Hiring Your First Employee in India: PF, ESI, Gratuity, the Labour Codes and the Real Cost in 2026

Hiring your first employee is a turning point. MoSPI’s ASUSE surveys show that across every activity, small businesses with hired workers generate several times the value of one-person businesses. But hiring also brings new costs and legal duties, and the rules changed significantly in 2025 and 2026. India’s four labour codes came into force on 21 November 2025, and the Provident Fund wage ceiling rose from ₹15,000 to ₹25,000 a month on 17 September 2026.

This guide explains what you need to know, what an employee really costs and how to stay compliant. Advanton’s free hiring cost calculator, with India selected, works out the numbers for your salary and state.

Key points

• Budget about 8% to 16% on top of gross salary for employer PF, EDLI, admin charges, ESI where it applies, and a gratuity provision, before any insurance or other benefits.
• Under the labour codes, wages (basic pay plus dearness allowance) should be at least 50% of total pay. PF, gratuity and bonus are worked out on wages.
• EPF: employer and employee contribute 12% each, on wages up to the ₹25,000 ceiling (or full wages, if you choose). Mandatory once you have 20 employees, and possible voluntarily earlier.
• ESI: applies to employees earning up to ₹21,000 a month in covered establishments: 3.25% from you and 0.75% from the employee.
• Gratuity is payable after five years of service, or one year for fixed-term employees, at 15 days’ wages for each year.

The four labour codes, in brief

On 21 November 2025, India replaced 29 central labour laws with four codes: 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. Central rules followed in May 2026, and states have notified their own rules on different timelines.

For a small employer, the changes that matter most are:

• A uniform definition of wages. Basic pay plus dearness allowance must be at least 50% of total remuneration. If allowances exceed half of pay, the excess counts as wages. Salary structures with a low basic and high allowances no longer reduce PF and gratuity costs.
• Fixed-term employees get the same wages and benefits as comparable permanent staff, and qualify for gratuity after one year.
• Final settlement of wages on resignation, dismissal or retrenchment must generally be made within two working days.
• Minimum wages and a national floor wage apply to all workers.

Provident Fund (EPF)

EPF is India’s main retirement scheme for employees, run by the Employees’ Provident Fund Organisation (EPFO).

Who must register: establishments with 20 or more employees must register with EPFO. Smaller businesses can register voluntarily, which many do to attract staff.

The wage ceiling: from 17 September 2026, mandatory coverage and contributions are based on wages up to ₹25,000 a month, up from ₹15,000, which had applied since 2014. You can contribute on higher wages if you choose.

Contributions:

So on wages of ₹25,000, the employee contributes ₹3,000 and you contribute ₹3,000 plus about ₹250 in EDLI and admin charges. Contributions are due by the 15th of the following month.

Employees’ State Insurance (ESI)

ESI provides medical care and cash benefits for sickness, maternity, disability and injury. It’s run by the Employees’ State Insurance Corporation (ESIC).

• Coverage: establishments with 10 or more employees in notified areas, for employees whose gross pay is up to ₹21,000 a month (₹25,000 for people with disabilities).
• Contributions: 3.25% of gross wages from the employer and 0.75% from the employee, paid by the 15th of the following month.

Employees covered by ESI get medical treatment through ESI dispensaries and hospitals, so you may not need separate health insurance for them.

Gratuity

Gratuity is a lump sum paid when an employee leaves after qualifying service: five years for regular employees, or one year for fixed-term employees under the labour codes. It’s worked out as 15 days’ wages for each completed year of service, using 15/26 of the last month’s wages.

Setting aside about 4.81% of wages each year covers it (15 ÷ 26 ÷ 12). Even if no one has qualified yet, building the provision avoids a large surprise later.

Statutory bonus

Employees earning up to ₹21,000 a month are entitled to an annual bonus of at least 8.33%, worked out on ₹7,000 a month or the minimum wage for their job, whichever is higher. Many businesses pay it at Diwali.

Professional tax and income tax (TDS)

• Professional tax is a state tax deducted from salaries in states that levy it, up to ₹2,500 a year per employee. Many states charge about ₹200 a month; some, such as Delhi, don’t charge it. Register with your state’s tax department if it applies.
• TDS on salary: if an employee’s taxable salary is above the tax-free limit, you must deduct income tax each month and file quarterly TDS returns. You’ll need a TAN. Under the new regime for tax year 2026-27, salaries up to ₹12.75 lakh effectively pay no tax, after the ₹75,000 standard deduction and the rebate, so many first employees won’t need TDS.

