It’s the 8th of the month, payroll is due to run, and one of your executives asks: “Why did my PF get deducted on only ₹15,000 when my basic is ₹40,000?” If you’ve fumbled through that explanation more than once, you’re not alone. PF and ESI are the two deductions every Indian HR manager touches every single month, and yet they’re also the two most commonly miscalculated — because the rules don’t work the way most employees (and a fair few payroll spreadsheets) assume.
This guide walks through exactly how PF and ESI are calculated on salary in India for 2026, the wage ceilings that trip people up, and where HR teams typically get it wrong. If you want to skip the manual math altogether, EZHRM’s free PF/ESI calculator does this for you in seconds — but it helps to know what’s happening under the hood before you trust any tool with it.
- PF is 12% of basic + DA from both employee and employer, calculated on a statutory wage ceiling of ₹15,000/month (unless your company contributes on actual basic).
- ESI is 4% total (3.25% employer + 0.75% employee) on gross wages, but only applies if gross is ₹21,000/month or less (₹25,000 for employees with disabilities).
- Once an employee is covered under ESI, they stay covered for the full contribution period even if their salary crosses ₹21,000 mid-cycle.
- PF ECR and ESI challans are both due by the 15th of the following month — miss it, and you’re looking at interest plus damages, not just a late fee.
What are PF and ESI, and why do both show up on the same payslip?
Provident Fund (PF) and Employee State Insurance (ESI) are two separate statutory social security schemes, and an employee can be covered by one, both, or neither, depending on their salary and your organisation’s size. PF, governed by the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952, builds a retirement corpus. ESI, governed by the Employees’ State Insurance Act, 1948, funds medical care, sickness benefit, and maternity benefit for lower-wage employees. They’re administered by different bodies — EPFO for PF, ESIC for ESI — with different portals, different due dates, and different wage definitions. That’s exactly why payroll teams mix them up.
How PF is calculated in 2026
PF contribution is 12% of “PF wages” (basic pay + dearness allowance, and in most private-sector cases, just basic) from the employee, matched by 12% from the employer — but the employer’s share is split further.
The employer’s 12% breakup
| Component | Rate | Goes to |
|---|---|---|
| Employees’ Provident Fund (EPF) | 3.67% | Employee’s PF account |
| Employees’ Pension Scheme (EPS) | 8.33% (capped at ₹1,250/month) | Pension fund |
| EDLI (insurance) | 0.50% | Employee Deposit Linked Insurance |
| Admin charges | 0.50% | EPFO administration |
The ₹15,000 wage ceiling — the part everyone gets confused about
Statutorily, PF is mandatory only on the first ₹15,000 of an employee’s basic + DA. That caps the mandatory employee contribution at ₹1,800/month, matched by the employer. This ceiling has stayed at ₹15,000 since September 2014, and it’s still ₹15,000 as of 2026 — despite periodic talk of a revision. If your company chooses to contribute 12% on the employee’s full actual basic (many mid-sized and larger employers do this as a retention benefit), that’s a voluntary policy decision, not a statutory requirement, and both employer and employee need to agree to it.
This is precisely why running the numbers through a PF/ESI calculator is safer than eyeballing it — one wrong assumption about “ceiling vs actual basic” and your ECR filing is off for every employee on the sheet.
How ESI is calculated in 2026
ESI contribution is 4% of gross wages in total — 3.25% from the employer and 0.75% from the employee — but only for employees whose gross monthly wage is ₹21,000 or less (₹25,000 for employees with disabilities). This rate has been stable since the July 2019 revision.
ESI applicability for employers
ESI becomes mandatory for a factory or establishment once it crosses 10 employees (the threshold is 20 in some states for non-factory establishments — check your state’s Shops & Establishments notification). Once your organisation is covered, every eligible employee below the wage ceiling must be enrolled, regardless of whether you “want” to offer it.
The mid-cycle salary jump trap
ESI works on contribution periods — 1 April to 30 September, and 1 October to 31 March. If an employee’s gross wage crosses ₹21,000 partway through a contribution period (say, after an increment in July), they remain covered under ESI for the rest of that period. HR teams frequently stop the ESI deduction the moment the hike kicks in — that’s a compliance miss. The deduction only stops at the start of the next contribution period.
