Indian HR & Payroll Terminology Reference Guide

This glossary covers over 50 essential HR and payroll terms used in the Indian business context. Bookmark this page as your reference guide for understanding salary structures, statutory compliance, labour laws, and HR management terminology.

A

Aadhaar

India’s 12-digit unique biometric identification number issued by the Unique Identification Authority of India (UIDAI) to Indian residents. Aadhaar is used for identity verification, KYC (Know Your Customer) checks, PF account seeding, ESI registration, and employee onboarding verification. Over 1.38 billion Aadhaar numbers have been issued as of 2026.

Annual Leave (Earned Leave)

Leave entitlement accrued by employees based on days worked. Under the Factories Act, 1948, workers who have worked 240 days in a calendar year are entitled to 1 day of earned leave for every 20 days worked. The Shops & Establishments Acts of different states may provide more generous entitlements. Unused earned leave can be carried forward or encashed, depending on the employer’s policy.

Arrears

Outstanding salary or wages owed to an employee from a previous pay period, typically arising from delayed salary revisions, backdated increments, or corrections to previous payroll errors. Arrears must be declared in the employee’s income tax return and are subject to TDS in the year of receipt.

B

Basic Salary

The core fixed component of an employee’s salary, typically 40–50% of the total Cost to Company (CTC). Basic salary is the basis for calculating PF (12% of basic), HRA (40–50% of basic), Gratuity (15/26 × basic per year), and leave encashment. A higher basic increases statutory deductions but also builds PF corpus faster.

Bonus Act

The Payment of Bonus Act, 1965 mandates that establishments with 20+ employees must pay an annual bonus between 8.33% and 20% of annual salary (capped at ₹21,000/year per employee wage ceiling as of 2026) to employees earning up to ₹21,000/month. The minimum bonus of 8.33% is payable even if the establishment makes a loss.

C

Casual Leave (CL)

Short-duration leave taken for personal or family reasons. Typically 7–12 days per year depending on company policy and state-specific Shops & Establishments Act provisions. Casual leave usually cannot be carried forward to the next year and cannot be clubbed with other leave types in most state regulations.

CTC (Cost to Company)

The total annual cost incurred by the employer for an employee, including gross salary, employer PF contribution, employer ESI contribution, gratuity provision, insurance premiums, and any other benefits provided. CTC is not the same as take-home pay. For example, if CTC is ₹6 lakh, take-home may be ₹4.5–5 lakh after deductions and contributions.

Challan

A government-prescribed document used for depositing statutory contributions (PF, ESI, TDS) with the respective government authorities. PF challans (Electronic Challan cum Return — ECR) must be filed by the 15th of each month; ESI challans by the 15th; TDS challans (Form 281) by the 7th of the following month.

D

DA (Dearness Allowance)

An allowance paid to government employees and PSU employees to offset the impact of inflation. DA is revised twice yearly based on the Consumer Price Index (CPI). For private sector employees, DA is often merged into Basic Salary. DA is included in PF calculation (12% on Basic + DA) and Gratuity calculation.

Deductions

Amounts subtracted from an employee’s gross salary to arrive at net take-home pay. Statutory deductions include Employee PF (12% of basic), ESI (0.75% of gross, if applicable), Professional Tax (state-specific), and TDS (income tax). Non-statutory deductions include loan repayments, advance recovery, LWF, and insurance premiums.

E

ECR (Electronic Challan cum Return)

The monthly PF contribution file submitted to EPFO through the Unified Portal. ECR contains details of all employees, their UAN numbers, and the PF/EPS/EDLI contributions for the month. ECR must be uploaded by the 15th of each month. EZHRM auto-generates the ECR file ready for upload.

EDLI (Employee Deposit Linked Insurance)

A government insurance scheme that provides a lump-sum payment to the nominee of a PF member who dies while in service. The employer contributes 0.5% of basic wages (maximum ₹75/month) towards EDLI. The maximum EDLI claim payable to a nominee is ₹7 lakh.

