You hired four engineers this quarter, headcount crossed twenty, and your accountant mentioned that PF registration is now due. Statutory deductions are the mandatory contributions an Indian employer withholds from salary or pays on top of it, and the three that matter most for a services firm are Provident Fund, Employees’ State Insurance, and gratuity. Each one switches on at a different headcount, sits on a different wage base, and hits your project margin differently. This guide covers all three as they stand in 2026.
What Statutory Deductions Cost a Services Firm
Two of the three are monthly cash. The third is a liability that accrues silently until someone resigns.
| Obligation | Employee share | Employer share | Applies when | Wage base |
| Provident Fund (PF) | 12% | 12%, plus insurance and administrative charges | 20 or more employees | Basic pay plus dearness allowance, subject to the ₹15,000 ceiling |
| Employees’ State Insurance (ESI) | 0.75% | 3.25% | 10 or more employees, for staff earning up to ₹21,000 a month | Gross wages |
| Gratuity | Nil | Full cost, paid on exit | 10 or more employees | Last drawn basic pay plus dearness allowance |
For a firm billing people’s time, this matters beyond compliance. Every rupee of employer contribution sits inside the cost rate you use to price an engagement. Get the difference between billing rate and cost rate wrong by five percent and a year of work at a thin margin turns into a year of work at no margin.
Provident Fund: The Contribution That Starts at Twenty People
The Employees’ Provident Fund is a retirement savings scheme funded by matched employee and employer contributions, administered by the Employees’ Provident Fund Organisation.
When PF Applies to Your Firm
The threshold is twenty employees. Under the Code on Social Security, 2020, provident fund provisions now apply to every establishment with twenty or more employees regardless of industry, which removed the older schedule-based approach that limited coverage to notified industries. The Press Information Bureau described this as resolving a long-running applicability question and reducing litigation.
Two points that catch growing firms:
- The count includes everyone on your rolls. Admin, finance, and interns all add to it.
- Once you cross the threshold, coverage does not lapse if headcount falls back below twenty later.
Firms below twenty can register voluntarily. A reduced 10% contribution rate applies to establishments employing fewer than twenty people, along with a small set of specified industries.
How the 12% Employer Share Is Split
The employee contributes 12% of basic pay plus dearness allowance, and all of it goes into the provident fund account. The employer contributes 12% as well, but that share is routed in two directions: 8.33% goes to the Employees’ Pension Scheme and the remainder goes into the provident fund account.
On top of the 12%, the employer separately pays 0.5% toward the Employees’ Deposit Linked Insurance scheme and 0.5% in administrative charges on provident fund wages, with a monthly minimum of ₹500 payable by the establishment, per the EPFO rate schedule. Neither appears on the employee’s payslip, and both are real outflows.
A consultant on ₹30,000 basic pay looks like this when the firm contributes on the statutory ceiling:
| Component | Monthly amount |
| Employee contribution (12% of ₹15,000) | ₹1,800 |
| Employer pension contribution (8.33% of ₹15,000) | ₹1,250 |
| Employer provident fund contribution (balance) | ₹550 |
| Insurance contribution (0.5% of ₹15,000) | ₹75 |
| Administrative charges (0.5% of provident fund wages) | ₹75 |
| Total employer outflow | ₹1,950 |
If the same firm contributes on the full ₹30,000 basic instead, the employee share doubles to ₹3,600 and so does the employer share, with the pension portion still capped at ₹1,250 and the balance flowing to the provident fund account. Administrative charges rise with the higher wage base too.
The ₹15,000 Ceiling and Who Sits Outside It
Mandatory contributions are calculated on wages up to ₹15,000 a month. A firm can contribute on higher wages, and many do, but that is a policy choice rather than a statutory requirement, and it requires a joint request from employer and employee. Once you make that choice, administrative charges apply to the higher wage base as well.
The related rule that trips up consulting and engineering firms hiring senior people: an employee who joins on wages above ₹15,000 a month and has never been a provident fund member can be treated as an excluded employee. Two engineers sitting on the same project can carry different provident fund treatment purely because of what they earned when they joined and whether they held a prior account. This is why your CTC versus net salary structure needs to be modeled per employee rather than applied as a blanket template.
