheet. ESI rates of 0.75% and 3.25% are on ESIC's contribution page, and the scheme covers employees earning up to ₹21,000 a month (₹25,000 for persons with disabilities).

How do you calculate PF and ESI, with an example?

Both are a percentage of "wages", and the Labour Codes changed what counts as wages. Under the Code on Wages, wages mean basic pay, dearness allowance and retaining allowance; listed exclusions such as HRA and conveyance allowance are left out, but if the excluded parts add up to more than 50% of total pay, the excess is added back to wages. The Labour Ministry's FAQs on the Labour Codes include a worked example. The simplest way to avoid surprises is to keep Basic plus DA at 50% or more of pay.

The formulas, once you know the wage base:

• Employee PF = 12% × PF wages (capped at ₹25,000 if you restrict to the ceiling, so at most ₹3,000).
• Employer PF = 12% × PF wages, of which 8.33% goes to the pension scheme (EPS) and the rest to the employee's PF account, plus 0.5% EDLI.
• Employee ESI = 0.75% × ESI wages, only while wages are ₹21,000 a month or less.
• Employer ESI = 3.25% × ESI wages.

Since November 2025, several payroll advisers read the ESI wage base as the Codes' wage definition rather than gross pay. Ask your CA which base your ESI filings use.

How much TDS should you deduct from salary?

Estimate each employee's taxable salary for the year, work out the tax at their slab rates, and deduct one-twelfth each month, adjusting as pay or declarations change. For tax year 2026-27 under the default new regime, the slabs in section 202 of the Income-tax Act, 2025 are:

Salaried employees get a ₹75,000 standard deduction under section 19 of the new Act, and a rebate means no tax when taxable income is ₹12 lakh or less, as the Income Tax Department's e-filing guide explains. In practice, a salary up to about ₹12.75 lakh a year usually needs no TDS under the new regime. Add 4% health and education cess on any tax. Employees who choose the old regime or declare other income need their own calculation.

A worked payslip for one employee

Example: a designer in Pune earning ₹50,000 a month (₹6 lakh a year) at a firm that has registered for PF, restricts PF to the ceiling and is in Maharashtra. Basic is 50% of pay.

Maharashtra's profession tax is ₹200 a month and ₹300 in February for salaries above ₹10,000, ₹2,500 a year in all, per the state's rate schedule, which has separate exemption limits for women. Other states have their own slabs, and some, such as Delhi, levy none.

How the same firm's other salaries change:

The last row: ₹15 lakh minus ₹75,000 is ₹14.25 lakh taxable, giving ₹93,750 of tax plus ₹3,750 cess, or ₹97,500 for the year.

A monthly payroll checklist

1. By the 25th, lock attendance. Confirm leave, loss-of-pay days and joiners or leavers for the month.
2. Prepare the draft. Gross pay per person, then PF, ESI, professional tax and TDS.
3. Add one-offs: bonuses, reimbursements, advances to recover.
4. Review and approve the totals: gross, deductions, net pay, employer cost.
5. Pay salaries by bank transfer, and deposit the deductions on time: PF and ESI by the 15th of the next month, TDS by the 7th (30 April for March's deductions). Check the current dates on the EPFO, ESIC and Income Tax portals.
6. Send payslips to every employee.
7. Each quarter, your CA files the TDS statements; once a year, each employee gets a TDS certificate.

How does Team & HR run payroll in KutrimBots?