EPF (Employee Provident Fund)

A mandatory retirement savings scheme administered by EPFO (Employees’ Provident Fund Organisation). Both employee and employer contribute 12% of basic+DA. The employee’s 12% goes entirely to EPF; the employer’s 12% is split between EPF (3.67%) and EPS (8.33%). PF balance earns interest declared by EPFO each year (8.25% for FY2024-25).

EPS (Employee Pension Scheme)

A pension scheme under EPFO into which the employer contributes 8.33% of basic+DA (capped at ₹1,250/month). Employees become eligible for pension after 10 years of service. The monthly pension is calculated based on the formula: (Pensionable Salary × Pensionable Service) / 70. Pensionable salary is capped at ₹15,000/month.

ESI (Employee State Insurance)

A social security and health insurance scheme for Indian workers earning up to ₹21,000/month gross, administered by ESIC (Employees’ State Insurance Corporation). ESI provides medical care (for employee and family), sickness benefit (70% of wages for up to 91 days/year), maternity benefit (26 weeks), disability benefit, and dependent pension.

F

Form 16

A certificate of TDS (Tax Deducted at Source) on salary issued by the employer to the employee, as required under Section 203 of the Income Tax Act. Form 16 must be issued by June 15 each year for the previous financial year. It is required by employees for filing their Income Tax Return (ITR) and serves as proof of salary and tax payment.

Full & Final Settlement (F&F)

The process of calculating and disbursing all outstanding dues to an employee upon separation — including unpaid salary, earned leave encashment, gratuity (if applicable), bonus, reimbursement claims, and recovery of outstanding advances or loans. F&F should ideally be completed within 30–45 days of the last working day.

G – H

Gratuity

A statutory retirement benefit payable under the Payment of Gratuity Act, 1972 to employees who have completed 5 years of continuous service. Formula: (Last Basic + DA) × 15/26 × Years of Service. Maximum gratuity is ₹20 lakh. Gratuity is tax-exempt up to ₹20 lakh for private sector employees.

Gross Salary

Total salary before any deductions, including Basic Salary, HRA, Conveyance Allowance, Special Allowance, LTA, and all other allowances. Gross salary is the basis for ESI calculation. It is higher than net take-home pay (which is gross minus deductions) but lower than CTC (which includes employer contributions).

HRA (House Rent Allowance)

An allowance paid to employees to cover accommodation expenses. Typically 40–50% of basic salary (50% in metro cities). HRA is exempt from income tax under Section 10(13A) to the extent of the minimum of: actual HRA received, 50% of basic (metro) or 40% (non-metro), and actual rent paid minus 10% of basic.

I – L

In-Hand Salary (Take-Home Pay)

The net salary credited to the employee’s bank account after all deductions (PF, ESI, PT, TDS) are subtracted from gross salary. This is the actual amount the employee receives. In-hand salary = Gross Salary – Employee PF – Employee ESI – Professional Tax – TDS – Other Deductions.

Increment

An increase in an employee’s salary, typically given annually based on performance appraisal, inflation adjustment, or promotion. Increments in India are commonly expressed as a percentage of CTC (e.g., 10% increment) or as a fixed monthly increase in basic salary.

Labour Welfare Fund (LWF)

A statutory contribution scheme in 15+ states where both employee and employer contribute to state welfare boards that fund recreational facilities, housing, and welfare programs for workers. Contribution amounts vary: from ₹6/year (employee) in some states to ₹60–₹120/year. Frequency also varies — monthly, half-yearly, or annually.

Leave Encashment

Payment received by an employee in lieu of accumulated but unutilized leave. Leave encashment is taxable when received during employment. However, leave encashment received at retirement or resignation is tax-exempt up to ₹25 lakh (revised limit from FY2023-24) for private sector employees.

M – P

Maternity Benefit

Under the Maternity Benefit (Amendment) Act, 2017, female employees who have worked for at least 80 days in the preceding 12 months are entitled to 26 weeks of paid maternity leave for the first two children, and 12 weeks for third and subsequent children. Establishments with 50+ employees must also provide a crèche facility.

