PF, ESI, and Gratuity Compliance for US Startups in India

What statutory payroll obligations must a US startup handle in India?

A US startup employing people in India must run five statutory items every payroll cycle: EPF (provident fund), ESI (state health insurance), gratuity, salary TDS (income tax withholding), and professional tax. This page walks through how each one is calculated and paid, with worked examples.

We built this page as the deep-mechanics companion to our complete guide to payroll compliance in India, which sets out the full landscape, the rates table, and the common mistakes. If you want the overview and the deadline calendar, start there; if you want to see the actual math behind each contribution, stay here.

Across the 300+ companies we support, the questions we field are almost never "what are the rules" and almost always "what is the number." So at Wisemonk, we work through each obligation with a real figure attached, shown in Indian rupees with the US-dollar equivalent in brackets, at an approximate rate of Rs 95 to $1 as of August 2026.

Two of these five are contributory and split between employer and employee (EPF and ESI). Gratuity is funded by the employer alone. TDS is withheld from the employee's own pay. Professional tax is a small state levy. If you are still setting up, our guide on how to set up payroll for a startup in India covers the registrations that come before any of this.

How does EPF (provident fund) work for a US startup's India employees?

EPF is India's mandatory retirement fund, similar to a US 401(k). The employee contributes 12% and the employer contributes 12% of PF wages, capped at wages of Rs 15,000 (about $158) a month. The employer's 12% then splits between the pension scheme and the fund itself, which is where most people get the mechanics wrong.

The Employees' Provident Fund is administered by the EPFO, and the split inside the employer's share matters because the two halves land in different accounts. Here is the calculation at the wage ceiling, step by step:

• Employee contribution: 12% of Rs 15,000 is Rs 1,800 (about $19), deducted from the employee's salary.
• Employer contribution: a matching 12%, another Rs 1,800, paid on top of salary as a company cost.
• The employer split: of that Rs 1,800, Rs 1,250 goes to the Employees' Pension Scheme (EPS) and Rs 550 goes to the EPF account.

Together, Rs 3,600 a month moves into the employee's provident fund and pension at the wage ceiling. Contributions on wages above Rs 15,000 are optional and depend on your policy, which is a decision we set at onboarding rather than mid-cycle.

The employer deposits the combined contribution by the 15th of the following month; the earlier five-day grace period was withdrawn in February 2016, so the 15th is a hard date. Our India payroll deadlines guide lays out where this sits against every other monthly filing.

Because EPF is calculated on basic pay plus dearness allowance, your salary structure drives the number directly. A compliant structure keeps basic plus DA at or above 50% of total remuneration, the statutory wage floor, and getting that salary structure in India right is what keeps PF and gratuity accurate for years afterward.

How does ESI work and who is covered?

ESI is India's state-run health and disability insurance. The employer pays 3.25% and the employee pays 0.75% of gross monthly wages, but only for employees earning Rs 21,000 (about $220) a month or less. It becomes mandatory once you employ 10 or more people, though a few states set that trigger at 20 for non-factory establishments.

An Employee State Insurance contribution is calculated on gross wages, not on the capped PF wage, which trips people up. Here is a worked example on a Rs 20,000 (about $211) monthly gross:

• Employee contribution: 0.75% of Rs 20,000 is Rs 150 (about $2), deducted from pay.
• Employer contribution: 3.25% of Rs 20,000 is Rs 650 (about $7), paid by the company.
• Total for the month: Rs 800 (about $8) moves into the ESIC scheme.

An employee earning above Rs 21,000 a month falls outside ESI entirely, so a mid-year raise can move someone off the scheme at the start of the next contribution period. This is one reason we track gross against the threshold every cycle rather than once at hire.

The employer deposits ESI within 15 days of the month-end. The scheme is administered by the ESIC and gives covered employees medical care, sickness benefit, and disability cover, which is why it applies to lower-wage staff specifically.

How is gratuity calculated and when is it payable?

Gratuity is a lump-sum reward for long service, paid by the employer alone. It equals last drawn basic plus dearness allowance, divided by 26, times 15, times completed years. It is payable after five years of service, and that five-year threshold is waived on death, disablement, or fixed-term expiry.

A gratuity calculation uses 26 as the divisor because it treats a month as 26 working days, and 15 because the entitlement is 15 days' wages per completed year. Here is the calculation for an employee whose last drawn basic plus DA is Rs 52,000 (about $547) with six completed years:

• The formula: (52,000 / 26) x 15 x 6.
• Step one: Rs 52,000 divided by 26 is Rs 2,000 per day.
• The result: Rs 2,000 x 15 x 6 is Rs 1,80,000 (about $1,895), payable on exit.

You can check any scenario with our gratuity calculator rather than working the divisor by hand. The 4.81% figure you may have seen quoted is not a statutory rate; it is a monthly provisioning derivation (15 divided by 26 divided by 12) that companies use to accrue the liability on basic pay each month.

The old Payment of Gratuity Act has been subsumed into and replaced by the Code on Social Security, and the Rs 20 lakh (about $21,000) ceiling is a cap notified by the Central Government under that Code, not a number fixed in the Code text itself. Gratuity is paid out as part of the full and final settlement in India when an employee leaves, so we provision it from day one to avoid a funding shock at the five-year mark.

How does salary TDS work under the Income-tax Act 2025?

