Understanding EPF and ESIC: A Guide for New Employers

Starting a business in 2026 is exciting, but payroll rules can feel overwhelming. The Indian government recently updated the Labour Codes to strengthen social security. As a new employer, you must know how to handle the Employee Provident Fund (EPF) and the Employee State Insurance (ESIC).

This guide explains these deductions clearly so you can manage your team with confidence.

1. What is EPF (Employee Provident Fund)?

The EPF acts as a long-term savings plan for retirement. The EPFO (Employees’ Provident Fund Organisation) manages these funds.

The Basics

• Who must register? You must register if your business has 20 or more employees.
• Who is eligible? Any employee earning a basic salary of up to ₹15,000 per month must join. Others can join voluntarily.
• The 12% Rule: You and your employee both contribute 12% of the “Wages” to the fund.

How the Employer’s 12% is Split

You don’t put the entire 12% into one bucket. Instead, you divide it like this:

• 8.33% goes to the Pension Scheme (EPS).
• 3.67% goes to the Provident Fund (EPF).
• 0.50% covers Insurance (EDLI).
• 0.50% covers Admin Charges.

2. What is ESIC (Employee State Insurance)?

ESIC provides medical care and cash benefits to workers. It helps your employees during illness, pregnancy, or workplace injuries.

The Basics

• Who must register? Most businesses with 10 or more workers need ESIC.
• Who is eligible? Employees earning ₹21,000 or less per month.
• Contribution Rates:
  • Employer Share: You pay 3.25% of the wages.
  • Employee Share: The worker pays 0.75% of their wages.

3. The New “50% Wage Rule” for 2026

The government changed how we define “Wages” in 2026. This rule ensures that workers receive fair retirement benefits.

The Rule: Your “Basic Pay” and certain allowances must total at least 50% of the total CTC (Cost to Company).

If you keep the basic pay too low and the allowances too high, the government will count the extra allowances as wages. This means you might pay more in PF and ESIC than you expected. Always balance your salary structure to meet this 50% limit.

4. Your Compliance Checklist

Follow these steps to avoid penalties:

• Pay by the 15th: Deposit all contributions by the 15th of every month.
• File Monthly Reports: Submit your Electronic Challan-cum-Return (ECR) through the official portal.
• Issue Terms: Give every worker a clear appointment letter stating their EPF and ESIC benefits.
• Keep Records: Maintain a digital record of all payments for at least three years.

Frequently Asked Questions (FAQs)

Q: Can I deduct my share of the PF from the employee’s salary?

No. You must pay the employer’s share from company funds. Deducting it from the worker’s take-home pay is illegal.

Q: What happens if I miss a payment deadline?

If you pay late, the government charges interest and penalties. In some cases, these fines can reach 25% of the total amount due.

Q: Is ESIC mandatory for high-earning employees?

No. If an employee earns more than ₹21,000 per month, ESIC is usually not mandatory.

Q: Does the 50% rule apply to small startups?

Yes. The new definition of “wages” applies to all businesses, regardless of their size.

Stay Connected with DailyLiv India

For verified job updates, walk-in interviews, and corporate hiring news, follow DailyLiv India on:

🔹 YouTube: https://www.youtube.com/
🔹 WhatsApp Channel: https://www.whatsapp.com/channel/0029Vb7YT3QLCoXAyRs1IZ46
🔹 LinkedIn: https://www.linkedin.com/company/dailyliveindia/
🔹 Instagram: https://www.instagram.com/dailylivindia/
🔹 Telegram: https://t.me/dailylivindia