PF & ESI Calculation Explained (with TDS): Formula, Examples & Payroll Basics

Ask any HR manager what separates a fresher who can be trusted with payroll from one who can't, and the answer is usually the same: do they understand statutory deductions?

Payroll is where HR stops being theoretical. Every month, real people are paid real money, and mistakes are expensive, both for employees and for the company's compliance record. Here is a practical introduction to the three deductions you will see on almost every Indian payslip.

This article is a learning overview. Rates, wage ceilings and rules are revised from time to time, so always check the current notifications from EPFO, ESIC and the Income Tax Department before processing payroll.

1. Provident Fund (PF)

What it is: a retirement savings scheme administered by the Employees' Provident Fund Organisation (EPFO).

How it works in practice:

• The employee contributes a percentage of their basic salary plus dearness allowance (commonly 12%).
• The employer contributes a matching amount, part of which goes to the pension scheme (EPS).
• Contributions are deposited monthly and filed through an electronic challan-cum-return (ECR).

What HR actually does: register new joiners, link their UAN, calculate contributions correctly (including when salary structures change mid-month), and make sure deposits are on time.

2. Employees' State Insurance (ESI)

What it is: a social-security scheme that provides medical and cash benefits, administered by ESIC.

Who it applies to: employees whose gross monthly wages fall under the prescribed ceiling, in establishments covered by the Act.

How it works in practice:

• A small percentage of gross wages is deducted from the employee.
• The employer contributes a larger percentage.
• Coverage changes when an employee's wages cross the ceiling, which is a classic source of payroll errors.

What HR actually does: register eligible employees, track wage changes that affect eligibility, and file monthly contributions.

3. Tax Deducted at Source (TDS) on salary

What it is: income tax that the employer deducts from salary and deposits with the government on the employee's behalf.

How it works in practice:

• HR estimates each employee's annual taxable income based on their salary structure and the tax regime they choose.
• Investment declarations and proofs affect the calculation.
• The annual tax is spread across the remaining months of the financial year.
• At year-end, the employer issues Form 16.

What HR actually does: collect declarations, recompute TDS when salaries or declarations change, and reconcile deductions before quarterly filings.

A worked mini-example

For an employee with a basic salary of ₹12,000 and a gross salary of ₹20,000:

Component	Calculation	Amount
PF (employee)	12% of basic	₹1,440
ESI (employee)	0.75% of gross	₹150
TDS	Income below the taxable limit	₹0
Net pay	₹20,000 − ₹1,590	₹18,410

In a real payroll run, you would also factor in attendance, leave without pay, arrears, professional tax (where applicable) and reimbursements.

Why employers test this in interviews

Because it is where the risk is. A recruiter can teach a fresher company-specific processes, but a candidate who already understands PF, ESI and TDS and has processed them on software can contribute from week one.

Learn it by doing it

In the Practical HR Management Course, Week 11 is dedicated to compensation and compliance: you build salary structures, calculate PF, ESI and TDS, and run a real payroll on RazorpayX Payroll, backed by a dedicated RazorpayX Payroll specialist track with its own co-branded certificate. Book a free counselling call to see the full curriculum.

Want a ready-made sheet? The free HR Starter Kit includes a payroll calculator with PF, ESI and TDS.