What Changed for Provident Fund in 2026
The old Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 has been subsumed into the Code on Social Security, 2020, which came into force on 21 November 2025. In July 2026, the Ministry of Labour and Employment notified contribution rates under three new schemes framed under the Code: the Employees’ Provident Funds Scheme, 2026, the Employees’ Pension Scheme, 2026, and the Employees’ Deposit Linked Insurance Scheme, 2026. The rates were kept at 12%, 8.33%, and 0.5%, respectively, and the provident fund notification is deemed to have taken effect from 21 November 2025, superseding the 1997 notification it replaced.
Two smaller changes are worth knowing if you have ever had a provident fund inquiry. The Code caps how far back an inquiry can reach at five years, requires it to be completed within two years of starting, and cuts the deposit required to appeal against a provident fund order to 25% of the assessed amount.
ESI: The Deduction That Switches On and Off Mid-Year
Employees’ State Insurance is a contributory health and cash benefit scheme covering sickness, maternity, disability, and dependent benefits.
Who Is Covered
The Employees’ State Insurance Act, 1948 applies to establishments employing ten or more persons, though the threshold is twenty in Maharashtra and Chandigarh. Coverage applies to employees earning gross wages up to ₹21,000 a month, and up to ₹25,000 for employees with disabilities.
Rates have been steady since 1 July 2019, when the Ministry of Labour and Employment cut the combined rate from 6.5% to 4%. The employer pays 3.25% and the employee pays 0.75%. Employees whose average daily wage is ₹176 or less are exempt from the employee share, while the employer still pays its full 3.25%.
On a junior associate earning ₹20,000 gross, the arithmetic is ₹150 deducted from the employee and ₹650 from the firm.
Contribution Periods Are Where Payroll Goes Wrong
ESI runs on fixed six-month contribution periods, April to September and October to March, each with a corresponding benefit period. The rule that surprises HR teams: if an employee’s wages cross ₹21,000 partway through a contribution period, contributions continue at the higher wage until that period ends. Coverage stops only from the start of the next period.
For a services firm that runs appraisals in July, that means a batch of promoted associates stays inside ESI until 30 September, calculated on their new salary. If your payroll rules drop them the month the raise lands, you have underpaid, and the shortfall will surface later with interest. A periodic HR and payroll audit catches this pattern early.
What the Social Security Code Changed for ESI
Three changes matter for firms with distributed teams:
- Coverage now extends across India. The earlier restriction limiting ESI to notified areas has been removed, which affects firms with site teams or satellite offices in locations that were previously outside the scheme.
- Establishments with fewer than ten employees can join voluntarily where employer and employees agree.
- Accidents on the commute to or from work are now treated as arising in the course of employment, so they qualify for compensation or ESI benefits.
The definition of family has also been widened to include a woman employee’s mother-in-law and father-in-law, subject to an income cap, along with a dependent minor unmarried sibling where the parents are no longer alive.
Gratuity: The Liability That Builds While You Are Not Looking
Gratuity is a lump sum paid to an employee on exit as a reward for continuous service. There is no monthly deduction and no employee contribution, which is why it gets forgotten until a senior consultant resigns in year six and finance discovers there is nothing set aside.
Eligibility and the Four Years 240 Days Question
The Payment of Gratuity Act, 1972 applies to establishments employing ten or more people on any day in the preceding twelve months. An employee becomes eligible after five years of continuous service, and that condition is waived where employment ends because of death or disablement.
The five-year rule is less absolute than most HR handbooks treat it. Courts have held that an employee who completes four years plus 240 days in the fifth year has satisfied the continuous service requirement. For a services firm with meaningful attrition in the fourth and fifth year, that distinction decides whether a full and final settlement includes a gratuity payout or not.
How Gratuity Is Calculated
The formula is fifteen days of wages for every completed year of service, based on the last drawn rate of wages:
Gratuity = (last drawn basic pay plus dearness allowance) × 15 ÷ 26 × completed years of service
The divisor of 26 treats a month as 26 working days. Service beyond six months in the final year rounds up to a full year, and six months or less is ignored. The statutory ceiling is ₹20 lakh, notified by the Central Government in March 2018 when the earlier ₹10 lakh limit was doubled. An employer can contractually pay more, and the employee then receives the higher amount.
The useful way to think about it operationally: 15 ÷ 26 ÷ 12 works out to 4.81% of annual basic pay.
