Three items on your salary structure confuse almost every fresher: Provident Fund (PF), Gratuity and Professional Tax (PT). Two of them are savings that belong to you (PF fully, gratuity once you qualify). The third is a small state tax.
This guide explains each one with numbers, using the rules in force in October 2026. Note that the four Labour Codes took effect on 21 November 2025. PF and gratuity now fall under the Code on Social Security, 2020, though the existing EPF schemes and the familiar gratuity formula continue.
1) Employees' Provident Fund (EPF)
EPF is a retirement savings scheme run by the Employees' Provident Fund Organisation (EPFO). Your account is linked to a Universal Account Number (UAN) that stays with you across jobs.
How much goes in
- You: 12% of your PF wages (Basic + DA) is deducted from your salary every month.
- Your employer: Also pays 12%, on top of your salary. This is part of your CTC.
The wage ceiling (changed in September 2026)
PF is mandatory on wages up to a statutory wage ceiling. This ceiling was raised from ₹15,000 to ₹25,000 a month with effect from 17 September 2026, the first revision since 2014. Contributions on wages above the ceiling are voluntary for both employer and employee. Some companies contribute on your full Basic by policy; others stop at the ceiling.
Where the employer's 12% goes
The employer's share is split:
- 8.33% to the Employees' Pension Scheme (EPS), calculated only on wages up to the ceiling. With the ₹25,000 ceiling, the EPS maximum is about ₹2,083 a month (it was ₹1,250 on the ₹15,000 ceiling).
- The rest (3.67% of wages up to the ceiling, plus any amount above) goes to your EPF account.
EPS money builds a monthly pension (from age 58, subject to minimum service), not a lump sum you can withdraw freely.
Worked example: Basic ₹30,000 a month
| PF on full Basic | PF only on ₹25,000 ceiling | |
|---|---|---|
| Your contribution (12%) | ₹3,600 | ₹3,000 |
| Employer total (12%) | ₹3,600 | ₹3,000 |
| – of which to EPS (8.33% of ₹25,000) | ₹2,083 | ₹2,083 |
| – of which to EPF | ₹1,517 | ₹917 |
| Total into your EPF account each month | ₹5,117 | ₹3,917 |
Interest and tax
- EPFO declared 8.25% interest for 2025-26, the same rate as the previous two years. The rate is set every year, so it is not guaranteed.
- Interest on your own contributions above ₹2.5 lakh a year is taxable. At fresher salaries you will not hit this.
- If you withdraw PF before five years of continuous service, the withdrawal is generally taxable (with TDS above ₹50,000), except in cases such as ill-health or the employer's business closing. Service with previous employers counts if you transfer your PF rather than withdraw it. So transfer, do not withdraw, when you change jobs.
- In the old tax regime, your own contribution counts towards the ₹1.5 lakh 80C limit. It gives no tax benefit in the new regime.
Can you opt out?
Only if you have never been an EPF member before and your PF wages exceed the wage ceiling when you join your first job. This is declared in Form 11. Once you have contributed, you cannot opt out at later jobs. Many employers make PF compulsory regardless.
2) Gratuity
Gratuity is a lump sum your employer pays when you leave, retire, or in case of death or disablement. You do not contribute anything from your salary.
Who is eligible
- Permanent employees: at least five years of continuous service. This condition does not apply on death or disablement.
- Fixed-term employees: under the Code on Social Security, eligible after one year of continuous service.
- The "4 years and 240 days" question: Some High Courts (including Madras and Kerala) have held that working at least 240 days in the fifth year counts as completing five years. This is a court interpretation, not a written rule, and employers do not all apply it. If you are close to five years, check with HR in writing before you resign.
The formula
For employees covered by the law:
Gratuity = 15 × (last drawn monthly Basic + DA) × completed years of service ÷ 26
- 15 = 15 days' wages for every year of service
- 26 = working days in a month
- Years of service: a part year of more than six months is rounded up to a full year; six months or less is ignored.
