Two questions come up in nearly every payroll conversation: which employees are covered under EPF and ESI? and at what rates do we contribute? The answers have been stable for years but are now in motion — the unified wage definition under the labour codes affects calculations from late 2025 onwards, and the wage ceilings themselves are on the agenda for revision. This is the practical state of play in 2026.
EPF — the ₹15,000 ceiling holds
The Employees’ Provident Fund (EPF) covers establishments with 20 or more employees. An employee earning a basic wage of up to ₹15,000 per month is mandatorily covered. Employees joining at a higher salary are not statutorily covered, but most employers extend coverage as a matter of practice. The ₹15,000 wage ceiling was last revised in 2014 and has not changed since — despite recurring discussion of an increase to ₹21,000 or ₹25,000.
The contribution structure on the wage (capped at ₹15,000):
- Employee: 12% of basic wages, all to EPF
- Employer: 12% of basic wages, split as 8.33% to the Employees’ Pension Scheme (EPS) and 3.67% to EPF
- Plus an EDLI contribution from the employer of 0.5% of wages (capped) to the Employees’ Deposit Linked Insurance scheme
- Plus EPF and EDLI administrative charges on the employer side
ESI — covered up to ₹21,000 (₹25,000 for disabled)
Employees’ State Insurance (ESI) covers establishments with 10 or more employees (in most states). An employee earning gross wages up to ₹21,000 per month (₹25,000 for persons with disabilities) is covered. The ₹21,000 ceiling has held since the last revision — though as with EPF, the government has been consulting on an increase.
Contribution rates (effective on the gross wage, not capped):
- Employee: 0.75% of gross wages
- Employer: 3.25% of gross wages
Total contribution: 4.00% of the employee’s gross monthly wages, paid to ESIC by the 15th of the following month via challan.
The unified wage definition — the December 2025 wrinkle
The four labour codes (Code on Wages 2019, Industrial Relations Code 2020, Social Security Code 2020, Occupational Safety Code 2020) introduced a common definition of “wages” that applies across PF, ESI, gratuity, bonus, and other social-security payouts. Effective from December 2025, this definition has begun to be enforced for PF and ESI computation purposes.
The headline change is that basic wages cannot be less than 50% of total monthly remuneration. Allowances above the 50% threshold get added back to the basic wage for computing PF and ESI. For employers who structured salaries with high HRA, special allowance and low basic to minimise PF outflow, this means the PF base goes up — and so does the contribution.
The transition has been phased and is still settling. Watch for:
- Higher EPF outflow for employees whose basic was below 50% of CTC under the old structure
- Higher gratuity liability on the books, since gratuity is computed on the new wider basic
- Compensation restructure conversations with employees, where the same CTC now produces a different take-home and a different employer-side cost
Voluntary Provident Fund — the under-used lever
Employees who want to contribute more than the statutory 12% can elect Voluntary PF contributions of any amount up to 100% of basic wages. The employer is not required to match the additional contribution. VPF earns the same EPF interest rate (8.25% for FY 2024-25, declared annually) and qualifies for Section 80C deduction. For high-tax-bracket salaried employees, this is one of the cleanest tax-efficient long-term savings vehicles.
Note: combined annual contributions (employee EPF + VPF) above ₹2.5 lakh attract tax on the interest on the excess, under Section 10(11)/(12) read with the new EPF circular. Plan accordingly.
Compliance calendar — what falls due monthly
Both EPF and ESI follow a monthly cycle:
- 15th of the following month — contribution payment and electronic challan-cum-return (ECR) upload for EPF; ESI challan deposit
- UAN management, KYC updates and Form 11 declarations — ongoing for new joiners and exits
- Half-yearly ESI return — April-September period due by 11 November; October-March period due by 11 May
- Annual EPF return (Form 3A and Form 6A) — due by 30 April for the preceding financial year
Late payment of EPF attracts interest at 12% per annum under Section 7Q and damages of up to 25% per annum under Section 14B for prolonged delays. Late ESI attracts simple interest at 12%. These are non-deductible.
What we recommend
- Audit your basic-wage to total-CTC ratio for every employee under the labour-code wage definition. If basic is under 50% of monthly remuneration, your PF and gratuity computations need adjusting.
- Don’t miss the 15th deadline. Auto-debit if your bank supports it. The interest and damages are larger than most employers realise.
- Reconcile your ECR upload monthly against the payroll register. UAN errors and KYC gaps surface here.
- For high-earning employees, frame VPF as a savings option rather than a tax-shelter — and watch the ₹2.5 lakh aggregate threshold for taxable interest.
- Track the wage-ceiling proposal. If the EPF ceiling does move from ₹15,000 to ₹21,000 or ₹25,000, your PF cost line goes up immediately. Build the contingency into your FY 2027-28 budget.
If you would like an EPF / ESI compliance audit or a labour-code wage-definition impact note, write to us at [email protected].
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