A consultant on ₹30,000 basic accrues roughly ₹17,308 of gratuity liability every year, or about ₹1,442 a month. Twenty such people accruing for four years is a liability above ₹13 lakh that never appeared on a single payslip. Treating that as a monthly provision rather than an exit-month surprise is the difference between a planned cost and a cash crunch in a quarter when two seniors leave together.
Fixed-Term Staff Now Accrue From Year One
This is the single biggest change for firms that staff projects with contract talent. Under Section 53 of the Code on Social Security, 2020, the eligibility requirement for fixed-term employees has been reduced from five years to one year, with gratuity payable on a proportionate basis once one year of continuous service is complete. Fixed-term employees are entitled to the same social security benefits as permanent staff.
If you run project-based hiring on 12 or 18 month contracts, which is common in engineering, EPC, and staffing work, your gratuity provision now needs to cover people your old policy would have excluded entirely.
Payment Deadlines and Interest
Gratuity is payable within thirty days of becoming due. Miss that window and simple interest runs on the unpaid amount from the due date until payment. Because gratuity typically clears alongside notice pay, leave encashment, and final salary, it belongs in your full and final settlement checklist rather than in a separate finance queue.
On tax, the exemption for employees covered by the Act is the least of three amounts: the 15/26 formula figure, the notified ceiling, and the gratuity paid. Those exemption limits now sit within the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 with effect from 1 April 2026.
The Wage Definition Change That Raises All Three
The Code on Social Security, 2020 introduces one standardized definition of wages across social security law: basic pay, dearness allowance, and retaining allowance where applicable. If other payouts such as bonus, house rent allowance, conveyance allowance, overtime, or commission exceed 50% of total remuneration, the excess is added back into wages.
The practical consequence for Indian services firms is direct. Salary structures built to keep basic pay low and allowances high, which many firms adopted precisely to hold down provident fund and gratuity costs, no longer produce that outcome. When the excess gets added back, the wage base for provident fund, gratuity, and leave salary rises with it. Any firm still running a 30% basic structure should model the new wage base before the next appraisal cycle rather than after.
Thresholds That Catch Growing Firms Off Guard
Compliance obligations arrive in steps rather than gradually, and each step lands at a specific headcount.
| Headcount | What triggers |
| 10 or more | ESI registration in most states, and coverage under the Payment of Gratuity Act |
| 20 or more | Provident fund coverage across all establishments regardless of industry |
| 20 or more (Maharashtra, Chandigarh) | ESI registration in those two jurisdictions |
| 50 or more | Crèche facility under the Code on Social Security, now gender neutral, or a crèche allowance of at least ₹500 a month per child for up to two children |
The fifty-employee mark is where several pressures land at once, which is why firms crossing 50 people tend to describe it as a cliff rather than a step. A new statutory facility requirement arrives in the same quarter that manual resource planning stops holding together.
One implementation note. The Codes came into force on 21 November 2025 and central rules followed in May 2026, but states frame their own rules, because the subject sits on the Concurrent List. If you operate across multiple states, confirm the position in each one rather than assuming a single national answer.
Where Statutory Cost Lands in Your Billing Rate
For a firm that sells time, statutory contributions are not an HR line item sitting off to one side. They are part of the fully loaded cost of every person you put on a project.
Take a consultant on ₹60,000 gross with ₹30,000 basic, at a firm contributing on the statutory provident fund ceiling:
| Cost element | Monthly |
| Gross salary | ₹60,000 |
| Employer provident fund, pension, insurance, and administrative charges | ₹1,950 |
| Gratuity accrual at 4.81% of basic | ₹1,442 |
| Fully loaded monthly cost | ₹63,392 |
That is roughly 5.7% on top of gross, before leave encashment, bonus, or professional tax. A firm contributing to a provident fund on full basic rather than the ceiling carries closer to 9%. Neither number is large in isolation. Both are large enough to erase the margin on a fixed-fee engagement priced off gross salary alone.
The second-order effect is the one firms miss. Statutory cost is charged on every person regardless of whether they billed a client that month. A consultant sitting on the bench still accrues gratuity and still triggers provident fund. When utilization slips, the statutory cost stays flat while the revenue behind it falls, so the effective load on billable hours rises exactly when you can least afford it.
