Legal basis: The Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (Sections 1, 2(b), 6, 7Q, 14, 14B); The Employees' State Insurance Act, 1948 (Sections 1(5), 2(22), 38, 40, 85); Code on Wages, 2019 (Section 2(y)); Section 192, Income Tax Act, 1961 — Effective: ongoing. Source: epfindia.gov.in. Last reviewed by CA Harun Raaj: September 2026.
Key point: A private limited company crossing 20 employees must register for EPF from the date the headcount is reached, not from the next convenient quarter — and arrears carry interest under Section 7Q plus damages under Section 14B.
Your startup crossed 20 employees last month. Quietly, a clock started ticking on five payroll obligations, and none of them wait for a convenient quarter-end. Companies that register late with EPFO don't just start compliance from the discovery date — they owe arrears from the day they hit the threshold, plus interest, plus statutory damages.
Here is what a 20-person private limited company actually owes in 2026, and what happens if any of it is missed.
EPF: registration is triggered by headcount, not payroll readiness
Section 1(3)(b) of the EPF Act brings every establishment employing 20 or more persons under mandatory coverage the moment the headcount reaches 20 — including permanent, probationary, and contractual staff engaged in connection with the establishment's work. Once covered, the establishment stays covered even if headcount later falls below 20. Smaller establishments can opt in voluntarily under Section 1(4).
Both employer and employee contribute 12% of "basic wages" (Section 2(b): all emoluments earned on duty or leave, per the contract) plus dearness allowance and retaining allowance. Of the employer's 12%, 8.33% goes to the Employees' Pension Scheme (capped at ₹1,250/month, i.e. 8.33% of the ₹15,000 wage ceiling) and 3.67% goes to the EPF account. The employee's full 12% goes to EPF. The employer separately contributes 0.5% to EDLI (death-in-service cover) and pays administrative charges of 1.1% on PF wages and 0.01% on pension wages.
Contributions are computed on wages up to ₹15,000/month, a ceiling in force since 1 September 2014 — an employee earning ₹50,000 basic is still covered, but contributions are calculated on ₹15,000, not the actual salary. Claims that this ceiling is ₹25,000 are incorrect.
ESI: computed on gross wages, not basic
Section 1(5) of the ESI Act lets the Central Government extend coverage to establishments with 10 or more employees by notification; most commercial establishments in cities are covered this way, and factories using power with 10+ workers are covered directly. The employer contributes 3.25% and the employee 0.75% of gross wages — 4% total, in force since 1 July 2019. The wage ceiling is ₹21,000/month gross (₹25,000 for persons with disabilities); an employee already enrolled who crosses the ceiling stays covered until the end of the contribution period (October or April).
The common error: ESI is computed on gross wages — including HRA, conveyance, and cash allowances — not basic. Startups that compute it on basic salary end up under-remitting, and ESIC field inspections catch this routinely.
Code on Wages: the 50% floor on exclusions
The Code on Wages, 2019 consolidated four labour laws and was operationalised from November 2025. Its wage definition, Section 2(y), caps all exclusions from wages — HRA, conveyance, special allowances, bonuses, overtime — at 50% of total remuneration; anything above that is pulled back into "wages" for statutory computation.
Example from the source material: a CTC of Basic ₹15,000, HRA ₹20,000, Conveyance ₹5,000, Special Allowance ₹30,000 (total ₹70,000) has exclusions of ₹55,000 — 78.5% of CTC. The excess over 50% (₹20,500) is added back, taking the EPF computation base to ₹35,500 instead of ₹15,000. State-level rules under the Code are still being finalised in several states, but EPFO has been auditing salary structures that suppress the PF base regardless — restructure proactively rather than wait for a state notification.
Professional tax and TDS on salary
Professional tax is a state levy, capped at ₹2,500 per employee per year under Article 276(2) of the Constitution. Each state where you employ staff needs its own PTRC registration, deduction, and remittance:
Directors drawing remuneration also need a personal PTEC enrolment, separate from EPFO and ESIC.
Separately, Section 192 of the Income Tax Act, 1961 makes every employer a withholding agent for salary TDS, personally liable for non-deduction. The process: collect Form 12BB from each employee, project annual taxable salary under the regime the employee has chosen, compute and deduct monthly TDS, deposit by the 7th of the following month (30th April for the March quarter), file Form 24Q quarterly (31 July, 31 October, 31 January, 31 May), and issue Form 16 by 15 June.
