How to calculate PF and ESI under the new Wage Code: a step-by-step guide for employers

Calculating PF and ESI under the new wage code comes down to getting one input right: the wage base. PF runs on basic plus DA, which must now be at least 50% of total remuneration, while ESI runs on gross wages up to a coverage limit. The rates have not changed — 12% plus 12% for PF, 0.75% plus 3.25% for ESI — so every rupee of difference comes from the base, not the percentage.

This is the procedural companion to our explainer on whether the new wage code cuts your take-home pay. Here we stay on the mechanics: what counts as wages, how to compute each contribution step by step, and where SMB payroll usually goes wrong.

Key takeaways

• PF base = basic + DA, which must be at least 50% of total remuneration under the new wage definition.
• ESI base = gross wages, and ESI only applies where gross is up to ₹21,000 a month (₹25,000 for persons with disability).
• The rates are unchanged: EPF 12% + 12%, ESI 0.75% + 3.25%. Only the base can move.
• Employer PF splits: of the employer’s 12%, 8.33% goes to EPS on the ₹15,000 ceiling and 3.67% to EPF.
• PF and ESI use different bases, so never compute both off the same number — that is the most common mistake.

What counts as “wages” for PF and ESI now

The new wage code did not raise any rate. It redefined “wages,” and that single definition flows into both PF and ESI.

• The 50% rule. Under the First Proviso to Section 2(y) of the Code on Wages, 2019, the excluded components (HRA, conveyance, special and other allowances) cannot exceed half of total remuneration. Any excess is added back, so basic plus DA must effectively be at least 50%.
• PF runs on basic + DA. Provident fund is computed on basic plus DA (and any retaining allowance), not on gross. A higher basic raises the PF base.
• ESI runs on gross. Employees’ State Insurance is computed on gross wages, and eligibility is tested on gross too. So the two contributions start from different numbers on the same payslip.
• The base is total remuneration, not CTC. The 50% test is run on all remuneration, with the excluded allowances capped at half of it.

How to calculate PF under the new Wage Code, step by step

Provident fund is mechanical once the base is right.

• Step 1 — Find the PF wage. Take basic plus DA after applying the 50% rule. If basic plus DA is below half of total remuneration, raise it to 50% first.
• Step 2 — Employee share. Deduct 12% of the PF wage from the employee.
• Step 3 — Employer share. The employer also contributes 12% of the PF wage, split into two parts.
• Step 4 — Split the employer 12%. 8.33% goes to the Employees’ Pension Scheme (EPS), capped on the ₹15,000 EPS wage ceiling, so EPS is at most ₹1,250 a month. The remaining 3.67% (or more, above the ceiling) goes to EPF.
• Step 5 — Decide your ceiling policy. You may contribute on the full basic or on the ₹15,000 statutory wage ceiling. Many SMBs use the ceiling, in which case a higher basic does not change the mandated PF — the cost instead shows up in gratuity and ESI. EPF currently earns 8.25% interest for FY 2025-26.

How to calculate ESI under the new Wage Code, step by step

ESI is simpler in arithmetic but stricter on eligibility.

• Step 1 — Test eligibility on gross. ESI applies only to employees whose gross monthly wages are up to ₹21,000 (₹25,000 for persons with disability). Above that, the employee is outside ESI.
• Step 2 — Employee share. Deduct 0.75% of gross wages.
• Step 3 — Employer share. The employer contributes 3.25% of gross wages.
• Step 4 — Mind the contribution period. If an employee is covered at the start of a contribution period and crosses ₹21,000 mid-period, ESI continues until the end of that period. Do not drop them the moment the number changes.

A worked example: PF and ESI on one salary

Treat every figure as illustrative; your structure, ceiling policy, and state rules decide the real numbers.

Take a monthly total remuneration of ₹50,000, restructured so basic plus DA is ₹25,000 (the 50% minimum) and other allowances are ₹25,000.

• Employee PF, on actual basic. 12% of ₹25,000 = ₹3,000 a month.
• Employee PF, on the ₹15,000 ceiling. 12% of ₹15,000 = ₹1,800 a month — the choice of base is the whole difference.
• Employer PF, on actual basic. 12% of ₹25,000 = ₹3,000, of which EPS is 8.33% of ₹15,000 = ₹1,250 and EPF is the remaining ₹1,750.
• ESI. At ₹50,000 gross this employee is above the ₹21,000 limit, so no ESI applies. For a covered employee on, say, ₹20,000 gross, ESI is 0.75% = ₹150 (employee) and 3.25% = ₹650 (employer).

The pattern to remember: PF moves with basic, ESI moves with gross and stops at ₹21,000.

Common PF and ESI calculation mistakes

These are the errors we see most in SMB payroll.

• Using one base for both. PF is on basic plus DA; ESI is on gross. Computing ESI on basic, or PF on gross, is the classic slip.
• Forgetting the EPS cap. The 8.33% pension slice is capped on ₹15,000, not the full basic, so the EPF and EPS split is not a clean 8.33/3.67 above the ceiling.
• Dropping ESI mid-period. Coverage runs to the end of the contribution period even after a raise crosses ₹21,000.
• Leaving basic below 50%. If you have not re-derived basic to the new wage definition, every downstream number is computed off the wrong base.
• Re-keying it by hand. Re-deriving basic, then recomputing PF, EPS, and ESI for every employee each month, is exactly where spreadsheets start producing quiet errors.

Let the system hold the wage base

The arithmetic is simple; doing it correctly for every employee, every month, as ceilings and rates get re-notified, is not. Field HRMS applies the 50% wage definition, re-derives basic, and computes PF, EPS, and ESI on the correct base automatically, so a re-notified threshold updates your payroll instead of breaking it.

For the take-home side of this change, see the new wage code and your team’s take-home pay, and for everything else that changed, our new labour codes compliance checklist. When you want the numbers checked against your real structure, join the Field HRMS waitlist or tell us your headcount and salary structure and we will show you the recomputed figures.

Verified as of June 2026. The Labour Codes are in force but final rules are still being notified, and the 50% threshold, ESI ceiling, EPF rate and interest can change by government notification. Confirm the current position in the Ministry of Labour FAQ on labour.gov.in before acting, and check with your CA where relevant.