Statutory payroll in India, explained for founders

Indian statutory payroll is a set of contributions and deductions that sit on top of an employee’s salary, some paid by the employer, some withheld from the employee, and each with its own rules and authority. As a founder you do not need to master the calculations, but you do need to understand the components and where they fit, so you can give your payroll partner clean inputs and read what comes back. This guide is a conceptual map, not a rate card: the exact numbers, thresholds, and slabs change and vary by state, so confirm current figures with a qualified professional or the official source before you rely on them.

The components, and where they fit

Indian payroll is built from a handful of statutory pieces. Here is what each one is for, described conceptually rather than by any specific rate.

Provident fund (PF). A retirement savings contribution, with both the employer and the employee putting in a portion tied to defined pay. It is administered centrally and applies once an organisation crosses a size threshold, after which it typically covers eligible employees.

Employees state insurance (ESI). A social security and health insurance scheme funded by employer and employee contributions, applying to employees earning up to a wage ceiling. Above that ceiling it generally does not apply, which is why it affects some of your team and not others.

Professional tax. A tax levied by individual states on income from employment, deducted from the employee. Because it is a state matter, whether it applies at all, and how much, depends on where the employee is, and it does not exist uniformly across India.

Tax deducted at source (TDS) on salary. The mechanism by which income tax on salary is withheld each month rather than paid in a lump sum at year end. The employer estimates the employee’s annual tax, spreads it across the year, deducts it, and remits it, with a reconciliation as the year progresses.

Gratuity. A lump sum payable to employees who complete a qualifying period of service, calculated from their pay and years worked. It is an obligation that accrues over time, so it is worth understanding as a liability that builds rather than a monthly line.

Statutory bonus. A bonus payable to eligible employees under the relevant law, subject to thresholds and limits. Like several of the others, whether it applies depends on the employee’s pay and the size of the organisation.

The pattern across all of these is the same. Some apply from your first employee, some only above a headcount or wage threshold, and several depend on the state. That is precisely why you cannot carry a single set of numbers in your head, and why this guide does not give you any.

Gross-to-net, conceptually

Every payroll run performs one core calculation: gross-to-net. It starts from the employee’s gross salary, which is usually itself made up of components such as basic pay and allowances. From that gross, it subtracts the statutory deductions that apply to that person, PF, professional tax, TDS, and others where relevant, along with any voluntary deductions, to arrive at net pay, the amount that actually lands in the bank account.

The same run also produces the employer side. Contributions the employer owes, such as its share of PF and ESI, are calculated, and the amounts to be remitted to each authority are totalled so they can be paid on time. The output of the run is therefore three things at once: what the employee receives, what the employer owes, and what must be sent to the authorities.

Doing this correctly means knowing the current rates, the current thresholds, the state rules, and how each component interacts. That knowledge changes from year to year and place to place, which is why the calculation belongs with a professional who keeps up with it.

Where Capstan fits, and where it does not

This is the part founders most often misread, so it is worth being blunt.

Capstan does not run Indian statutory payroll. It holds no rate, no slab, no bracket, no threshold and no formula. It does not compute gross-to-net, and it files nothing with any authority. That absence is permanent and structural rather than a gap waiting to be filled: the module is built so that no table or column in it may carry a statutory rate or bracket, and a test asserts it. If a tool tells you it will do all of that for you, that is a different kind of product carrying a different kind of responsibility, and it is not what Capstan is. That category has a name and a shape worth understanding before you buy one, which is the subject of payroll-first HR systems.

What Capstan does is sit on both sides of the calculation. It is the system of inputs that feeds payroll and the system of record that holds the outcome. Your payroll partner or chartered accountant is the system of computation in between.

The division of labour is clean. Your partner does the statutory maths and files the returns. Capstan holds the inputs going in and the record coming out. The next two sections describe exactly what crosses that line in each direction, because “hands it to your partner” is the kind of phrase that hides a lot, and it should not.

What Capstan sends to your partner

A pay run in Capstan belongs to a pay group (a set of people on the same pay frequency and pay-day rule) and to one period. It moves through a stated lifecycle: draft, compiled, exported, results imported, finalised.

Compiling is the part that earns the module its place. It snapshots every input Capstan already owns for that period, per person, with a note of which record each fact came from: payable days and loss-of-pay days from the attendance fold, unpaid leave from the leave ledger, approved overtime, the compensation components in force at period end, approved but unpaid expense reimbursements flagged for payroll settlement, variable-pay declarations, and settlement snapshots for anyone leaving in the period. Compiled inputs are also diffed against the previous period per person, so new joiners, departures, day-count swings and compensation changes surface as flags for a human to look at. The flags never block the run; they just stop a surprise reaching your partner unread.

