When employees receive their salary, the credited amount is typically less than their gross salary, and that difference is not an error. It results from statutory deductions that employers like you are legally required to withhold during payroll processing.
These deductions cover obligations such as income tax, provident fund contributions, and professional tax, depending on the employee’s income and location. They fund national welfare schemes, including pensions, healthcare, and unemployment benefits.
In this blog, you’ll learn what the statutory deductions allowed from an employee’s salary are, how they’re calculated, and what your responsibilities are as an employer to ensure compliance.
Statutory salary deductions refer to mandatory deductions made from an employee’s gross salary, as outlined by government laws. As an employer, you're legally obligated to deduct and remit these amounts, which fund tax collections, retirement schemes, healthcare benefits, and more.
Purpose: Financing Government Programs and Benefits
Support for public healthcare systems: A portion of deductions may go towards health schemes that provide medical cover for employees and their families, especially after retirement or during emergencies.
Contribution to pension and retirement schemes: Deductions like Provident Fund or National Pension Scheme help employees build a retirement corpus, ensuring long-term financial security.
Compliance with income tax obligations: As an employer, you are responsible for deducting income tax (TDS) from your employees' salaries to ensure they are fulfilling their tax obligations in accordance with government regulations.
Funding unemployment and disability benefits: Some deductions contribute to schemes that provide financial support in case of job loss, disability, or workplace injuries.
Impact on an Employee's Gross to Net Pay
Reduces the overall amount credited each month: The deductions are subtracted from your gross salary, directly reducing the amount you receive in your bank account as take-home pay.
Affects monthly budgeting and savings capacity: Since your net salary is what you actually receive, deductions influence how much you can spend or save every month.
Creates variation across employees with similar roles: Two employees with the same gross salary may have different take-home pay depending on their tax declarations, location, or contribution preferences.
Can change based on income and statutory updates: Any salary revision, tax rule change, or policy update can alter your monthly deductions, leading to fluctuations in your net pay.
Now that we've covered what statutory salary deductions are and how they impact your pay, let’s take a closer look at the different types of deductions commonly applied to employee salaries.
Statutory deductions vary across regions, but most follow common categories that fund national welfare, healthcare, and retirement programs. These deductions are fixed or calculated based on income, and employers are legally required to apply them during payroll processing.
1. Income Tax and Its Progressive Calculation
What it is: Income tax is a direct tax imposed on the earnings of an individual, deducted monthly by the employer as Tax Deducted at Source (TDS).
How it works: Your annual salary is projected, and deductions are made based on the applicable tax slab. The more you earn, the higher the percentage you pay, making it a progressive tax system.
Features:
Calculated based on annual income, exemptions (like HRA), and deductions (like 80C, 80D).
Slabs differ depending on the tax regime you choose (old or new in India, for instance).
Deducted monthly but adjusted while filing the tax return on actual earnings and savings declarations.
Benefits: Income tax funds critical public infrastructure, defence, education, and healthcare systems. It also contributes to social and economic development programs.
2. Social Security and Medicare Contributions
What it is: Social security and Medicare contributions are deductions made to ensure financial security during retirement, and access to healthcare, especially in old age.
How it works: A fixed percentage is deducted from the employee’s salary and usually matched by your company. These amounts are deposited into statutory retirement and healthcare funds.
Features:
In India, the Employee Provident Fund (EPF) and Employees’ State Insurance Corporation (ESIC) are classic examples—both employer and employee contribute 12% of basic salary.
These contributions may be capped after a certain income level.
Benefits: Secures post-retirement income, disability protection, and access to subsidised or free healthcare later in life.
Example: If your basic salary is ₹15,000, ₹1800 (12%) would be deducted monthly towards EPF, with your employer contributing an additional ₹1800.
3. State and Local Taxes
What it is: Additional taxes levied by state governments or local municipalities to fund regional services.
How it works: These taxes may be fixed or calculated as a percentage of your salary. Not all states impose them, and rates vary widely.
