Understanding PF, PSI, and TDS Calculations: How Do You Determine the Right Percentages for Employees?

To calculate the PF, PSI, and TDS percentages for the employees, you will need to follow specific steps depending on your company's policies and the applicable regulations.

For Provident Fund (PF), you typically calculate a percentage of the employee's basic salary and dearness allowance. The exact percentage can vary based on the regulations and the company's policies.

Professional Tax (PT) or State Insurance (SI) deductions are usually calculated as per the state-specific rates and the employee's salary bracket.

Regarding Tax Deducted at Source (TDS), the percentage deducted depends on the employee's total income, investments, and tax-saving declarations.

It is crucial to consult with your company's finance or HR department to ensure accurate calculations and compliance with the relevant laws.

Hi, Shruthi.

PF is calculated on the basic salary, i.e., 12% from the employee.
TDS Basic tax is 30%.
Surcharge charge is 10% on Basic tax.
Education Cess is 3% on 33%.
The total is 33.99%.

INCOME TAX SLAB
Up to Rs 160,000: Nil
Rs 160,000 - Rs 3,00,000: 10%
Rs 3,00,000 - Rs 5,00,000: 20%
Rs 5,00,000 and above: 30%
Add 3% Education Cess on it.

Thank you for your reply. I also want to know about ESI calculation and its percentage. What calculations will be included in the salary slip that HR prepares for a new employee? I want to be able to do this myself, so please inform me on how to prepare the salary breakup, which should include PF, ESI, and TDS.

You may check this payroll resources to get a better understanding of ESI, PF, PT, and TDS.

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Hi,

ESIC is deducted from the employee's salary at 1.75% of the gross salary, and the employer's share is 4.75%. PF is 12% of the basic salary. TDS is applicable if the income falls under the tax deduction slab. PT is applicable based on the state's slab. Which state data do you require? Hope this information helps.

Nisha

Hi Shreekumar.j,

The link you mentioned was very informative. I want to know one thing: is there a particular percentage that should be taken as a basic amount? For example, if the gross is 6000, what is the minimum proportion that should be considered as basic?

Nisha

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Dear,

The question of "If gross is X, how much proportion should be taken as Basic pay?" has been a common query on this forum. I suggest searching CiteHR for answers to your question.

To address the root of the issue, such situations arise because HR departments, especially in 'baniya/lalaji' companies, tend to fix the Gross salary first. Ideally, it should be the other way around. Basic pay, as indicated by its name, should be fixed first, as all other calculations, including perks, stem from it. Totaling the various components should then give you the Gross salary.

However, the prevailing practice, often initiated by inexperienced HR professionals, is to determine the Gross Salary first and then backtrack to 'guess-estimate' the Basic Pay. This approach is unprofessional, arbitrary, and not standard in dealing with compensation matters, and it reflects poorly on the company's practices.

Good companies typically avoid such practices.

Warm regards.

Hi, as per my knowledge, PF is deducted from the basic salary (50% of the gross salary), with 12% deducted from the employee's side and 13.61% from the employer's side. ESIC deducts 1.75% from the employee's side and 4.75% from the employer's side, and it is deducted from the gross salary.

**Note: It is to be noted that where the basic salary of the employee exceeds Rs. 6,500 per month, the minimum contribution payable by the employer and employee will be limited to the amount payable on Rs. 6,500 only. For ESIC, every employee drawing a gross salary up to Rs. 10,000 per month - above 10k, ESIC is not deducted.

If the gross salary is above 20,000, then we have to deduct TDS. As per government rates, it is 10.3%.

Dear Sonali,

Thanks for asking; I appreciate your curiosity and your desire to learn.

I have already answered this on a number of threads. If you can take the time to search CiteHR, you'll find it. Otherwise, feel free to send me a private message.

To briefly point out here:

Every good organization has a salary structure and compensation model (rather than an ad-hoc system), wherein new employees are placed based on their qualifications, experience, and the value they bring to the organization. New entrants should be offered compensation that aligns with industry norms and maintains internal equilibrium.

The salary structure is based on grades (or bands) created according to job responsibilities and span of control.

Each grade consists of a series of basic pay levels separated by fixed or incrementally varying amounts called increments.

Additional benefits stem from the basic pay and the grade.

For example, car allowance is provided after reaching a certain grade, while before that, there might be a two-wheeler allowance or a fixed conveyance allowance.

I hope this has provided you with some insight into Compensation and Benefits Management, a specialized field you may have seen in job advertisements seeking experts/specialists, as it plays a crucial role in employee retention.

Warm regards.