The Monthly and Annual Rhythm
| Task | Frequency | Timing |
| Provident fund contribution and electronic challan cum return | Monthly | By the 15th of the following month |
| ESI contribution deposit | Monthly | By the 15th of the following month |
| Register a new joiner for provident fund and ESI | Per hire | At onboarding, before the first payroll run |
| Review ESI eligibility against the ₹21,000 ceiling | Twice a year | At the start of each contribution period |
| Update gratuity provision | Monthly | With payroll close |
| Actuarial review of gratuity liability | Annual | At financial year close |
A caution worth repeating to anyone running this on spreadsheets: the ESI eligibility review and the gratuity provision are the two that quietly slide. Neither produces an error message when skipped.
Running Statutory Deductions Without a Spreadsheet Chase
Most firms under 150 people do not have a compliance failure problem. They have a reconciliation problem. Attendance lives in one sheet, salary structures in another, and the provident fund and ESI calculation gets rebuilt every month by someone who also has a client deadline. It works until a threshold moves, a state rule changes, or three people resign in the same fortnight.
Juntrax is a project-to-cash operations platform for professional services firms in the 25 to 150 employee range. Its HRMS holds employee master data, salary structures, attendance, and leave in one record, so statutory calculations run off the same data that drives payroll rather than off a copy of it. Because the PSA module sits natively alongside it, employer contributions and gratuity accrual feed the cost rate behind every project, which means project margin reflects the fully loaded cost of a person rather than their gross salary.
Juntrax works alongside your accounting system rather than replacing it, so Tally, QuickBooks, Xero, or SAP stays where it is while people, projects, and cash flow live in one place. For consulting firms and engineering practices with staff across several states, that single record is what keeps a threshold change from turning into a month of rework.
Getting the Basics Right
Statutory deductions reward boring consistency. Register when you cross a threshold rather than when someone asks. Model your wage base against the Code definition before your next appraisal cycle. Provision gratuity monthly at 4.81% of basic instead of discovering the liability at exit. Review ESI eligibility at the start of each contribution period rather than the month a raise lands.
None of that requires a compliance specialist on staff. It requires your employee data, attendance, and salary structures to live in one place, so the calculation is a query rather than a reconstruction. For deeper reading on the wider compliance picture, our guide to payroll tax in India covers TDS, professional tax, and the filing calendar alongside the three obligations above.
See how your payroll and project costs run in Juntrax
Frequently Asked Questions
What Are Statutory Deductions in India?
Statutory deductions are contributions an employer is legally required to withhold from an employee’s salary or pay on top of it. For most Indian services firms the core set is Provident Fund, Employees’ State Insurance, professional tax, and tax deducted at source, with gratuity as an employer-funded obligation that accrues during service and is paid on exit.
At What Headcount Do PF and ESI Become Mandatory?
Provident fund coverage applies at twenty or more employees, and under the Code on Social Security, 202,0 it applies to every establishment at that size regardless of industry. ESI applies at ten or more employees in most states, and at twenty in Maharashtra and Chandigarh, for staff earning gross wages up to ₹21,000 a month.
How Much Does an Employer Pay Beyond the 12% Provident Fund Share?
Beyond the matched 12%, the employer pays 0.5% toward the Employees’ Deposit Linked Insurance Scheme and 0.5% in administrative charges on provident fund wages, with a monthly minimum of ₹500 for the establishment. Neither is deducted from the employee.
Is Gratuity Deducted From Salary?
No. Gratuity is funded entirely by the employer and paid on exit. Many firms show a gratuity provision inside the cost to company figure, which is an accounting presentation rather than a payroll deduction, so it never reduces take-home pay.
Do Fixed-Term Employees Get Gratuity?
Yes. Under Section 53 of the Code on Social Security, 2020, fixed-term employees become eligible for gratuity after one year of continuous service, payable on a proportionate basis, instead of the five years that applies to permanent employees.
What Happens to ESI When an Employee’s Salary Crosses ₹21,000?
Contributions continue at the higher wage until the end of the current contribution period, which runs either April to September or October to March. Coverage stops only from the start of the next period.
How Do I Calculate Gratuity Liability for Provisioning?
Multiply last drawn basic pay plus dearness allowance by 15 and divide by 26 for each completed year of service. As a monthly provision, that works out to about 4.81% of annual basic pay per employee per year.