PF vs ESI: a quick side-by-side
| Parameter | PF (EPFO) | ESI (ESIC) |
|---|---|---|
| Total contribution | 24% (12% + 12%) | 4% (3.25% + 0.75%) |
| Wage ceiling | ₹15,000/month (basic+DA) | ₹21,000/month gross (₹25,000 for PwD) |
| Employer threshold | 20+ employees | 10+ employees (20 in some states) |
| Filing frequency | Monthly ECR | Monthly challan + half-yearly return |
| Due date | 15th of following month | 15th of following month |
| Purpose | Retirement corpus + pension | Medical, sickness, maternity benefits |
Filing deadlines and what happens if you miss them
- PF ECR: File and pay by the 15th of the following month via the EPFO Unified Portal. Late payment attracts interest at 12% per annum plus damages under Section 14B, which scale with the number of days delayed.
- ESI contribution: Pay by the 15th of the following month via the ESIC portal. Late payment attracts 12% per annum interest, and repeated defaults can invite penal action.
- ESI half-yearly return: Due 11 May (for Oct–Mar period) and 11 November (for Apr–Sep period).
- Annual PF return: Reconciled through the monthly ECR filings; no separate annual filing is required for most establishments now that ECR has replaced the old Form 12A/5/10.
What HR managers get wrong
A few mistakes show up in almost every payroll audit we’ve seen:
- Calculating PF on gross instead of basic + DA. PF wages exclude HRA, conveyance, and most other allowances (with some Supreme Court-driven nuance on allowances that are “universally paid” — worth a chat with your compliance advisor if your CTC structure is heavy on special allowances).
- Stopping ESI the moment salary crosses ₹21,000 instead of waiting for the contribution period to end.
- Forgetting the EPS cap. Employer PF contribution to EPS is capped at ₹1,250/month even when the employer voluntarily contributes 12% on a higher basic — the excess goes back into the EPF account, not EPS.
- Applying the wrong employee-count threshold for ESI when opening a new branch in a different state, without checking that state’s specific Shops & Establishments coverage rules.
- Not reconciling exited employees in the ECR before filing, which causes UAN-level mismatches that take weeks to fix later.
A quick example
Take an employee with a basic salary of ₹18,000 and gross wages of ₹22,000. PF is calculated on the ₹15,000 ceiling (assuming the company follows the statutory minimum): employee contributes ₹1,800, employer contributes ₹1,800 (split ₹550 to EPF, ₹1,250 to EPS). Since gross wages of ₹22,000 exceed the ₹21,000 ESI ceiling, this employee is not covered under ESI at all — even though their basic is well within the PF bracket. That’s the kind of gap that a manual spreadsheet misses and a proper PF and ESI calculator catches instantly.
Frequently asked questions
Is PF mandatory for all employees in India?
PF is mandatory for establishments with 20 or more employees, and for employees earning basic + DA up to ₹15,000/month. Employees above this can opt out at the time of joining (International Workers have separate rules), but once enrolled, they generally can’t opt out later.
Can PF be deducted on full basic salary above ₹15,000?
Yes, voluntarily. Many employers contribute 12% on actual basic (not just the ₹15,000 ceiling) as a retention benefit. This must be a mutually agreed policy, and it increases both the employee’s and employer’s monthly outgo.
What is the ESI wage ceiling for 2026?
₹21,000 per month gross wages for most employees, and ₹25,000 per month for employees with disabilities. These figures have been unchanged since the last revision in 2017 (ceiling) and 2019 (rate).
If an employee’s salary crosses the ESI limit mid-year, does the deduction stop immediately?
No. ESI contribution periods run April–September and October–March. Coverage continues for the rest of the ongoing period even if wages exceed ₹21,000 partway through — it only stops at the start of the next period.
What’s the penalty for late PF or ESI payment?
Both attract interest at 12% per annum for the delay period. PF additionally attracts damages under Section 14B of the EPF Act, which increase with the length of default, and can invite closer scrutiny during an EPFO inspection.
Do all states have the same ESI employee-count threshold?
No. While 10 employees is the common threshold for factories, several states apply a 20-employee threshold for non-factory establishments under their Shops & Establishments notifications — always check your specific state’s rule before assuming coverage.
Getting this right, every single month
PF and ESI aren’t complicated once you know the ceilings and the contribution-period logic — they’re just easy to get wrong at scale, especially when you’re juggling new joiners, exits, and mid-year increments across 50, 150, or 500 employees. If you’d rather not re-derive this every payroll cycle, run your numbers through EZHRM’s free PF/ESI Calculator — it applies the current ceilings and splits automatically, so your ECR and ESI challan match what actually needs to be filed.
You’ll find this alongside our other free HR calculators — including the CTC salary calculator and the payroll ROI calculator — and if PF/ESI compliance is a recurring headache for your team, our payroll management module automates the whole calculation-to-filing cycle. For more guides like this one, browse the EZHRM blog.
Sources: EPFO — epfindia.gov.in, ESIC — esic.gov.in