An HRMS (human resource management system) that runs Indian payroll must calculate and record four deductions (provident fund, ESI, professional tax and tax deducted at source on salary) and one employer liability, gratuity. It must also produce the files and certificates that follow, and apply the leave and wage rules of the new labour codes. Each rate and form has changed or is changing in 2026, so the software should hold rates as dated settings, not as fixed code.
The statutory items at a glance
| Item | Rule, as reported by the source linked | What payroll must produce |
|---|---|---|
| Provident fund (EPF) | According to EPFO's FAQ, employee 12% and employer 12% of PF wages, with 8.33% of the employer share going to the pension fund and 0.5% of pay to the EDLI scheme | Monthly contribution file and challan |
| Employees' State Insurance (ESI) | According to ESIC, employee 0.75% and employer 3.25% of wages, with payment within 15 days of month end | Monthly contribution file |
| Professional tax | Levied by states, with a cap per person per year under Article 276 of the Constitution | State-wise deduction and challan |
| TDS on salary | Under the Income-tax Act, 2025, which the Income Tax Department says applies from 1 April 2026 | Quarterly statement and annual certificate |
| Gratuity (an employer liability, not a deduction) | According to a PIB factsheet on the Code on Social Security, fixed-term employees qualify after one year | Monthly accrual and final settlement |
Provident fund and the wage ceiling
PF is calculated on basic wages plus dearness allowance and retaining allowance. Under the EPFO rules, the employee's 12% and the employer's 12% go to the provident fund, except that 8.33% of the employer share goes to the pension scheme.
The wage ceiling changed in September 2026. The Ministry of Labour and Employment notified a higher ceiling under the Code on Social Security, 2020, with effect from 17 September 2026, as reported by SCC Online. The figure and any transition rules are in EPFO's own notification, so read that before you set the new value and before you rerun September.
An HRMS should store the ceiling with a start date, and let you rerun a month if a notification lands late.
ESI and professional tax
ESIC's standard note, as on 1 January 2025, sets a monthly wage limit for coverage, with a higher limit for persons with disabilities. Check ESIC's current notice for the low-wage exemption from the employee share, which the employer still funds.
Professional tax is the most state-specific item. Each state sets its own slabs, within the national cap. The HRMS must map each employee to the state of their work location, not their registered office. A company with plants in Jharkhand and Uttar Pradesh needs both rule sets side by side.
TDS on salary and the new form names
According to the Income Tax Department, the Income-tax Act, 2025 and the Income-tax Rules, 2026 took effect on 1 April 2026. Two forms that every payroll team knew have new names:
- Form 16 is now Form 130, the annual salary TDS certificate, under Rule 215. Take its due date from the Department's rule table and FAQs.
- Form 24Q is now Form 138, the quarterly salary TDS statement, under Rule 219.
According to the Department's transition FAQs. the form depends on the tax year, not the day you file. Work for 2025-26 stays on Form 16 and Form 24Q. Tax year 2026-27 and later uses Form 130 and Form 138.
Take the due date of each quarter's statement from the Form 138 FAQ, and check it on TRACES before you file. Annexure I goes in every quarter, and Annexures II and III with the last.
An HRMS should handle both tax regimes for each employee, collect investment declarations when the employee chooses the old regime, project the year's tax, and spread it over the remaining months. Sources: Income Tax Department, Form 130 and Form 138.
What the labour codes change in payroll
According to PIB, the four labour codes came into force on 21 November 2025. Four changes reach payroll directly:
- Wage definition. According to the Ministry of Labour's FAQs on the Code on Wages, basic pay, dearness allowance and retaining allowance form wages, and if other allowances exceed 50% of total remuneration, the excess is added back to wages. Where that applies, the base for PF and gratuity rises. Source: Ministry of Labour, Code on Wages FAQs.
- Paid leave. The PIB summary says workers qualify for annual leave with wages after 180 days in a calendar year, down from 240 days.
- Overtime. The same summary puts overtime at double the normal wage rate, with the worker's consent.
- Appointment letters. According to the summary of the OSH Code, every employee gets a letter in the prescribed format, with wage and social security details.
Sources for items 2 to 4: Ministry of Labour via PIB, OSH Code summary. Sources differ on exactly which pay items count in the 50% test. Ask your CA for the reading your auditors will apply.
Leave rules the HRMS must hold
Leave is a payroll input. A day of unpaid leave changes PF wages, ESI wages and tax. An HRMS needs:
- balances by leave type, with accrual rules and carry-forward limits
- encashment on exit or at year end, with its tax treatment
- compensatory off for work on a holiday or weekly off
- a holiday calendar by state and by site
- shifts and regularisation of missed attendance, approved by a manager before payroll locks
Leave policy also depends on the state's Shops and Establishments law or the factory rules that apply. Keep the policy as data that HR can version, so an audit can see which policy applied in which month.
Design rules for payroll software
- Effective-dated settings. Every rate, ceiling and slab carries a start date. Never overwrite a past value.
- Arrears. When a rule applies retrospectively, the HRMS recalculates the months and shows the difference per employee.
- Whole-number money. Hold amounts in paise as whole numbers, so rounding does not drift across a year.
- Locked months. Once payroll closes, changes go through a documented reopening, with a reason.
- Protected payslips. Payslip files are encrypted or password-protected, because they hold salary data covered by the Digital Personal Data Protection Act.
- Preparation, not filing. Many systems prepare files and leave the filing to your team or CA. State which side of that line the HRMS sits on.
Ten questions for a demo
- Where do I set the PF wage ceiling, and can I give it a start date?
- How does the HRMS choose professional tax by state?
- Which tax regime options does an employee see, and who can change them?
- Can you produce Form 130 and Form 138 data for tax year 2026-27?
- How does the HRMS apply the 50% wage test?
- What happens to a locked month if a rate changes retrospectively?
- Which leave types, encashment and compensatory off rules are built in?
- What does an auditor see in the change log?
- Where does the data sit, and who can read a payslip?
- How do I export everything if I leave?
Where Brihat PeopleDesk fits
Brihat PeopleDesk is an on-premise HRMS for Indian businesses with 10 to 500 employees, covering attendance, leave and payroll with payslips, a bank-transfer file, and TDS certificates and quarterly TDS return files for your CA. It does not file taxes.