1. Implementing Payroll for India
  2. Statutory Deductions for India

Statutory Deductions for India

Statutory deductions are standard deductions which the employer deducts from an employee's gross pay, when the salary is paid.

The statutory deductions from the monthly salary include:

  • Income tax

  • Employee State Insurance

  • Professional Tax

  • Provident Fund

  • Labour Welfare Fund

  • National Pension Scheme

Income Tax

The factors that determine the income tax include:

  • Employee's age: below 60 years, between 60 years to 80 years, above 80 years. Based on the employee's age, different tax slabs are applicable.

  • Tax Regime:

    • New regime provides different(lower) tax rates; subject to forgoing certain exemptions and deductions.

    • Old regime

  • The income thats subject to tax includes the following:

    • Basic salary

    • Perquisites which include non-monetary benefits provided to the employee

    • Profits in lieu of salary

    • Income from house property

    • Other income such as interest from savings bank account

    • Previous employment income applicable to a new joiner joining the organization in the middle of a financial year

  • Deductions and Exemptions

    • Standard deductions under section 16

    • Exemptions under section 10 which includes the house rent allowance (HRA)

    • Chapter VIA Deductions

    • Rebate under section 87A

    • Relief under section 89

When the above information is available, the income tax, the applicable surcharge, marginal relief, and health and education cess amounts are computed.

Provident Fund

A provident fund​ is an investment fund that is established by the employer and employees to serve as long term savings to support an employee’s retirement. Provident fund is one of the statutory contribution popularly used for India legislation. This consists of the employee and employer contribution, and the employer charges as well.

The Employee Provident Fund Organization (EPFO) offers various schemes to promote employees to save some funds for retirement.

Using the Provident fund component we can create, maintain and process the following items for employees:

Employees' Provident Fund, Employees' Pension Fund.

  • Provident Fund (PF) – Both, the employee and the employer contribute a fixed percentage of the PF basis towards the Provident Fund. The minimum percentage contributed is as specified by the Indian Legislative requirements.

  • Pension Fund – The employer contributes a fixed percentage of the PF basis towards the pension fund of an employee. The minimum percentage contributed is as specified by the Indian Legislative requirements.

  • Employer Charges - which includes EDLI contribution and EDLI Administration charges, EDLI Inspection charges, PF administration Charges and PF Inspection Charges.

  • Employee Deposit Linked Insurance(EDLI)In addition to contributing towards PF and Pension Fund of the employee, an employer also contributes to the Employee’s Deposit Linked Insurance (EDLI).

  • Voluntary Provident Fund(VPF) : Employees are allowed to choose to contribute a certain percentage or Flat amount towards a Voluntary Provident Fund (VPF).

  • International Workers(IW)

  • Disabled Employee Category ( PwDs)

  • Aatma Nirbhar Bharat Rojgar Yojana (ABRY)

  • Deferred Pension Age Scheme

Professional Tax

This is a tax on employment according to the professional tax act of the state or union territory. Professional tax is applicable across 21 states and union territories of India.

Employers must register with the state and have a professional tax registration number. Professional tax deductions differ for each state. Some of the state governments levy professional tax on any employee working in the state.

You can create multiple professional tax organizations TRU for an employer.

Note: Professional Tax is calculated based on the frequency set at the Business Group level, and deducted monthly from the employee's salary.

Here are the factors considered for the professional tax:

  • Employee’s state or union territory

  • Municipal corporation or Panchayat (applicable for the state of Tamilnadu)

  • Employee's income and age (in some states)

Based on the income slabs

-Maximum of 2500 in a FY

-Deduction under section 16

Professional Tax deductions are predefined for Andhra Pradesh, Gujarat, Maharastra, Karnataka, Madhya Pradesh, Kerala, two corporations in Tamil Nadu (Chennai and Coimbatore) and Telangana.

Employee State Insurance

Employee State Insurance (ESI) is a social security scheme offered by the Government of India as per the Employees' State Insurance Act, 1948, where the employees and the employers make regular monthly contributions to the scheme at a certain percentage of their wages. The ESI wage limit is Rs.21,000.0/-. For employees who have a disability, the wage limit is not applicable.

Here are the factors considered for ESI eligibility:

  • ESI Eligible Wages

  • ESI Contributory Wages

  • Average daily wages

  • Disability

There are two contribution periods of six months duration in each financial year is:

  • 01st April to 30th September

  • 01st October to 31st March

Labour Welfare Fund

Labour Welfare Fund (LWF) is a statutory contribution managed by individual state authorities. It is applicable for 14 states in total.

Here are the factors considered for LWF:

  • Employee's state
  • Position
  • Salary

The LWF calculation or payment frequency, and deduction can be monthly, half yearly, or annual, which is determined by the State Act. The LWF computation is based on the employee's salary, position and employment type.