Provident Fund, ESI and Gratuity: Rates, Ceilings and the Transition
Three contributions, three different bases, and three different answers to the question of what the new definition of wages does to them. Provident fund is capped, so the increase in the wage base mostly does not reach it. Employees' state insurance is capped too, at a different number. Gratuity is not capped at all, which is why it is the expensive one.
- Provident fund rates, the split between the fund and the pension scheme, and the ceiling's rise to ₹25,000 on 17 September 2026
- Employees' state insurance rates, ceilings and the new registration timing
- Gratuity, including the one-year entitlement for fixed-term employees
- What the fifty per cent rule does to each of the three
Rates, the ceiling, and the statute the numbers sit under
The 1952 provident fund statute was repealed, but not on the date most summaries give: that part of the repeal list was commenced in May 2023, which is why it is absent from the November 2025 notification. Guide 1 sets out how that reads on the face of the notifications. What matters here is the consequence. Prospective obligations run under Chapter III of the Code on Social Security and the 2026 schemes made under it, and the 1952 Act is now relevant only to rights, liabilities, defaults and proceedings belonging to the earlier period.
| Item | Position in August 2026 |
|---|---|
| Employee contribution | 12 per cent of wages. |
| Employer contribution | 12 per cent of wages. A reduced rate of 10 per cent continues for notified classes, including establishments under insolvency and the jute, beedi, brick, coir other than spinning, and guar gum industries. |
| Split of the employer share | 8.33 per cent of wages to the pension scheme, restricted to the notified wage ceiling, and the balance credited to the provident fund. At the ₹25,000 ceiling that is about ₹2,083 to pension and about ₹917, or 3.67 per cent, to the fund; at the former ₹15,000 it was ₹1,250 and ₹550. The 3.67 per cent is not a universal figure: it does not hold where contributions are made above the ceiling, or where the higher pension provisions apply. Deposit-linked insurance and administrative charges are borne separately by the employer. |
| Deposit-linked insurance | 0.5 per cent, employer only, no employee share. |
| Monthly wage ceiling | ₹25,000 a month with effect from 17 September 2026, notified as S.O. 5109(E) of that date for Chapter III of the Code on Social Security. It supersedes S.O. 2702(E) of 29 May 2026 and the ₹15,000 ceiling that carried. The Union Cabinet approved the increase on 16 September 2026 and the notification followed the next day, taking effect on publication rather than on a later appointed date. The history matters because it explains why so much published material still says ₹15,000: on 5 January 2026 the Supreme Court directed the Central Government and the retirement fund body to decide a representation seeking revision within four months, and that decision was retention, notified as S.O. 2702(E). It held for less than four months. S.O. 2701(E) of the same date is a different notification, on inspection charges for exempted establishments, and is sometimes cited for the ceiling by mistake. The consequential amendments to the provident fund, pension and deposit-linked insurance schemes had not been located as at 23 September 2026, so confirm those before running a payroll on the new figure. |
| Applicability | Twenty or more employees. |
| Contribution base | Wages as defined in section 2(88) of the Code on Social Security, including the fifty per cent deemed add-back, rather than the basic wages, dearness allowance and retaining allowance base of section 6 of the 1952 Act. Subject to the notified ceiling and to any provision for contributing above it. |
| Identifiers | Aadhaar-seeded bank account, permanent account number and universal account number are effectively preconditions for membership, claims and incentive disbursement. Aadhaar-based identification has been in force under the Code on Social Security since 3 May 2021. |
Rates, ceilings and a new registration deadline
| Item | Position in August 2026 |
|---|---|
| Monthly wage ceiling | ₹21,000, confirmed as continuing in the Ministry's own frequently asked questions of 16 March 2026. ₹25,000 for employees with disability. Proposals to raise the general ceiling to ₹25,000 or ₹30,000 are proposals and have not been notified. |
| Employer contribution | 3.25 per cent of gross wages. |
| Employee contribution | 0.75 per cent of gross wages. Employees on average daily wages up to ₹176 are exempt from the employee share; the employer share is still payable. |
| Applicability | Ten or more persons, or one or more for hazardous occupations. Coverage is now pan-India, and establishments below ten may opt in voluntarily. |
| Contribution periods | 1 April to 30 September and 1 October to 31 March, with benefit periods lagging by six months. |
| Payment | By the fifteenth of the following month. |
| Registration | Rule 18(1) of the Social Security (Central) Rules 2026 requires the employer to register every employee eligible for employees' state insurance on the prescribed portal on or before the employee's date of joining. For an employer used to registering in a monthly batch that is a process change, not a timing preference. |
| Statutory basis | Transitional, and this is the row to diarise. Neither ₹21,000 nor the ₹25,000 disability figure has been freshly prescribed under Chapter IV of the Code or under the Social Security (Central) Rules 2026. Both continue under rule 50 of the Employees' State Insurance (Central) Rules 1950, read with the transitional saving in section 164(2)(b) of the Code, and that saving runs out on 20 November 2026 unless it is extended or the rules are remade under the Code. |
The uncapped one, and the change for fixed-term staff
Gratuity is now governed by section 53 of the Code on Social Security. The general rule survives: five years of continuous service, on superannuation, retirement, resignation, death or disablement, with the five-year requirement waived on death or disablement. The rate survives too: fifteen days' wages for each completed year, on last drawn wages, with service of one year plus six months or more rounding up to an additional year under the 2026 central rules.