Team & HR prepares and checks payroll with you; it never pays anyone and never locks payroll without your approval. Here's the flow:

1. Set up the company once. In Team & HR's company settings, choose the statutory deductions that apply to you (PF, ESI, professional tax by state, TDS); changes wait for your approval. Outside India there's a simple mode with your own earnings and deductions.
2. Add your people with joining date, role and manager. Salary (annual CTC), bank details and PAN wait for your approval, and bank and PAN numbers are only ever shown masked.
3. Attendance runs itself. Each employee gets a private self-service page, with no login, to check in and out, request leave and see balances. Days with no check-in become absent overnight unless they were leave, a holiday or a weekly off.
4. From the 25th, you're reminded to run payroll. The draft comes from salaries and attendance: paid days, loss of pay, PF, ESI, professional tax and a TDS estimate. A draft changes nothing, so you can redo it any time.
5. Adjust any payslip for a bonus, reimbursement, advance or a TDS figure from the employee's own declaration.
6. Lock it. Finalising numbers and locks the payslips, after your approval.
7. Publish payslips. After another approval, payslip PDFs are saved in File Manager → HR → Payslips and appear on each person's page. The payroll register exports as a spreadsheet for your CA.

Locked payroll flows into the CFO · Finance plugin as salaries and employer contributions, so your monthly profit and loss is up to date. Team & HR's own instructions describe its PF, ESI and TDS figures as estimates; because the PF ceiling and the wage definition changed this year, check the draft's PF and ESI base against the current rules with your CA before you lock the first month. For how approvals work across agents, see are AI agents safe.

What payroll software can't do for you

• Registrations. EPFO, ESIC, professional tax and TAN registrations are yours or your CA's.
• Deposits and returns. Software prepares the numbers; you pay challans and your CA files TDS statements.
• Judgement calls. Old or new tax regime, restructuring salaries for the 50% wage rule, gratuity and full-and-final settlements need professional advice.
• Keeping up with the law. Ceilings, slabs and state rates change; confirm with your CA at least once a year and whenever a notification lands.

Try it with one month's payroll

KutrimBots includes Team & HR, CFO · Finance and Invoices & Billing on every plan, from $20 a month for up to five agents; see pricing. You can run a draft payroll during the free 7-day trial (add a card or UPI, nothing is charged today) and compare it with last month's payslips. New to agents? Start with how to set up your first AI team.

Frequently asked questions

Is PF mandatory for a business with 8 employees?

No. PF is compulsory for establishments with 20 or more employees; below that, you can join voluntarily. Once covered, coverage generally continues even if headcount later falls, so check with your CA before opting in.

What is the ESI salary limit in 2026?

As of November 2026, ESI covers employees with wages up to ₹21,000 a month (₹25,000 for persons with disabilities), at 0.75% from the employee and 3.25% from the employer. It's compulsory for establishments with 10 or more employees.

How do you calculate PF and ESI, with an example?

For wages of ₹25,000, employee PF is 12%, or ₹3,000, and the employer pays the same plus 0.5% EDLI. For wages of ₹18,000 with ESI, the employee pays ₹135 (0.75%) and the employer ₹585 (3.25%).

Do I deduct TDS if an employee earns less than ₹12 lakh?

Usually not under the new regime: after the ₹75,000 standard deduction, taxable income up to ₹12 lakh gets a full rebate, so salaries up to about ₹12.75 lakh a year often need no TDS. Employees on the old regime or with other income need their own calculation.

Can I make payslip PDFs without expensive payroll software?

Yes. KutrimBots' Team & HR makes payslip PDFs after you lock and publish payroll, and each employee downloads theirs from a private page. It's included on every plan from $20 a month.

Sources

• Government makes the four Labour Codes effective (PIB)
• Provisions for workers in the Labour Codes (PIB)
• Code on Social Security, 2020: towards universal social protection (PIB)
• Code on Wages, 2019: wage definition (PIB)
• FAQs on Labour Codes (Ministry of Labour and Employment)
• EPFO frequently asked questions
• New EPF wage ceiling of ₹25,000 (BDO India, September 2026)
• ESIC contribution rates
• TDS compliance FAQs, Income-tax Act, 2025 (Income Tax Department)
• Section 202, Income-tax Act, 2025: tax rates (Income Tax Department)
• Section 19, Income-tax Act, 2025: standard deduction (Income Tax Department)
• Salaried individuals: slabs and rebate (Income Tax e-filing portal)
• Maharashtra profession tax rate schedule (Maharashtra GST Department)