Quick answer: Payroll penalties in India come from five places. PF and ESI: 12% a year interest plus damages for late deposit, and imprisonment of 1 to 3 years if the employee's share is deducted and not paid. TDS: interest of 1% or 1.5% a month, a ₹200-a-day fee for late returns, a penalty equal to the tax not deducted, and prosecution for non-deposit. Professional tax: State interest, penalty and late fees. Wages: fines up to ₹50,000 for underpaying (more on repeat), up to ten times the shortfall as compensation, and up to ₹10,000 for missing records.
Most payroll penalties are not one-off fines but running costs: interest that grows every month a deposit is late, damages that step up with the delay, and fees that accrue daily. A few defaults, especially keeping an employee's PF, ESI or TDS after deducting it from their salary, are criminal offences. This guide brings the penalties under each payroll law into one reference, with the current rates, how they are worked out and how to limit them. For due dates and how to pay, see the individual challan guides linked in each section.
Payroll penalties at a glance
| Default | Interest / fee | Penalty / damages | Prosecution |
|---|---|---|---|
| Late PF deposit | 12% a year simple (s.127, Code on Social Security) | Damages 0.25%–1% a month by length of delay (s.128) | If employee share deducted and not paid (s.133) |
| Late PF return | Late fee ₹500 a day, subject to a cap | — | — |
| Late ESI deposit | 12% a year simple | Damages under the ESI regulations | If employee share deducted and not paid (s.133) |
| TDS not deducted | 1% a month (s.398) | Equal to the tax not deducted (s.448) | — |
| TDS deducted, deposited late | 1.5% a month (s.398) | — | If not paid by the TDS return due date (s.476) |
| TDS return (Form 138) late | ₹200 a day, capped at the TDS (s.427) | ₹10,000–₹1,00,000 (s.461) | — |
| Professional tax late | State-prescribed interest | State penalty and late return fee | State law |
| Wages below the minimum or unpaid | — | Fine up to ₹50,000; compensation up to 10× to the employee | Imprisonment only on repeat within 5 years |
| Registers not kept | — | Fine up to ₹10,000 (s.54(2), Code on Wages) | — |
Section numbers for PF and ESI are from the Code on Social Security, 2020 and for TDS from the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026 (the old equivalents are 7Q, 14B, 201(1A), 234E, 271C, 271H and 276B).
PF penalties: interest, damages and prosecution
PF contributions and admin charges are due within 15 days of the end of the wage month, with no grace period (see our PF challan due date guide). If you pay late:
- Interest (section 127, earlier 7Q): 12% a year simple interest from the due date to the date of payment, notified in May 2026 with effect from 21 November 2025.
- Damages (section 128, earlier 14B): levied after a hearing and capped at the arrears. Under the EPF Scheme, 2026 (from 29 June 2026) the rate depends on the length of delay: 0.25% a month for delays under two months, 0.50% a month for two to under four months and 1% a month for four months or more (Khaitan & Co on the EPF Scheme, 2026). For June 2024 to June 2026 the rate was a flat 1% a month, and earlier periods used the old 5%–25% a year slabs.
- Late return fee: ₹500 for each day a return is late, subject to a cap.
- Prosecution (section 133): deducting the employee's share from wages and not paying it is punishable with imprisonment of one to three years and a fine of ₹1 lakh (the court may impose a shorter term for special reasons); repeat offences carry heavier punishment.
Example: PF paid one month late
An employer's total PF dues for October 2026 are ₹1,00,000, due by 15 November. They are paid on 15 December, 30 days late. Interest is ₹1,00,000 × 12% × 30 ÷ 365 = ₹986. The delay is under two months, so damages at 0.25% for one month are ₹250. Total cost of the delay: about ₹1,236. Had the same dues been paid five months late, damages alone would be 1% a month, or ₹5,000, plus about ₹5,000 of interest.
Relief: the EPFO's VISHWAS scheme lets employers settle pending damages cases for defaults before 14 June 2024 at reduced rates; it is open until 28 December 2026. Details are in our PF payroll guide.