Two things did change, and both cost money.
Fixed-term employees qualify at one year
The Ministry's guidance is explicit: a fixed-term employee is eligible for gratuity after rendering service under the contract for one year, payable pro rata. Working journalists have a three-year rule. For any employer that has used fixed-term contracts precisely to avoid a gratuity accrual, that strategy has stopped working, and the accrual starts from a much earlier point in each engagement.
The wage base moved, and gratuity has no ceiling
Gratuity is computed on last drawn wages under the new definition, applied prospectively from 21 November 2025. Unlike provident fund and employees' state insurance, there is no wage ceiling to absorb the increase. Where the fifty per cent rule pushes the statutory wage base up, gratuity absorbs the whole of it. If you carry an actuarial valuation, this is the assumption that needs rebasing.
On the tax side, the exemption ceiling is ₹20 lakh, and it is a lifetime aggregate across all employers rather than a per-employment figure. Under the Income-tax Act 2025 it sits in section 19, broadly corresponding to section 10(10) of the 1961 Act: the Table to section 19(1) covers gratuity under the gratuity legislation at serial number 5 and other employee gratuity at serial number 6, and section 19(2)(a) reduces the limit available by gratuity from earlier employers or earlier tax years that has already had the benefit. The Finance Act 2026 did not raise the ₹20 lakh figure.
Section 57 of the Code on Social Security provides for compulsory insurance of gratuity liability by non-government employers, with an alternative for a qualifying approved gratuity fund. It takes effect from a date notified by the appropriate government, and no general central date has been notified. That does not make it a purely future problem: state-specific compulsory insurance requirements already apply in some states, including Karnataka and Andhra Pradesh, so check the state before assuming there is nothing to do.
Where the wage base actually lands
| Benefit | Ceiling | Effect of the fifty per cent rule |
|---|---|---|
| Provident fund | ₹25,000 per month from 17 September 2026 | Limited. Cost rises only where the statutory wage base was previously below the ceiling. For most salaried staff above the ceiling, nothing changes. |
| Employees' state insurance | ₹21,000 per month | Limited, for the same reason, and the population inside the ceiling is different from the provident fund population. |
| Gratuity | None | Full. The entire increase in the wage base flows through, and it compounds with the fixed-term entitlement change. |
| Leave encashment | None on the computation | Full. Under the Ministry's March 2026 guidance carry-forward is capped at thirty days but encashment is not statutorily capped. |
| Statutory bonus | Ceiling not settled | Uncertain, and dependent on the open bonus ceiling question in guide 1. |
| Overtime | None | Full, and the population is wider than most employers assume, because the Ministry reads it as extending to everyone for whom a minimum wage is fixed. |
Where to go next
Payroll Services
Back to the main payroll page: who we work with, how an engagement is put together, and how to reach us.
What the Labour Codes Did to Your Payroll
The commencement notifications read properly, the new statutory definition of wages and the fifty per cent rule, which Acts were actually repealed, and why the provident fund repeal is dated earlier than the rest.
Salary TDS Under the Income-tax Act 2025
Two Acts running at once, the new section numbers, the slab and rebate position for FY 2025-26 and tax year 2026-27, the renumbered forms, and the quarterly calendar a payroll team has to work to.
Running Payroll Across States: Registrations, Professional Tax and Minimum Wages
Why a single national payroll process still breaks at the state line: the uneven rollout of state rules under the Codes, professional tax by state, minimum wage computation, and the registers and returns that stayed local.
Cross-border Payroll: International Workers and Social Security Agreements
Provident fund for international workers and the litigation hanging over it, the twenty operational social security agreements, certificates of coverage, and the India and United Kingdom agreement, in force since 15 July 2026.
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The useful first conversation here is usually about gratuity: what your accrual looks like once the wage base is rebased and fixed-term staff start accruing at one year. We can model it from your existing payroll file.
This page is general information, not professional advice. Indian payroll law changed more between November 2025 and June 2026 than in the twenty years before it. The four Labour Codes commenced on 21 November 2025, central rules under them followed in May 2026, and the Income-tax Act 2025 replaced the 1961 Act on 1 April 2026. State rules under the Codes are still being notified and differ by state, so the correct answer for one employer is not automatically the correct answer for another. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.