Under the Labour Codes, gratuity is based on "wages". If your allowances are more than 50% of your total pay, the excess is added to wages for this calculation, which can raise your gratuity.
Worked example 1: permanent employee
- Last drawn Basic + DA: ₹60,000 a month
- Service: 7 years 8 months → counts as 8 years
- Gratuity = 15 × ₹60,000 × 8 ÷ 26 = ₹2,76,923
If service were 7 years 5 months, it would count as 7 years: 15 × ₹60,000 × 7 ÷ 26 = ₹2,42,308.
Worked example 2: fixed-term employee
- Last drawn Basic + DA: ₹40,000 a month
- Service: 1 year 3 months → counts as 1 year
- Gratuity = 15 × ₹40,000 × 1 ÷ 26 = ₹23,077
Limits and tax
- For private-sector employees, gratuity is tax-free up to ₹20 lakh over your lifetime (across all employers), within the formula limits. Amounts above that are taxable.
- Why CTC shows 4.81%: 15 ÷ 26 ÷ 12 = 4.81% of annual Basic, the yearly cost of one year's gratuity. Whether gratuity is shown in CTC at all is the company's choice.
3) Professional Tax (PT)
Professional tax is a tax charged by state governments (sometimes collected through local bodies) on employment, trades and professions. Your employer deducts it from salary and pays it to the state.
The cap
Article 276(2) of the Constitution limits the total professional tax on any one person to ₹2,500 a year. That is why states that charge ₹200 a month often charge ₹300 in one month (usually February) to reach exactly ₹2,500.
Examples by state (salaried employees)
| State | Monthly salary | PT |
|---|---|---|
| Maharashtra | Up to ₹7,500 (men); up to ₹25,000 (women) | Nil |
| ₹7,501 – ₹10,000 (men) | ₹175 a month | |
| Above ₹10,000 (men); above ₹25,000 (women) | ₹200 a month, ₹300 in February (₹2,500 a year) | |
| Karnataka | Below ₹25,000 | Nil |
| ₹25,000 and above | ₹200 a month, ₹300 in February (₹2,500 a year, from April 2025) | |
| Telangana | Up to ₹15,000 | Nil |
| ₹15,001 – ₹20,000 | ₹150 a month | |
| Above ₹20,000 | ₹200 a month | |
| Delhi, Haryana, Uttar Pradesh, Rajasthan | Any | No professional tax |
PT is based on the state where you work (where your employer's establishment is registered for PT). Slabs are revised by state laws, so check your state's current schedule or your payslip.
Tax treatment
In the old regime, PT paid is deductible from salary income. In the new regime, it is not.
Quick summary
| EPF | Gratuity | Professional tax | |
|---|---|---|---|
| Who pays | You and employer, 12% each | Employer only | You |
| Is it your money? | Yes, from day one | Only once eligible | No, it is a tax |
| Affects monthly in-hand? | Yes (your 12%) | No | Yes (up to ₹300/month) |
| Usually in CTC? | Employer share, yes | Sometimes | No (deducted from your pay) |
To see how all three affect your take-home pay, try the In-Hand Salary Calculator. Our Methodology page explains its assumptions.
FAQ
What happens to my PF when I change jobs?
Your UAN stays the same. Request a transfer of the old balance to the new employer's account through the EPFO member portal so that your service stays continuous for tax purposes.
I left after 4 years and 10 months. Will I get gratuity?
Under the written rule for permanent employees, no. Some courts have accepted 240 days in the fifth year as completing five years, so ask HR how they apply this. Fixed-term employees qualify after one year.
Why does my PT go up in February?
States like Maharashtra and Karnataka charge ₹300 in February so the annual total reaches the ₹2,500 constitutional cap.
Last reviewed: October 2026. This guide is for general information, not tax or financial advice. Rules change; confirm with your employer's payroll team or a chartered accountant before making decisions.