TCO Worked Examples and Selection Checklists
ERP payroll module in India: EPF, ESI, professional tax and labour code checks
What an ERP payroll module must calculate for EPF, ESI, professional tax and TDS on salary, how it is priced, a worked contribution example and labour code checks.
If you run payroll inside your ERP, the module has to calculate EPF, ESI, state professional tax, TDS on salary and, in some states, labour welfare fund, produce the challans and returns data, and keep up with rule changes such as the four labour codes that came into force on 21 November 2025. Payroll modules are usually priced per employee per month or bundled with HR features; the alternative is a separate payroll tool or an outsourced payroll bureau. This guide sets out what to test, how the statutory amounts are calculated with an illustrative example, and how to compare the cost options.
It belongs to the 3–5-year ERP TCO guide section. It is not a substitute for advice from your payroll consultant or CA.
What the payroll module must handle
| Area | What to check | Why it matters |
|---|---|---|
| EPF | Employee and employer shares, EPS split, EDLI and admin charges, wage ceiling handling, ECR file for the EPFO portal | Monthly filing and payment |
| ESI | Eligibility by wage limit, contribution periods, employee and employer shares, monthly contribution data for the ESIC portal | Eligibility changes mid-period need correct handling |
| Professional tax | State-specific slabs, monthly or annual deduction, returns where required, multiple states | Each state sets its own rules; some do not levy it |
| Labour welfare fund | State-specific amounts and periods | Required in some states only |
| TDS on salary | New and old tax regime choices, declarations and proofs, monthly projection, quarterly TDS return data, annual certificates | Errors lead to notices and interest |
| Labour codes | Wage definition (including the 50% rule), full and final settlement timelines, gratuity for fixed-term staff | Rules being notified by the Centre and states |
| Attendance and leave | Integration with biometric or app attendance; leave policies; overtime | Errors flow into every statutory figure |
| Records | Payslips, registers, audit trail of changes | Inspections and disputes |
How the main contributions are calculated
Current rates and limits should be checked on the EPFO and ESIC websites; the figures below are the long-standing ones, applied to an illustrative salary.
- EPF: employee 12% of wages (basic + DA and some allowances); employer 12%, of which 8.33% goes to the pension scheme (EPS) and the rest to EPF; mandatory contributions apply on wages up to the wage ceiling, raised from ₹15,000 to ₹25,000 a month from 17 September 2026 (S.O. 5109(E)), and EPFO circulars should be checked for how the EPS share applies above ₹15,000; plus EDLI and administrative charges paid by the employer.
- ESI: for employees with wages up to ₹21,000 a month, employee 0.75% and employer 3.25% of gross wages.
- Professional tax: set by each state within the constitutional cap of ₹2,500 a year per person.
Worked example (illustrative)
An employee earns a gross salary of ₹20,000 a month, of which basic + DA is ₹14,000.
| Item | Calculation | Amount per month |
|---|---|---|
| EPF, employee share | 12% × ₹14,000 | ₹1,680 |
| EPS, from employer share | 8.33% × ₹14,000 | ₹1,166 |
| EPF, rest of employer share | 12% × ₹14,000 − ₹1,166 | ₹514 |
| EDLI and admin charges (employer, at 0.5% each, illustrative) | 1% × ₹14,000 | ₹140 |
| ESI, employee share | 0.75% × ₹20,000 | ₹150 |
| ESI, employer share | 3.25% × ₹20,000 | ₹650 |
| Professional tax | State slab (illustrative) | ₹200 |
Employee deductions = ₹1,680 + ₹150 + ₹200 = ₹2,030; take-home before TDS = ₹17,970. Employer cost on top of gross = ₹1,166 + ₹514 + ₹140 + ₹650 = ₹2,470, so cost to company ≈ ₹22,470 a month. Test exactly this kind of case in a demo, including someone who crosses the ESI wage limit during the year.
The labour codes and the "wages" definition
The Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020 and the Occupational Safety, Health and Working Conditions Code, 2020 were brought into force on 21 November 2025. Central and state rules are still being finalised, and existing EPF and ESI procedures continue to apply until replaced, so check the position on the Ministry of Labour and Employment website.
The change most relevant to payroll software is the uniform definition of wages: broadly, if excluded allowances exceed 50% of total remuneration, the excess is added back to wages.
Illustrative example: gross ₹20,000, basic + DA ₹8,000, allowances ₹12,000. Half of total remuneration is ₹10,000. Allowances exceed that by ₹2,000, so wages for the codes become ₹8,000 + ₹2,000 = ₹10,000. How this flows into each contribution depends on the rules under each code; your payroll module should be able to apply the 50% test as a configurable rule once your adviser confirms the treatment.
Cost options compared (illustrative)
For a business with 70 employees:
| Option | Pricing (illustrative) | Yearly cost | Considerations |
|---|---|---|---|
| ERP payroll module | ₹80 per employee per month | 70 × ₹80 × 12 = ₹67,200 | One system for attendance, costs and accounting; check depth of statutory features |
| Separate payroll SaaS | ₹100 per employee per month | ₹84,000 | Specialist features; needs integration to the ERP's accounts |
| Outsourced payroll bureau | ₹150 per employee per month | ₹1,26,000 | Less internal work; you remain responsible for correctness |
| In-house spreadsheet | Staff time, e.g. 15 hours a month × ₹600 | ₹1,08,000 | High error risk as headcount grows |
Remember the internal time: even with software, someone has to process attendance, check payroll and file returns. Payroll data is also personal data; see the data protection guide.
Demo test list
- Process a month for three sample employees: one under the ESI limit, one above, one with salary arrears.
- Run the 50% wage test on a salary structure heavy in allowances.
- Generate the EPF ECR file and ESI contribution data.
- Apply professional tax for employees in two different states.
- Project TDS on salary under both tax regimes and generate the quarterly return data.
- Process a full and final settlement, with leave encashment and gratuity.
Add payroll requirements to the ERP requirements checklist, and include the module in the manufacturer cost example if you plan to bring payroll in-house.
FAQ
Should payroll be in the ERP or separate?
In the ERP when attendance, job costing and accounts integration matter and the module is strong on statutory work. Separate when a specialist tool is clearly better or HR needs features the ERP lacks.
Who is liable for payroll errors made by software?
The employer remains responsible for correct deduction and deposit. A contract may give you remedies against the vendor, but not a defence against the authorities.
Do I need EPF and ESI registration before using a payroll module?
Registration depends on headcount and wage thresholds under the applicable law, not on the software. Check your obligations on the EPFO and ESIC websites.
Sources
- EPFO — EPF contribution rates, ECR filing
- ESIC — ESI eligibility and contribution rates
- Ministry of Labour and Employment — labour codes and rules
- Income Tax Department — TDS on salary under the Income-tax Act, 2025
- Your state's commercial taxes or professional tax department — professional tax slabs