ESI penalties
ESI contributions are due by the 15th of the following month (see ESIC challan due date). Late payment attracts 12% a year simple interest, notified in May 2026 with effect from 21 November 2025. Damages are levied under the ESI regulations: under the 1950 regulations they rise with delay from 5% a year (under two months) to 10%, 15% and 25% a year (six months or more). The 1950 regulations are continued by the Code's saving clause for one year from 21 November 2025, that is, up to 20 November 2026; draft ESI regulations of 2026 propose a flat 1% a month but were not final at the time of writing, so check the position for defaults after that date. The section 133 offence also covers ESI deducted and not paid. ESIC's amnesty scheme for pending disputes runs until 31 December 2026; see our ESI payroll guide.
TDS on salary penalties
TDS deducted from salary must be deposited by the 7th of the following month (30 April for March). Under the Income-tax Act, 2025:
- Not deducted: the employer is an assessee in default for the tax, pays interest at 1% a month or part of a month from the date it should have been deducted to the date it is deducted (section 398), and may face a penalty equal to the tax not deducted (section 448, earlier 271C).
- Deducted but deposited late: interest at 1.5% a month or part of a month from the date of deduction to the date of deposit (section 398). Interest must be paid before the TDS return is filed.
- Not deposited at all: rigorous imprisonment of three months to seven years with fine under section 476 (earlier 276B) (TDSMAN on section 476). This does not apply if the TDS is paid on or before the due date for filing the TDS statement.
- Late TDS return: a fee of ₹200 a day, capped at the TDS amount (section 427, earlier 234E), and a penalty of ₹10,000 to ₹1,00,000 (section 461, earlier 271H), which is not levied if tax, fee and interest are paid and the return is filed within one month of the due date.
Form 138 filing and Form 130 certificates are covered in our TDS return guide, and the deduction itself in TDS on salary.
Professional tax penalties
Professional tax is a State levy, so the penalties are set by each State's Act. In Maharashtra, for example, late payment attracts simple interest at the prescribed rate for each month or part of a month (section 9), the authority may impose a penalty of 10% of the tax after a hearing, and a late return carries a fee of ₹200 if filed within 30 days and ₹1,000 after that. Late registration or enrolment also attracts penalties. Check your State's rules in our professional tax guide.
Wage penalties under the Code on Wages
The Code on Wages, 2019 covers minimum wages, timely payment, deductions, overtime and bonus. Under section 54 (text of section 54):
- Paying less than the amount due (below minimum wage, unpaid overtime or bonus, unauthorised deductions): fine up to ₹50,000; a repeat within five years: imprisonment up to three months, fine up to ₹1 lakh, or both.
- Any other contravention of the Code or rules (for example, late payment of wages or no wage slips): fine up to ₹20,000; a repeat: imprisonment up to one month, fine up to ₹40,000, or both.
- Records not kept or kept improperly: fine up to ₹10,000 (section 54(2)). See statutory registers.
For 'other' contraventions and record-keeping lapses (not underpayment), the Inspector-cum-Facilitator must first give a written direction and time to comply; if you comply, there is no prosecution unless the same violation is repeated within five years, and most offences can be compounded by paying half the maximum fine. The bigger exposure is usually the employee's claim: under section 45 the authority can order payment of the shortfall plus compensation of up to ten times the amount. Example: underpaying a worker ₹2,000 a month for 12 months creates a claim of ₹24,000 and possible compensation of up to ₹2,40,000, in addition to any fine. Check rates in our State minimum wages tracker and the timelines in salary payment rules.
Gratuity, bonus and welfare fund
- Gratuity: if not paid within the time allowed, simple interest is payable for the delay under the Code on Social Security; see our gratuity guide.
- Bonus: statutory bonus is now under the Code on Wages, so non-payment falls under the section 54 fines above.
- Labour welfare fund: State Acts prescribe interest and penalties for late contribution; use our LWF calculator to check amounts.
How to pay payroll penalties online
PF interest and damages are paid through the EPFO employer portal with the ECR and challan (TRRN) once assessed; ESI interest and damages through the ESIC employer portal; TDS interest and the late filing fee through the income-tax e-Pay Tax service (and must be included before the TDS statement is filed); and professional tax interest and penalty through the State's tax portal, such as MahaGST in Maharashtra. Step-by-step payment is covered in our PF ECR guide and the PF and ESIC challan guides linked above.