Features:
In India, this typically includes Professional Tax (levied by certain states), which is capped and based on salary slabs.
Employees working in multiple states or cities may be subject to more than one local tax.
Benefits: Supports local infrastructure, sanitation, transport, water supply, and emergency services.
Example: In Karnataka, an employee earning above ₹26,000/month pays ₹200 as professional tax each month.
4. Workers’ Compensation Insurance
What it is: A form of insurance that covers employees in case of workplace injuries or illnesses, ensuring medical and wage benefits.
How it works: Typically funded by the employer.
Features:
Covers medical bills, lost wages, and rehabilitation costs after a work-related accident.
Mandatory for most industries, particularly those involving physical or hazardous work.
Benefits: Ensures that injured employees don’t suffer financial hardship and can recover without worrying about medical expenses.
Example: Contribution varies with the employer contributions
5. Pension Contributions
What it is: Mandatory retirement savings deducted from salaries to build a fund for post-retirement life.
How it works: A percentage of your salary is deducted and deposited into a pension account, which matures or provides regular payments after retirement.
Features:
In India, EPS (Employee Pension Scheme) is part of the EPF, where 8.33% of the employer’s share goes towards pension.
Contributions may be eligible for tax deductions under sections like 80CCD.
Benefits: Creates long-term financial stability after you stop working. Helps reduce reliance on children or government pensions in old age.
Example: An employee whose basic pay is ₹15,000 will have ₹1,200 contributed by the employer towards EPS every month.
Understanding these different types of statutory deductions not only helps you read your payslip with confidence but also allows you to make informed financial decisions and plan better for taxes, retirement, and healthcare needs.
Statutory deductions are calculated based on a combination of your gross salary, government-mandated rates, and applicable exemptions or limits. While some deductions are fixed percentages, others depend on your income level, job location, or employer classification. Understanding how each deduction is computed helps you anticipate how much will be subtracted from your salary each month.
Income Tax (TDS):
Calculated based on your projected annual income and applicable tax slab. Deductions like HRA, 80C (investments), and 80D (medical insurance) reduce your taxable income. Employers use these declarations to estimate and deduct tax monthly through TDS.Social Security & Medicare (or EPF & ESI in India):
Contributions are based on a fixed percentage of your basic salary. For example, 12% of basic pay goes to EPF in India, and both employee and employer contribute equally. For ESI, deductions apply if your gross salary is within a defined threshold.State/Local Taxes (e.g., Professional Tax):
Deducted at flat monthly rates based on your salary bracket and state regulations. These are not percentage-based but fixed slabs (e.g., ₹200/month if your salary exceeds ₹15,000 in some Indian states).Pension Contributions:
Generally calculated as a percentage of salary, either deducted from employee salary or allocated from the employer’s share (e.g., 8.33% of ₹15,000 to EPS in India). Contribution caps may apply.
By understanding how each deduction is calculated, you can better manage your finances, spot discrepancies in your payslip, and ensure you're meeting your tax and social security obligations correctly.
Deductions from your salary can be divided into two main categories—statutory and voluntary. Statutory deductions are mandated by law and must be made by every employer, while voluntary deductions are optional and made only with your consent.
Knowing the difference helps you understand which parts of your salary are legally required and which are based on personal or employer-driven choices.
Aspect | Statutory Deductions | Voluntary Deductions |
Mandate | Legally required by government or regulatory bodies | Optional; based on employee's consent |
Examples | Income tax (TDS), EPF, ESI, professional tax | Health insurance premiums, voluntary provident fund (VPF), and donations |
Employee Consent Needed | No | Yes |
Applicable to All | Yes, based on eligibility criteria and income threshold | No, only if you opt in |
Purpose | To comply with legal and tax obligations | To access additional benefits or savings plans |
Changes Allowed | Only if the government updates laws or thresholds | Can be modified or discontinued by an employee at any time |
Recognising the difference between mandatory and optional deductions empowers you to take control of your payslip, make informed financial decisions, and optimise your salary structure.