Minimum Wages

The minimum remuneration prescribed by the Central and State governments for different categories of employment under the Minimum Wages Act, 1948. As of 2026, the national floor wage is ₹178/day. State minimum wages for unskilled workers range from ₹350 to ₹700+/day. Paying below minimum wage is a criminal offence.

Net Salary

Same as In-Hand Salary or Take-Home Pay — the amount received by the employee after all deductions. Net Salary = Gross Salary – (Employee PF + Employee ESI + Professional Tax + TDS + any other deductions).

Notice Period

The period an employee must work before leaving the organization after resignation, typically 30, 60, or 90 days as per the employment contract. During the notice period, the employee continues to receive full salary. If the employee cannot serve the notice period, they may be required to pay a buy-out (notice period salary to the employer).

PF (Provident Fund)

See EPF (Employee Provident Fund). PF is commonly used as a shorthand for EPF in Indian business contexts. The UAN (Universal Account Number) is a 12-digit number assigned by EPFO to each PF member, which follows the employee across jobs.

Professional Tax (PT)

A state-level tax on employment income levied in 21 Indian states. The maximum annual Professional Tax is ₹2,500. Employers must deduct PT from employee salaries and deposit with the state government. Employers must also obtain a Professional Tax Registration Certificate (PTRC) and a Professional Tax Enrolment Certificate (PTEC).

Probation Period

A trial period at the start of employment (typically 3–6 months) during which both employer and employee evaluate the suitability of the employment relationship. Employees on probation typically have shorter notice periods. Confirmation of employment is issued at the end of a successful probation period.

R – T

Reimbursement

Payments made to employees against submission of bills for official expenses incurred — such as travel, mobile, medical, or petrol expenses. Reimbursements are not part of salary and are not subject to PF, ESI, or TDS when supported by bills. They are a tax-efficient component of compensation planning.

Salary Revision

A formal change in an employee’s salary, typically following an annual performance appraisal, promotion, or market correction exercise. Salary revisions are documented via a salary revision letter and take effect from a specified date.

Salary Slip (Pay Slip)

A monthly document issued to employees showing the detailed breakdown of earnings and deductions for the pay period. A statutory-compliant salary slip must show: employee name, designation, PF number, period, all earning components, all deductions (PF, ESI, PT, TDS), and net pay. Digital salary slips are legally valid.

Statutory Compliance

The obligation of employers to adhere to all applicable labour laws and government regulations. In India, statutory compliance covers PF, ESI, Professional Tax, TDS, Gratuity, Minimum Wages, Shops & Establishments registration, Maternity Benefit Act, and more. Non-compliance can result in penalties, prosecution, and business disruption.

TDS (Tax Deducted at Source)

A mechanism under the Income Tax Act, 1961 requiring employers to deduct income tax from employee salaries at source. Under Section 192, employers must deduct TDS based on the employee’s total projected annual income, applicable tax slab, and declared investments/deductions. TDS must be deposited by the 7th of the following month, and quarterly TDS returns (Form 24Q) must be filed.

U – W

UAN (Universal Account Number)

A 12-digit permanent account number assigned by EPFO to every PF member. The UAN remains the same throughout an employee’s career, even as they change jobs. All PF accounts (Member IDs) across different employers are linked to a single UAN. Employees can check their PF balance, transfer PF, and apply for PF withdrawal using their UAN.

Variable Pay

Performance-linked compensation paid in addition to fixed salary, including performance bonuses, commissions, incentives, and quarterly/annual bonuses. Variable pay is typically not included in PF calculation (unless paid monthly as a regular component) but is included in gross salary for ESI calculation if paid monthly.

Wages

Under Indian labour law, ‘wages’ has a specific legal definition under the Code on Wages, 2019. It includes all remuneration expressed in monetary terms including basic pay, dearness allowance, and retaining allowance, but excludes: house rent allowance, conveyance allowance, PF contributions, bonuses, overtime, gratuity, and reimbursements. The wages definition determines PF, ESI, and minimum wages applicability.