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ESI Calculation

Updated on:  

08 min read

The Employee State Insurance (“ESI”) is a contributory fund that has contributions both from the employer and employee and enables Indian employees to take part in a self-financed, healthcare, insurance fund.

The scheme is managed by the Employee State Insurance Corporation that is a government body, and it is governed by the ESI Act 1948. The ESI is the largest integrated need-based social insurance scheme for employees. It protects the employees in times of uncertain and unfortunate events. The scheme provides both cash benefits and healthcare.

All non-seasonal factories having 10 or more employees are covered under ESI. All the establishments that are covered under the Factory Act and Shops and Establishments are also eligible for ESI. The units that have 10 or more employees or are located in the scheme-implemented areas are covered under this Act.

Although the establishments are covered under the Act, not all employees are covered under the Act. So, what is the eligibility criteria for employees? All employees whose monthly income that is excluding overtime, bonus, leave encashment does not exceed Rs.21,000 are covered under this Act.

Wages as per the ESI Act

The contributions (employee and employer) are made basis on the wages paid to the employees. Some of the inclusions and exclusions from the wage component are as follows:

InclusionsExclusions
Basic PayEntertainment Allowance
Dearness AllowanceRetrenchment Compensation
City Compensatory AllowanceEncashment of leave and gratuity
House Rent AllowanceDeduction of health insurance
Incentives (including sales commission)Tax Deductions
Medical Allowance
Meal allowance
Any other special allowances
Attendance and Overtime Payments

Computation of ESI

The rates of the ESI contribution are calculated on the wages paid. Currently, the employee contribution is 0.75% of wages paid/payable, and employer contribution is 3.25% of wages paid/payable.

Illustration:
Let us say Mr Hard Working with wages of Rs. 18,000 works in a factory unit.

The contribution will be as follows:

Employee Contribution – 0.75%*18,000 = 135
Employer Contribution – 3.25%*18,000 = 585

So a total contribution of Rs. 720 will be made. The onus of deducting the contribution and depositing the same is on the employer. The employer must deposit the amount within 15 days of the end of the calendar month in which the deduction is made. The same can be deposited online or to authorised designated branches of SBI or other designated branches.

Contribution Period and Benefit Period

The concept of contribution period covers the employee in the event of the wages increasing from the threshold limit of Rs. 21,000.

Let us continue with the above example, say Mr. Hard Working was earning wages of Rs. 18,000 till June 2020, the wages increase to Rs. 22,000 from July 2020. The contribution period is 1 st April 2020 – 30th September 2020 and hence the deduction will continue on the revised salary up to September and he will be eligible for the benefit up to 30th June of the following year.

Similarly, say an employee Mr Diligent earns a wage of Rs. 20,000 till October 2020 and from next month he earns Rs. 23,000. The deduction must continue on the revised salary up to 31st March 2021 and he will be eligible for the benefit up to December 2021.

NameSalary RevisionContribution PeriodBenefit Period
Mr Hard WorkingJuly 2020 1 st April 2020 – 30th September 2020
1st January to June 2021
Mr Diligent November 2020
1st October to 31st March 20211st July to 31st December

Hence ESI contribution must be made by both employee and employer and the benefits help the employee in unfortunate circumstances.

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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