What payroll and statutory registrations do we need as we hire?

The first few hires feel simple. Agree a salary, transfer it monthly, deduct TDS. Somewhere between the eighth and the twenty-fifth person that stops being true, and the company discovers a set of registrations it should have made, contributions it should have been paying and a cost base roughly 15% higher than the salaries it budgeted.

None of this is difficult. It is just a sequence of thresholds, each with its own trigger, and they are easier to handle in advance than to fix afterwards.

What follows is the shape of it as of September 2026. Rates and thresholds change, and the position for your own company should be confirmed with your CA before you act on it.

What the labour codes changed

The four consolidated labour codes were brought into force on 21 November 2025, replacing a long list of older central statutes.

The change that matters most for payroll arithmetic is the definition of wages. Under the codes, the excluded allowances cannot exceed half of total remuneration, which in practice means the wage base used for provident fund, gratuity and similar calculations must be at least 50% of what you pay.

This matters because a very common Indian salary structure kept basic pay low, often 30% or 35% of the total, with the rest in allowances. That structure reduced employer contributions. Under the codes it no longer works, and companies that used it are looking at a higher contribution base for the same cost to company.

The practical response is to model the fully loaded cost on a wage base of at least half of total pay, and to have your payroll provider or CA review existing salary structures rather than assume they carry over.

Provident fund

Registration under the Employees' Provident Funds and Miscellaneous Provisions Act becomes mandatory once an establishment employs 20 or more people. Companies below that can register voluntarily, and many do, because employees expect it and because the threshold arrives quickly.

The employer side is three components: 12% of wages as the contribution itself, 0.5% towards the EDLI insurance scheme, capped at ₹75 per employee per month, and 0.5% as administrative charges. The employee contributes 12% from their own pay, which is a deduction rather than a cost to the company.

There is a statutory wage ceiling of ₹15,000 a month for mandatory coverage, and many companies contribute on actual wages above it instead. Which approach applies to a given employee depends on their history and on what the company has adopted, and it is worth getting a clear answer once rather than handling it case by case.

Deposits and the monthly return are due by the 15th of the following month. Late deposits carry interest and damages, and the employee's share is money you hold on their behalf, so it is not a payment to defer when cash is tight.

ESIC

The Employees' State Insurance scheme applies to establishments with 10 or more employees in most states, and covers employees earning gross wages up to ₹21,000 a month.

The employer contributes 3.25% of wages for covered employees and the employee 0.75%. Contributions are due by the 15th of the following month.

Two practical points. The threshold is about the establishment's headcount, so a company with twelve people may have only three employees who are actually covered, and it still has to register. And an employee whose salary rises above ₹21,000 mid-contribution-period continues to be covered until the end of that period rather than dropping out immediately.

For a software company where most salaries are well above the ceiling, ESIC often affects only support, administrative and facilities roles. It still needs the registration, the monthly filing and someone who knows which employees are in scope.

Professional tax

Professional tax is a state levy, so whether it applies at all depends on where your employees are.

In Karnataka, employers must obtain registration and deduct professional tax from employees earning gross wages of ₹25,000 a month or more, at ₹200 a month, which caps at ₹2,400 a year. The registration certificate must be obtained within 30 days of becoming liable, and monthly payment is due by the 20th.

Kerala works differently. Professional tax is collected by local bodies rather than the state, on a half-yearly basis, with payment due by 31 August for the first half of the financial year and 28 February for the second, calculated on half-yearly earnings on a slab basis.

Several states, including Delhi and Haryana, do not levy professional tax at all. A company hiring remote employees across states needs to know which registrations each location triggers, and this is one of the more common compliance gaps in distributed teams.

Gratuity

Gratuity is payable to an employee who completes five years of continuous service, calculated at 15 days of wages for each completed year, using a 26-day month. That works out at roughly 4.81% of wages a year.

The five-year point creates a common mistake. Because nothing is payable until then, many startups recognise no cost at all for the first four years, and then take the full hit in a single year when the first cohort of employees crosses the line.

The correct treatment is to accrue it from the start, so each year carries its own cost. That is also what an auditor will expect, and what a diligence team will adjust for if you have not.

Whether to fund the liability through an insurer's gratuity scheme or simply provide for it is a separate decision, driven by cash and by the size of the liability. The accrual should happen either way.