The export itself is deliberately dull, which is the point. It is one JSON file, which is authoritative, and one CSV flattening of the same rows so a spreadsheet opens it. Per person it carries:

• Day counts in the clear: payable days, loss-of-pay days, overtime minutes.
• Compensation components: a component key and an amount, decrypted at generation for the administrator who has compensation clearance, and filed under the compensation document category so the same reach rule governs who can download the file.
• Prorations as date facts: a joiner or exit date and the payable days, never a prorated amount. Working out what a part month is worth is arithmetic, and arithmetic is your partner’s job.
• Adjustments as labelled facts: a prior-period correction carries a label and a day count, and your partner computes its effect.

What the file does not carry is a rate, a slab, a bracket, a threshold or a formula. Not because they were left out, but because there are none in the module to leave out. The format is versioned and documented rather than proprietary, so it works with any partner who can import a file, and re-exporting before the run is finalised produces a new numbered version rather than silently overwriting the old one.

What comes back, and how it is checked

Your partner computes gross-to-net and returns a results file in the same documented shape: per person a gross, a total of deductions, a net, and their statutory line items as labelled lines. Capstan stores those labels and amounts and understands nothing about them. There is no code in the product that reads “PF” or “TDS” and does anything with it, and no code that recomputes any of it.

The import is checked before anything is written, and it refuses rather than partly succeeding:

• Member set. People who are in the run but missing from the file, and people in the file who are not in the run, are named individually.
• Totals against sums. For each person, gross minus total deductions must equal net, and the labelled lines must add up to the total deductions. The lines are only summed, never classified, because reading a label is exactly the thing the module refuses to do. A mismatch names the person and shows the declared figure against the computed one.

The only way past a discrepancy is to acknowledge it explicitly with a written reason, which is recorded and audited. A file with no discrepancy lands clean. Payslip PDFs come back the same way and are filed onto each person’s record under the payslip category, which means an employee sees their own payslips in self-service, and a former employee can still reach their own after they leave. Finalising the run freezes it. Payment is recorded as a date and a reference; no money moves through Capstan, and there is nowhere in the system for it to.

The reason to spell all of this out is that “we integrate with your payroll provider” is usually a sentence with nothing behind it. The useful question to ask any vendor is what crosses the line in each direction, and what happens when the two sides disagree.

Keeping clean inputs

Because the calculation lives with your partner, the single most valuable thing you can do is give them clean, complete, and timely inputs. Most payroll errors are not calculation mistakes; they are input mistakes that the calculation faithfully carried through.

A few habits help:

• Keep every employee’s core details, pay structure, and statutory identifiers current on their record, not in a chat thread.
• Record joiners, leavers, and mid-month changes as they happen, so a start date or an exit is never a surprise on payroll day.
• Keep leave and attendance flowing into the same record that feeds payroll, so the numbers reconcile themselves.
• Capture one-off items, reimbursements, adjustments, arrears, against the person and the month they belong to.
• Send the same documented export to your partner each cycle, so the inputs arrive in a shape they can rely on.

The first line of any input pack is how many days each person is actually paid for, which is where mid-month joiners, exits and unpaid leave all land. The payable days calculator works that out for a period on both a calendar-day and a working-day basis, and shows the proration fraction under each of the three common divisors, because which one applies is your provider’s rule and not something Capstan decides.

Exits are the input that most often arrives late and incomplete, because the final period carries a leave balance, a notice position, any recoveries and an accrued gratuity all at once. The order those are gathered in, and who owns each step, is set out in full and final settlement.

Clean inputs make your partner’s job faster and cheaper and cut the back-and-forth that eats payroll week. That is the part a good system of record earns its place on.

One practical note on packaging: payroll is a paid module rather than part of the free core, and like every module it needs a paid plan under it before you can switch it on. The employee records, leave and attendance that feed it are core, so you can build clean inputs long before you enable anything.

Where to go next

Statutory payroll is only one part of employing someone in India. The contract, the notice and probation terms, leave, and the identifiers you collect on day one all sit alongside it, and they are covered in how to hire employees in India.

If you are building a mixed team of employees and contractors in India and abroad, the guide to hiring global contractors covers the structures and the documents involved. And if you are still deciding what to run your people operations on, the HR software for startups guide explains how a system of record earns its keep before you have a dedicated HR hire.

For the specific rates, thresholds, and state rules that this guide has deliberately left out, speak to a qualified payroll provider or chartered accountant, or check the relevant official source. The numbers move, and the point of this orientation is the structure they sit inside, not the numbers themselves.