What non-compliance costs
For EPF, the Act provides for interest under Section 7Q and damages under Section 14B on delayed contributions, with prosecution under Section 14 for wilful default — refer to the Act or an EPFO circular for the exact quantum applicable to your period of default. For ESI, the Act provides for prosecution and fines on failure to register or contribute — refer to the ESI Act for specifics. For TDS, Section 201(1A) charges interest of 1% per month for failure to deduct and 1.5% per month for deduction without remittance, Section 40(a)(ia) disallows 30% of the salary payment as an expense where TDS wasn't deducted, and Section 271C provides for a penalty tied to the TDS not deducted — refer to the Act for the exact penalty amount. Form 26AS mismatches also trigger automatic adjustments under Section 143(1)(a) on employee tax returns, which trace back to the employer.
What to do this month
Audit your headcount today, including contractors — 20 or more triggers EPF, 10 or more (in a notified area) may already have triggered ESI. Register on the EPFO and ESIC employer portals if you haven't. Run the Code on Wages 50% test against every salary structure and revise before the next payroll run. Register for professional tax in every state where you have employees, and confirm your payroll processing and Form 24Q workflows are current. If you're already past a threshold, get a professional assessment of your arrears exposure before approaching EPFO — voluntary disclosure reduces exposure but doesn't erase it. For an end-to-end review, HRA's PF and ESI compliance and TDS compliance services are available flat-fee.
I'm CA Harun Raaj. If this affects your company's compliance calendar, reach out.
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See Also
Frequently asked questions
At what headcount is EPF registration mandatory for a private limited company?
Section 1(3)(b) of the EPF Act makes coverage mandatory the day an establishment employs 20 or more persons, counting permanent, probationary, and contractual staff engaged in connection with the establishment's work. Once covered, the establishment stays covered even if headcount later drops below 20.
Is the EPF wage ceiling ₹15,000 or ₹25,000?
It is ₹15,000 per month, a ceiling in force since 1 September 2014. An employee earning more than ₹15,000 basic is still mandatorily covered, but contributions are computed on ₹15,000, not the actual salary; a ₹25,000 ceiling is not correct.
Why is ESI computed differently from EPF?
EPF contributions are computed on basic wages plus dearness allowance (Section 2(b) of the EPF Act), while ESI contributions under the ESI Act are computed on gross wages, including HRA, conveyance, and other cash allowances. Startups that apply the ESI rate to basic salary alone typically under-remit, which ESIC field inspections routinely catch.
Do I need to register for ESI separately from EPF?
Yes. Section 1(5) of the ESI Act extends coverage to notified establishments with 10 or more employees, a lower threshold than EPF's 20. Both are separate registrations with separate portals, employer codes, and contribution schedules.
What is the Code on Wages 50% rule, and does it affect my current salary structure?
Under the first proviso to Section 2(y) of the Code on Wages, 2019, all exclusions from wages — HRA, conveyance, special allowances, bonuses, overtime — cannot together exceed 50% of total remuneration; any excess is added back into wages for statutory computation. If your CTC structure loads most pay into allowances rather than basic, the EPF computation base may be higher than your current basic salary implies.
We paid salaries for several months before registering with EPFO. What is our exposure?
Exposure includes full arrear contributions from the date coverage arose under Section 1(3)(b), interest under Section 7Q, and damages under Section 14B — refer to the Act or an EPFO circular for the exact rates applicable to your default period. Voluntary disclosure reduces but does not eliminate the resulting liability, so a professional assessment before approaching EPFO is worthwhile.
Do I need a separate professional tax registration in each state where I have employees?
Yes. Professional tax is a state levy capped at ₹2,500 per employee per year under Article 276(2) of the Constitution, and each state — Maharashtra, Karnataka, Telangana, and Andhra Pradesh among them — requires its own PTRC registration with its own due dates. Directors drawing remuneration also need a personal PTEC enrolment.
What happens if TDS on salary under Section 192 isn't deducted correctly?
Section 201(1A) charges interest of 1% per month for failure to deduct and 1.5% per month for deduction without remittance, Section 40(a)(ia) disallows 30% of the payment as a business expense, and Section 271C provides for a penalty tied to the TDS amount not deducted — refer to the Act for the exact penalty quantum. Mismatches also surface in Form 26AS and can trigger adjustments on the employee's own tax return.
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