Karan offered ₹6L CTC to his first hire. Before the joining date, his CA dropped: "Register for PF, ESI doesn't apply at this salary, plan TDS, professional tax in your state, gratuity provision." Five new things in one breath.
The first employee unlocks an entire compliance layer. Knowing it before is much easier than after.
- PF (EPF): mandatory when ≥ 20 employees (some states 10). Employee + employer each contribute 12% of basic.
- ESI: mandatory when ≥ 10 employees AND employee gross ≤ ₹21,000/month. Below that — opt in voluntarily.
- TDS on salary (Sec 192): if estimated taxable salary > basic exemption. You deduct monthly, deposit by 7th.
- Professional Tax (PT): state-specific (Maharashtra, Karnataka, WB, TN, etc.). ₹200/month typical.
The 5-layer compliance stack
CTC structure, joining date, probation, notice period, leave policy, conditions. Legally binding.
EPF Establishment Code via epfindia.gov.in when ≥ 20 employees. ESI registration via esic.in when ≥ 10 + salary cap.
Basic + HRA + Special + Reimbursements + Employer NPS. See our structure guide for tax-optimal split.
Get employee's deduction declaration (80C, HRA rent, etc.). Estimate annual tax. Deduct 1/12 each month.
Generate payslip → pay net salary by 1st-7th → deposit PF + ESI + TDS + PT by their respective due dates.
PF, ESI, TDS, PT — the four parallel deductions
EPF
≥20 emp threshold
Employee gets EPF + EPS (pension). Employer files ECR by 15th of next month.
ESI
If salary ≤ ₹21k
For workers with gross ≤ ₹21,000/month. Provides medical + maternity + disability cover. Skip for white-collar above threshold.
Salary TDS (Section 192)
You estimate the employee's annual taxable salary, compute tax, deduct 1/12 each month. Adjust quarterly when deductions change. Deposit by 7th of next month (30 April for March). File 24Q quarterly. Issue Form 16 by 15 June.
Professional Tax (state-specific)
States like Maharashtra, Karnataka, WB, TN, Telangana, AP, Gujarat have PT. Typically ₹150-200/month per employee. Deducted monthly, deposited to state govt by month-end.
If you're under 20 employees, PF is voluntary (most startups still register to attract talent). ESI doesn't apply for white-collar (gross > ₹21k). PT depends on state. TDS depends on actual salary level. Don't over-engineer day 1.
Karan's first payslip (₹50k/month gross)
Employer also pays: ₹1,800 EPF + ₹450 EPS + ₹1,250 administration = ~₹3,500. Real cost to Karan ≈ ₹53,500.
What every employer must keep
- Signed offer + appointment letter
- Form 11 (EPF declaration), Aadhaar, PAN, bank details
- Monthly payslips (signed / e-payslips)
- Attendance + leave register
- Annual Form 16
- Termination letter + full-and-final settlement (when leaving)
Hidden ones — gratuity + leave encashment
👉 Gratuity — payable after 5 years of continuous service. 15 days × last drawn basic × years served. Provision in books from year 1 (actuarial valuation if > 10 emp).
👉 Leave encashment — unutilised earned leave (typically PL) compensated on exit. Policy-defined.
👉 Bonus — Payment of Bonus Act applies if salary ≤ ₹21k/month. 8.33% minimum, up to 20%.
The first hire is a multiplier — of impact, and of compliance. Most founders nail the work and stumble on PF/PT/TDS for 6 months. Set the cycle up cleanly on day 1.
Quick answers
PF is mandatory at ≥ 20 employees (sometimes 10 by state notification). Below — voluntary. Many founders register voluntarily to offer it as a benefit (attracts talent).
For mandatory contributions, PF wage is capped at ₹15,000 basic. Above-cap contributions are voluntary (some employers offer matching on full basic).
You're liable to pay it + 1.5%/month interest. Plus disallowance of the salary expense under Sec 40(a)(ia) in your income tax (30% of salary disallowed if no TDS). Big hit.
Don't. Salary payments > ₹10,000 in cash to one person in a day are disallowed under Sec 40A(3). Always pay via bank transfer.
No PF/ESI/PT/Form 16. You deduct TDS under 194J (10%). But "consultant" must genuinely look like a consultant (own tools, multiple clients, results-not-time-bound). Sham contracts get re-characterised as employment with retroactive PF demands.
When you might want help
First-employee compliance is the most error-prone moment. Where help pays back: PF / ESI registration setup, designing the salary template for old + new regime parity, monthly payroll engine (so deposits + filings auto-trigger), and the eventual year-end Form 16 issuance.
Want payroll handled?
Monthly payroll, PF / ESI / TDS / PT deposit, Form 16 — for a fixed per-employee monthly fee.