EPF, ESIC & Gratuity — The Three Mandatory Statutory Contributions
Quick Summary
Indian payroll involves three mandatory employer-side contributions: Employees' Provident Fund (EPF), Employees' State Insurance (ESIC), and Gratuity. Each kicks in at a different employee headcount or salary threshold. This article explains all three, when they apply, and how Founding Legals automates the calculations and filings.
1. Employees' Provident Fund (EPF)
Governed by the EPF and Miscellaneous Provisions Act, 1952. Administered by the EPFO. Mandatory once the company employs 20 or more persons. Voluntary registration permitted below 20.
| Contributor | Rate | Cap on Wages |
|---|---|---|
| Employee | 12% of Basic + DA | Optional cap at ₹15,000/month |
| Employer (to EPF) | 3.67% of Basic + DA | ₹15,000/month |
| Employer (to EPS Pension) | 8.33% of Basic + DA | ₹15,000/month |
| Employer (Admin charges) | 0.5% (EDLI) | ₹15,000/month |
| Total Employer Cost | 12.5% of Basic + DA | - |
Filings: Monthly ECR (Electronic Challan-cum-Return) by the 15th of the following month.
2. Employees' State Insurance (ESIC)
Governed by the ESIC Act, 1948. Mandatory once the company employs 10+ persons (20 in some states), and the employee's gross monthly wage is ₹21,000 or less (₹25,000 for persons with disabilities).
| Contributor | Rate of Gross Wages |
|---|---|
| Employee | 0.75% |
| Employer | 3.25% |
| Total | 4.00% |
3. Gratuity
Governed by the Payment of Gratuity Act, 1972. Mandatory once the company employs 10 or more persons. Payable to employees who complete 5 years of continuous service.
Gratuity = (Last Drawn Basic + DA) × 15/26 × Number of Completed Years of Service
Tax Exemption: Up to ₹20 Lakh is exempt under Section 10(10) of the Income Tax Act. Companies typically provision 4.81% of Basic monthly as a Gratuity reserve.
Quick Reference — Trigger Thresholds
| Statute | Employee Headcount Trigger | Salary Cap |
|---|---|---|
| POSH Act, 2013 | 10 or more | No cap |
| ESIC Act, 1948 | 10 or more (20 in some states) | ₹21,000 gross/month |
| Gratuity Act, 1972 | 10 or more | No cap |
| EPF Act, 1952 | 20 or more | ₹15,000 Basic/month (cap optional) |
| Maternity Benefit Act, 1961 | 10 or more | No cap |
How to Do It on Founding Legals
- Step 1: Go to Payroll → Statutory Compliance → Setup. Enter your headcount and registered office state. The platform flashes applicable laws.
- Step 2: Register for EPF and ESIC directly through Shram Suvidha portal integration. UAN generation is fully automatic.
- Step 3: Running payroll auto-calculates EPF (12.5%), ESIC (3.25%, if gross ≤ ₹21,000), and Gratuity provision (4.81% of Basic, accumulated).
- Step 4: Generate and file the monthly ECR for EPF and ESIC return before the 15th. Payment challans are auto-prepared with banking links.
- Step 5: Use the Gratuity Liability Dashboard to view accumulated reserves per employee — vital for M&A due diligence and financial statements.
Delay in EPF deposit attracts interest at 12% per annum under Section 7Q + damages of 5–25% per annum under Section 14B of the EPF Act. Repeat default is a criminal offence with imprisonment up to 3 years. Indian VCs flag EPF defaults as a deal-breaker during diligence — fix it before raising.
Consider voluntary EPF registration even with 5–10 employees. It signals stability, gives them a tax-saving avenue under Section 80C (Old Regime), and avoids the panic-registration scramble when you hit the 20-employee threshold.