What an employee really costs: three examples

These examples use wages at 50% of gross pay, PF on wages up to the ceiling, and no insurance or other benefits.

At ₹15,000 the employee qualifies for ESI and bonus, which adds to your cost. At ₹60,000 the PF contribution is capped at the ₹25,000 ceiling. Run your own numbers in the hiring cost calculator, which also estimates TDS.

For context, MoSPI’s ASUSE 2025 found that small unincorporated businesses paid an average of ₹1,46,550 a year per hired worker (about ₹12,200 a month), including employer contributions, rising to ₹1,56,143 in urban areas.

Your hiring checklist

1. Check your registrations: shops and establishments registration (and update your employee count), professional tax if your state levies it, and EPFO and ESIC once you’re covered or if you choose to register voluntarily.
2. Write an appointment letter with the job title, wages broken into basic, DA and allowances, working hours, leave, notice period and probation. Keep wages at least 50% of pay.
3. Collect documents: PAN, Aadhaar, bank details and the employee’s UAN if they’ve had PF before.
4. Pay at least the minimum wage for the job in your state, and pay on time, usually by the 7th of the following month.
5. Keep simple records: attendance, wages paid, deductions and leave. The labour codes have reduced the number of registers employers must keep.
6. Deposit PF and ESI by the 15th of each month, and file returns on time.
7. Plan your cash. Advanton’s cash and payroll planner shows how a new hire affects your cash flow week by week.

Where to register

• EPFO: register your establishment on the EPFO’s unified portal at epfindia.gov.in. Each employee gets a Universal Account Number (UAN) that stays with them from job to job. You file a monthly electronic challan-cum-return (ECR) and pay contributions online.
• ESIC: register on the ESIC portal at esic.gov.in once you’re covered, register each employee, and pay contributions monthly online. Employees get an ESIC card for treatment at ESI facilities.
• Professional tax: register with your state’s tax or commercial taxes department, if your state levies it.
• TAN: apply through the Income Tax Department’s TIN facilitation services before you start deducting TDS.

Common mistakes to avoid

• Keeping basic pay low to cut PF. Under the labour codes, allowances above 50% of pay count as wages anyway, so the saving disappears and your records won’t match the law.
• Treating regular staff as "contractors" to avoid PF and ESI. If someone works regular hours under your direction, they’re likely an employee.
• Paying late or in cash without records. Late PF and ESI deposits attract interest and damages, and cash wages make disputes hard to settle.
• Forgetting the gratuity provision. A long-serving employee’s gratuity can be a large one-time payment if you haven’t set money aside.
• Missing state rules. Minimum wages, professional tax, leave and working hours depend on your state. Check your state labour department’s website.
• No written terms. A clear appointment letter prevents most disputes about pay, leave and notice.

Frequently asked questions

Do I have to register for PF with only one employee?
Not if you have fewer than 20 employees, but you can register voluntarily, and many good candidates prefer jobs with PF.

Can I pay salary in cash?
Pay through bank transfer or UPI wherever possible. It creates records, and the labour codes expect electronic payment in many cases.

What about interns and part-time staff?
Part-time and fixed-term workers are employees under the labour codes. Genuine apprentices under the Apprentices Act are treated differently.

Does hiring help my business grow?
In MoSPI’s data, small businesses with hired workers consistently generate far more value than those without. See running solo or hiring staff: what the data says.

Where can I find workers?
Local networks, job portals, Skill India Digital and listing your business with a "hiring" update in the India Business Directory can all help.

This guide is general information, not legal or tax advice. Check EPFO, ESIC and your state labour department, or consult a payroll professional, for your specific situation.

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Sources

1. Ministry of Labour and Employment
2. Employees' Provident Fund Organisation
3. Employees' State Insurance Corporation
4. Income Tax Department
5. MoSPI, ASUSE 2025 factsheet (January to December 2025)

Last reviewed November 7, 2026. Startup costs are estimates; check local prices, licensing and tax rules before you commit money.