The hidden cost: income-tax disallowance
Late statutory deposits can also cost you a tax deduction. Following the Supreme Court's ruling in Checkmate Services (2022), the employees' share of PF and ESI deposited after the due date under the PF or ESI law has been disallowed as a deduction, so it is taxed as the employer's income, and tribunals have continued to apply this for earlier years. Section 29(1)(e) of the Income-tax Act, 2025 allows the deduction if the employee share is deposited by the due date of filing the return, and tribunals have treated this as applying only from the new Act's commencement. Interest on late TDS is not deductible. Whether PF and ESI interest and damages are deductible is disputed; get advice before claiming them.
How to avoid payroll penalties
- Calendar every due date: TDS by the 7th, PF and ESI by the 15th, PT and LWF as per State, returns as scheduled. Use our payroll compliance calendar.
- Pay first, fix later: deposit on time even if a return needs a supplementary or revised filing afterwards.
- Reconcile monthly: payroll deductions must equal PF ECR, ESI contribution and TDS challans.
- Check wage floors twice a year: minimum wage revisions in April and October change the floor overnight.
- Keep registers and wage slips: they are your defence in any inspection or claim.
- Respond to notices on time: a written direction to comply is your chance to avoid prosecution.
- Use relief windows: VISHWAS for PF damages (to 28 December 2026) and the ESIC amnesty (to 31 December 2026).
For the full list of obligations, see our payroll compliance guide and payroll deductions list.
Stay ahead of every payroll deadline. The Practical Payroll Management e-Book covers PF, ESI, PT, TDS and the Labour Codes with due dates, worked examples and checklists.
Frequently asked questions
What is the penalty for late payroll remittance?
It depends on the deduction. Late PF attracts 12% a year simple interest plus damages (0.25%, 0.50% or 1% a month depending on the length of delay, under the EPF Scheme, 2026). Late ESI attracts 12% interest plus damages under the ESI regulations. Late TDS attracts interest of 1.5% a month or part of a month from deduction to deposit. Late professional tax attracts interest and penalty under the State's PT law.
What happens if an employer deducts PF or ESI but does not deposit it?
Apart from interest and damages, it is a criminal offence. Under section 133 of the Code on Social Security, 2020, an employer who deducts the employee's contribution from wages and does not pay it is punishable with imprisonment of one to three years and a fine of one lakh rupees (the court may impose a shorter term for special reasons). In income tax, the employee share deposited after the due date has also been disallowed as a business deduction.
What is the penalty for not deducting TDS on salary?
The employer is treated as an assessee in default for the tax not deducted, pays interest of 1% a month from the date it should have been deducted, and can face a penalty equal to the tax not deducted under section 448 of the Income-tax Act, 2025. Deducting but not depositing can lead to prosecution under section 476.
What is the penalty for paying less than the minimum wage?
Under section 54 of the Code on Wages, 2019, paying less than the amount due is punishable with a fine of up to 50,000 rupees, and a repeat within five years with imprisonment of up to three months, a fine of up to one lakh rupees, or both. The employee can also claim the shortfall with compensation of up to ten times the amount under section 45.
Are PF damages and TDS interest tax deductible?
Interest on late TDS is not deductible, because it relates to income tax. Whether PF or ESI interest and damages are deductible depends on whether they are treated as compensatory or penal, and tribunals have reached different conclusions, so take advice. Separately, the employees' share of PF or ESI deposited after the statutory due date has been disallowed for earlier years following the Supreme Court's Checkmate Services ruling.
How can an employer reduce payroll penalties?
Pay every challan by its due date even if returns need correction later, reconcile payroll with PF, ESI and TDS every month, keep statutory registers, respond to inspector directions within the time given, and use relief schemes where available, such as the EPFO VISHWAS scheme for PF damages and the ESIC amnesty scheme for disputes.
Position as of 15 November 2026. Based on the Code on Social Security, 2020 (sections 127, 128 and 133) and the EPF Scheme, 2026; the ESI (General) Regulations, 1950 as continued; the Income-tax Act, 2025 (sections 29, 398, 427, 448, 461 and 476); the Code on Wages, 2019 (sections 45, 54 and 56); and the Maharashtra professional tax law as an example. Penalties under State laws vary. General information, not legal or tax advice.