Indian payroll explained: PF, TDS, gratuity, every component

An India payslip reads differently from a Dutch or German one, and the difference is worth understanding before your first hire. Once you can read it, the monthly run stops being a black box and becomes a set of components you recognise.

The cost to company, or CTC, splits into a handful of earning heads. A common breakdown, and the default used in CTpay, the India payroll engine behind Cyphertree, looks like this:

• Basic: around 50% of CTC. This is the anchor. Most statutory numbers, from PF to gratuity, are calculated off Basic.
• HRA: house rent allowance, around 25% of CTC.
• Special allowance: the remainder, a balancing figure.
• Gratuity: provisioned at 4.81% of Basic, set aside each month toward a future payout.

From gross earnings, a set of statutory deductions comes off to reach net take-home. The value of knowing them is simple: your team sees a payslip that matches the law to the rupee, and you can answer any question about it.

Provident fund (PF / EPF)

Provident fund is India's retirement savings scheme. The employee contributes 12% and the employer matches 12%, calculated on wages up to a ceiling of ₹15,000. The employer share splits between EPF and EPS, with a small admin and EDLI portion on top. Each employee has a UAN, a universal account number that follows them across jobs, and the platform keeps a PF ledger tracking contributions and challan status.

Employee state insurance (ESI)

ESI is health and social security cover for lower-wage employees. The employee contributes 0.75% and the employer 3.25%, applied when monthly wages fall at or below the ₹21,000 ceiling. Above that threshold, ESI no longer applies.

Tax deducted at source (TDS)

TDS is income tax withheld from salary each month, so the employee does not face a large bill at year end. India runs two tax regimes, and the employee chooses one:

• The new regime, with lower rates and a standard deduction, and fewer exemptions.
• The old regime, with higher rates offset by exemptions and investment declarations.

The engine computes both, applies the standard deduction, the surcharge, the 87A rebate, and 4% cess. Two of those carry marginal relief, on the surcharge and on the 87A rebate. Marginal relief is the detail most basic tools skip, and it matters: on an income of ₹12.1L, the tax works out to around ₹10,400 rather than the ₹60,000-plus a naive calculation would show. Monthly TDS is spread evenly, computed as annual tax minus the year-to-date already deducted, divided by the months remaining.

Professional tax (PT)

Professional tax is a small state-level levy, so the amount depends on the employee's work state. CTpay covers 10 states with their own slabs and rules, such as the Maharashtra pattern with a ₹300 charge in February and a ₹2,500 annual cap. The correct slab is driven automatically by work state.

Labour welfare fund (LWF)

LWF is another state-level contribution toward worker welfare. It is covered across all 16 states that levy it, at 2025 rates, and applied based on where the employee works.

Gratuity

Gratuity is a lump sum paid for long service, and it vests after 5 years. It is calculated as (Basic × 15) / 26 per year of service, capped at ₹20L. Because it is a future liability, it is provisioned monthly at 4.81% of Basic and tracked in a gratuity ledger, so the amount owed is visible long before anyone leaves.

Each deduction becomes a return to a government body, in a prescribed format. Getting the format exactly right is the difference between a filing accepted and one bounced back. The main ones:

For contractors, TDS is handled separately with Form 16A. Salary payments go out through a NEFT/RTGS bank file exported from the run.

The payroll engine is CTpay, built and validated against a CA-approved prototype, and owned in-house rather than resold from a third party. That ownership is the point: every statutory rule above is computed for you, and each is tied to the employee's work state so the right PT slab and LWF rate apply on their own.

A monthly run takes loss-of-pay days, bonuses, reimbursements, arrears and advance recovery, then moves through a clear lifecycle, from not submitted to submitted to finalized, with a diff between what you submitted and what the CA finalized. Each payslip carries its own TDS audit trail. When the month is right, it locks.

Because the buyer is European, amounts show in EUR or USD under every INR figure, with an FX rate history behind them. Your team gets an itemised payslip with each deduction broken out, correct to their regime choice and declarations, available through self-service and after they leave. You get the statutory numbers computed and exported in exact filing formats, so finance is reviewing returns rather than hand-building them.

The value of reading a payslip this way is confidence: you can explain every line on it, and the compliance underneath runs on its own. See the payroll engine for the full picture of runs, ledgers and exports, or book a demo to walk a real payslip through with your own numbers.