Employers like you are legally responsible for correctly calculating, deducting, and remitting statutory deductions from employee salaries. Payroll teams must ensure full compliance with government regulations while also maintaining transparency and accuracy in employee communications.
Ensure Legal Compliance: You must stay updated with the latest statutory deduction laws, thresholds, and contribution rates. Failing to comply can lead to legal penalties, audits, or interest on delayed payments.
Accurate Deduction and Timely Remittance: Payroll must calculate the correct amount for each statutory deduction based on employee income and applicable rules, and ensure timely deposit to government departments (e.g., EPF, ESI, TDS).
Maintain Clear Records: All deduction records must be well-documented and stored securely for audit purposes. This includes payslips, tax forms (like Form 16 or Form 24Q in India), and remittance challans.
Transparent Employee Communication: Deductions must be clearly reflected on employee payslips. You should be available to explain the purpose of each deduction and assist employees with queries related to tax declarations or benefits.
Use of Payroll Software or Systems: Most companies use payroll software to automate calculations, reduce human error, and stay compliant. These systems can also generate payslips, tax reports, and help in filing statutory returns.
By fulfilling these responsibilities, you are not only staying compliant with the law but also building trust with employees by ensuring their pay is accurate, transparent, and legally sound.
To better understand how statutory deductions work in practice, let’s look at some everyday payroll situations. These examples show how different deductions apply based on factors like income level, job location, and employment type.
Income Tax Deduction (TDS): A salaried employee earning ₹13 lakh annually will have monthly TDS deducted based on applicable tax slabs. If they invest under Section 80C, the tax liability is reduced, and the deduction amount is adjusted in payroll.
Provident Fund Contribution (EPF – India): An employee with a basic salary of ₹15,000 will have ₹18,00 (12%) deducted monthly toward EPF. The employer also contributes ₹18,00, with a portion going to the pension fund.
Professional Tax (State-specific): In Karnataka, an employee earning more than ₹26,000 a month will have ₹200 deducted monthly as professional tax, which goes to the state government.
ESI Deduction (For Low-Income Salaries): An employee earning ₹18,000 per month is eligible for ESI. 0.75% (₹135) is deducted from the employee, and 3.25% (₹585) is contributed by the employer, providing access to subsidised healthcare.
These real-life scenarios highlight how statutory deductions are applied across different roles and regions, helping you understand what gets deducted from your salary and why it matters for long-term financial and social security.
Statutory salary deductions may feel like a financial burden at first glance, but they play a vital role in supporting national welfare systems and securing your financial future. From tax compliance and pension savings to healthcare and unemployment support, these deductions ensure that employees contribute to and benefit from essential government programs.
Understanding what gets deducted, why it’s deducted, and how it’s calculated gives you better control over your finances and helps avoid surprises in your take-home pay.
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1. What are the statutory deductions allowed from an employee’s salary?
Statutory deductions include mandatory contributions such as income tax (TDS), provident fund (EPF), employee state insurance (ESI), professional tax, and other region- or industry-specific deductions. These are legally required and deducted automatically from your gross salary.
2. Can I opt out of statutory deductions?
No, statutory deductions are mandatory under law. If you fall within the applicable salary or eligibility threshold, these deductions must be made. Only certain voluntary contributions, like additional retirement savings or insurance premiums, are optional.
3. Why is my take-home salary less than my gross salary?
Your take-home salary is reduced due to statutory deductions like income tax, EPF, and professional tax. These deductions ensure compliance with tax laws and contribute to your long-term financial benefits, such as pensions and healthcare.
4. Are statutory deductions the same for every employee?
Not necessarily. While some deductions are standard, others vary based on your salary, location, and applicable laws. For example, professional tax rates differ from state to state, and ESI applies only if your salary is below a certain threshold.
5. Where can I check the details of deductions made from my salary?
You can find a detailed breakdown of your deductions in your monthly payslip. If you need further clarification, you can also consult your HR or payroll department for a year-wise summary or tax form (like Form 16 in India).