TDS on salaries, and on everyone else

Salary TDS is deducted monthly on the estimated annual tax of each employee, deposited by the 7th of the following month, with quarterly returns and annual Form 16s.

The part startups get wrong more often is TDS on the people who are not employees. Contractors, consultants, agencies and freelancers all attract deduction under the relevant sections, at different rates, with their own thresholds.

Under section 393 of the Income Tax Act 2025, professional services attract 10% and technical services 2%, with a threshold of ₹50,000 in a financial year for that payee. A company paying a designer ₹20,000 a month crosses that threshold in month three, and the obligation applies from the point the threshold is crossed.

Two consequences of getting it wrong. The tax becomes recoverable from the company along with interest, and the expense itself can be disallowed for income tax purposes, which turns a compliance slip into a tax cost.

Contractors are not a way around any of this

Startups often engage people as consultants on monthly retainers to avoid the payroll obligations. Sometimes that reflects the reality of the relationship. Often it does not, and the difference matters.

What decides the question is how the work actually happens rather than what the contract calls it. Someone who works fixed hours, uses company equipment, reports to a manager, has no other clients and has been engaged for two years is an employee in substance, whatever the paperwork says.

Where that is challenged, the consequences arrive together: contributions payable with interest for the period, the employee's share now recoverable from the company because it was never deducted, and the TDS deducted under the wrong section. The saving was never real; it was a deferral with interest attached.

Genuine contracting is straightforward and worth doing properly. A scope of work rather than a job description, an invoice from the contractor, the correct TDS section, GST where the contractor is registered, and a written agreement that reflects how the work is really done.

What this actually costs

An illustrative example. An employee on a cost to company of ₹12 lakh a year, structured so that wages are 50% of total pay, giving a wage base of ₹6 lakh.

• ·Employer PF at 12% of ₹6 lakh: ₹72,000.
• ·EDLI at 0.5%, capped at ₹75 a month: ₹900.
• ·Administrative charges at 0.5%: ₹3,000.
• ·Gratuity accrual at about 4.81% of wages: ₹28,860.
• ·ESIC: not applicable at this salary level.
• ·Health insurance, laptop and software: perhaps ₹60,000, depending on the company.

So roughly ₹1.65 lakh a year above the salary the offer letter states, or about 14%. That figure, not the salary, is what belongs in the hiring plan and in the runway calculation. The hiring calculator on this site works through the same arithmetic against your cash position.

Where this shows up later

Payroll compliance is one of the first things examined in diligence, and it is examined because gaps are common and quantifiable.

A diligence team will typically reconcile the PF and ESIC returns against the payroll register and the P&L, check that professional tax registrations exist in every state where employees sit, look for a gratuity provision in the accounts, and test whether anyone classified as a contractor looks like an employee.

Where something is missing, the usual outcome is not that the deal fails. It is an indemnity, an escrow, or a reduction in price for the estimated exposure, and the estimate made by the buyer's advisers is rarely generous.

The cost of fixing this in advance is a few hours with your CA and whatever contributions were genuinely due. The cost of fixing it during a round is the same money plus a negotiating position you would rather not have. It is worth a review once a year, ideally alongside the audit, when the payroll data is already assembled.

The order to set it up in

1. 01At the first employee: PAN and TAN for the company, salary TDS, and a payroll process, even a simple one, that produces payslips and a record.
2. 02As soon as anyone is engaged as a contractor: the relevant TDS sections and thresholds, tracked per payee across the year rather than per invoice.
3. 03On hiring in a state that levies professional tax: registration within that state's window, which in Karnataka is 30 days.
4. 04At 10 employees in most states: ESIC registration and monthly contributions for covered employees.
5. 05At 20 employees: PF registration, or earlier voluntarily, which most funded startups do.
6. 06From the first employee, invisibly: a gratuity accrual in the monthly books, so the liability builds as it is earned.
7. 07At any point where employees sit in multiple states: a review of what each state requires, because this is where remote teams accumulate gaps.

Most companies outsource the mechanics to a payroll provider or their CA firm, which is sensible. What cannot be outsourced is knowing which thresholds you are approaching, because the trigger is a hiring decision and the person making it is you.

About Simplify

Simplify is a finance clarity and investment readiness practice working with founders across India, built on six years inside startups. We write about the questions founders bring before a decision, not after it.