ESI, professional tax and labour welfare fund in payroll software: rates, limits and multi-state rules

Payroll software must handle three deductions that trip up many MSMEs: ESI, which applies to employees with wages up to ₹21,000 a month at 0.75% from the employee and 3.25% from the employer; professional tax (PT), a state tax with its own slabs, capped by the Constitution at ₹2,500 a year per person; and the labour welfare fund (LWF), a small contribution that only some states levy, at different amounts and intervals. The ESI rules are national; PT and LWF are state-by-state, which is where many tools fall short. This guide explains each with illustrative examples and the tests to run.

It is part of the payroll and HR software comparison overview.

ESI: who is covered and how much

ESI now operates under the Code on Social Security, 2020, in force since 21 November 2025, and is administered by the Employees' State Insurance Corporation. The long-standing figures, which still applied in October 2026 as far as we could confirm, are:

A rise in the wage limit (to ₹30,000 was reported) was under discussion in 2026, but we found no notification. Because the code allows a change by notification, check ESIC before each contribution period.

Contribution periods: the rule software must get right

If an employee is covered at the start of a contribution period and their wages rise above ₹21,000 during it, contributions continue until the end of that period. Coverage then stops from the next period. Software that drops ESI the month the salary crosses the limit produces short payments.

Illustrative example. An employee earns ₹20,000 in April 2026 and gets a raise to ₹23,000 from July. ESI continues on ₹23,000 for July, August and September: employee 0.75% × ₹23,000 = ₹172.50, employer 3.25% × ₹23,000 = ₹747.50 a month. From 1 October 2026 the employee is out of ESI, unless the limit changes.

ESI wages follow the code definition of wages, so the 50% rule can matter. Overtime treatment for ESI has its own rules; ask your adviser and test it.

Professional tax: one tax, many states

Professional tax is levied by states (and in some places local bodies) on employment, under Article 276 of the Constitution, which caps it at ₹2,500 per person per year. Each state decides whether to levy it, the slabs, monthly or annual deduction, a special amount in one month (some states collect a higher amount in February to reach the annual total), exemptions (for example for senior citizens or persons with disability) and the return format. Several states and union territories do not levy PT at all.

Software must therefore:

• apply PT by work location, not by head office;
• handle transfers between states mid-year;
• support monthly, half-yearly or annual deduction patterns;
• produce challans and returns in each state's format;
• track employer registration and enrolment numbers per state.

Illustrative example. An employee earning ₹30,000 a month in a state with a ₹200 monthly slab and a ₹300 February deduction pays 11 × ₹200 + ₹300 = ₹2,500 a year. The slab numbers here are illustrative; take actual slabs from your state's commercial tax or PT department.

PT paid by a salaried employee is deductible from salary income under the Income-tax Act, 2025 (it was listed alongside the standard deduction in section 19). Payroll should pass this to the TDS calculation. See TDS on salary.

Labour welfare fund

Several states run labour welfare funds under their own Acts. Contributions are small (often tens of rupees), split between employee and employer, collected monthly, half-yearly or annually, and paid to the state welfare board with a return. Applicability can depend on the type of establishment, the employee's role or wages. Because amounts are small, LWF is easy to forget, and late payment can still attract penalties.

Ask the vendor for a list of states where LWF is calculated and the return produced, not just "supported".

Multi-state test table

Before you sign, ask the vendor to process this set (illustrative):

Compare results with your own calculation; mismatches in A, C and D are the most common failures. The multi-state services firm example shows a full month.

Why this affects price

Vendors that support many states and file returns automatically often charge more per employee or sell a "compliance" add-on. For a business in one state, a simpler tool may be enough. For four or five states, a cheaper tool without state coverage leaves your team doing PT and LWF by hand. Compare the types on the compare page and price them in the cost estimator.

Frequently asked questions

Does ESI apply to all businesses?

ESI applies to notified areas and establishments above the employee threshold set under the code and its notifications. Check coverage for your area on ESIC's website.

Can employees opt out of ESI?

Eligible employees in covered establishments cannot simply opt out; coverage follows wages and the contribution-period rule.

Is professional tax the same everywhere?

No. Each state sets its own rules within the ₹2,500 annual cap, and some do not levy it.

Do we need separate LWF registrations?

Usually per state where the fund applies. Check each state labour welfare board's rules.

Sources

• ESIC — contribution rates, wage limit, contribution periods
• Ministry of Labour and Employment — Code on Social Security
• India Code — Constitution Article 276 and state Acts
• Income Tax Department — treatment of professional tax in salary TDS