Salary TDS is monthly income tax the employer withholds from each paycheck under Section 392 of the Income-tax Act 2025 (formerly Section 192, as of August 2026). You estimate the employee's annual tax under their chosen regime, divide by 12, and deposit it by the 7th of the following month, with the March deduction due by April 30.

A Tax Deducted at Source deduction on salary is not a flat percentage; the amount depends entirely on the employee's projected annual income and which tax regime applies to them, so there is no single rate to quote. What is fixed is the mechanism and the paperwork.

Two forms travel with salary TDS: the quarterly return is Form 138 (formerly Form 24Q) and the annual certificate the employee receives is Form 130 (formerly Form 16). For the underlying rates and regime detail, see our dedicated guide to payroll tax in India; we keep the slab math there so this page stays focused on the withholding mechanics.

What about professional tax and other state levies?

Professional tax is a small state-level levy on employment income, deducted by the employer and paid to the state government. It is not central, so the rate and due dates vary by state, and several states levy none at all. The constitutional maximum is Rs 2,500 (about $26) per year.

Because professional tax is set state by state, an employee in one state pays it while an employee in another does not, as of August 2026. The amounts are small, but the registration and the monthly or annual filing are still an obligation, and the due dates follow each state's own schedule rather than a national one.

What are the PF, ESI, gratuity, and TDS rates and deadlines at a glance?

Here is every statutory payroll obligation for a US startup's India employees in one view: the contribution rate, the wage ceiling or threshold, who pays, and the deposit deadline. Use it as a quick reference, then read the sections above for the worked calculations behind each figure.

What are the penalties for getting PF, ESI, gratuity, or TDS wrong?

Getting these wrong is expensive and, in one case, criminal. Late EPF deposits attract damages of 1% per month plus 12% annual interest. PF that is deducted from pay but never deposited is a criminal offence. Late TDS carries 1.5% monthly interest, and short compliance draws fines under the Code on Social Security.

On EPF specifically, the late-deposit damages are a uniform 1% per month (12% a year) under the June 2024 gazette, which replaced the older sliding 5% to 25% scale that many articles still quote. On top of the damages, Section 7Q interest runs at 12% a year on the delayed amount.

The serious one is PF that you deduct from an employee's salary but fail to deposit. That is a criminal offence under Section 14(1A) of the EPF Act, carrying imprisonment of 1 to 3 years and a fine of Rs 10,000 (about $105). This is the risk that surfaces in Series A due diligence, and it is why our guide on employee misclassification penalties in India treats deducted-but-undeposited PF as a founder-level liability, not a bookkeeping slip.

Under the Code on Social Security, a first offence carries a fine of up to Rs 50,000 (about $526), rising to up to Rs 3 lakh (about $3,158) for a repeat offence. Late TDS deposits are simpler but still costly, at 1.5% interest for every month or part of a month of delay.

How can a US startup handle all of this without an India entity?

You do not need an Indian entity to do any of this. An Employer of Record (EOR) becomes the single legal employer of your India team and runs every calculation and filing above under its own registrations. This is not co-employment; one legal employer holds the entire statutory burden.

An Employer of Record in India already holds the EPFO, ESIC, and tax registrations, so your team is onboarded onto an existing compliant payroll rather than one you build from scratch. There is one legal employer per worker, and the EOR is it.

If you are weighing whether this arrangement is even permitted, our explainer on whether an EOR is legal in India walks through the statutory basis. It is a well-established model, and it removes the need to incorporate a subsidiary purely to employ a handful of people.

Running your own entity means you carry all five obligations plus corporate filings, and it can create permanent establishment risk in India that exposes your parent company to Indian corporate tax.

We compare both routes directly in our EOR vs entity in India guide, which is where most founders start before committing either way.

For the steady-state view of what running this monthly actually looks like, see how US startups manage India payroll without an entity, which follows the same team through a full year of cycles.

How can Wisemonk run PF, ESI, and gratuity compliance for you?

We run the whole statutory stack for you. As an India-native Employer of Record, Wisemonk becomes the single legal employer of your India hires and calculates, deducts, and files EPF, ESI, gratuity, and salary TDS every cycle, so you hire in India without an entity and without owning the compliance risk.

Why Wisemonk for PF, ESI, and gratuity compliance

Wisemonk is an India-native Employer of Record. We help global companies hire, pay, and manage talent in India without setting up a local entity. We support 300+ global clients and manage over 2,000 employees across India, processing $20M+ in annual payroll with a 4.8/5 rating on G2. Pricing starts from $99 per employee per month, and onboarding runs 24 to 48 hours.

Here is what we take off your plate:

• Single legal employer: we act as the one legal employer of record for each India hire, so there is no co-employment and no entity for you to set up.
• PF, ESI, gratuity, and TDS filed each cycle: we calculate every contribution and deduction and file them with the EPFO, ESIC, and the Income Tax Department on the statutory deadlines.
• Compliant salary structure: we build each offer so basic pay plus dearness allowance meets the statutory 50% wage floor, keeping PF and gratuity correct.
• Gratuity provisioned from day one: we accrue gratuity from the first month, so the liability is funded well before the five-year mark.
• AOR for contractors: where you engage independent contractors instead, we run compliant contractor payments as your Agent of Record.

Each item is handled by our in-house India team, not passed to a third party. We provide EOR services in India, and we are expanding rapidly into the US and UK markets.