PF and ESI basics every employer should know

Provident Fund and ESI are the two statutory schemes most small employers meet first, usually in a hurry, usually because a new client or an inspector asked. Both are manageable once you understand who they cover and what they cost. Both are painful if you discover them retroactively.

Who must register

EPF (Employees' Provident Fund) generally applies to establishments with 20 or more employees. Once registered, an establishment stays covered even if headcount later dips below the threshold. Employers below the threshold can also register voluntarily, and some do because employees value PF.

ESI (Employees' State Insurance) generally applies to establishments with 10 or more employees in most states, in areas where the scheme has been implemented. It provides medical care and cash benefits for sickness, maternity and employment injury.

Count carefully: contract staff, part-timers and workers engaged through vendors can count towards thresholds depending on the arrangement. This is the single most common place employers get a nasty surprise.

Wage thresholds, as commonly applied

PF: employees earning basic wages up to ₹15,000 per month are mandatorily covered. Employees above that ceiling are often enrolled anyway, either as existing members who continue, or by employer policy, with contributions commonly computed on the ₹15,000 ceiling or on full basic depending on what the employer opts for.

ESI: employees with gross wages up to ₹21,000 per month are covered. Cross the threshold mid-year and the employee typically continues to contribute until the end of the current contribution period, not from the next payslip. Payroll software should handle this continuation automatically; humans forget it reliably.

Who pays what, at a high level

Both schemes split contributions between employee and employer.

• PF: employee and employer each contribute 12% of the PF wage base. A portion of the employer's share goes to the pension scheme (EPS) rather than the PF account, and the employer also pays small administrative charges on top.
• ESI: the employee contributes a small fraction of a percent of gross wages and the employer contributes a few percent; the employer's share is several times the employee's. Rates have changed over the years, so check current notified rates rather than an old blog post, including this one.

The employee's share is deducted from salary; the employer's share is a cost above CTC or inside CTC depending on how you structure offers. Either way, deposit both by the due dates, which fall in the month after the payroll month.

Common mistakes we see

1. Registering late. Liability runs from the date coverage applied, not the date you registered. Interest and damages accumulate quietly.
2. Wrong wage base. PF is computed on basic and dearness allowance, and authorities have challenged structures where allowances were carved out purely to shrink PF wages. Splitting salary to minimise PF is a well-trodden path to a dispute. How you set basic matters for more than PF; see our note on salary structure design.
3. Missing ESI continuation. Removing an employee from ESI the moment they cross ₹21,000, instead of at the end of the contribution period.
4. Forgetting new joiners' UANs. Every PF member needs a UAN linked to Aadhaar; onboarding should capture this on day one, not at first payroll.
5. Depositing late. Beyond penalties, an employee's PF contribution deducted but deposited late is treated harshly in tax computations for the employer.
6. No paper trail. Challans, ECR files and returns should be filed and stored month by month. When a query arrives three years later, memory is not a filing system.

Make it mechanical

None of this requires judgement once set up correctly; it requires the same computation and the same deadlines every month. That is exactly what software should do for you: apply the thresholds, handle continuation periods, generate the deposit-ready output, and refuse to finalize a run with missing UANs or ESI numbers. ZekoHR's pre-flight checks exist for precisely this class of error, and the payroll pages describe how contributions are computed and tracked.

Get registered on time, compute on the right base, deposit on time, keep the records. That is 90% of PF and ESI compliance.

This article is general information, not legal or tax advice. Thresholds, rates and rules change and vary by state and establishment type; confirm current requirements with a qualified professional.