This document describes the rules for ESI is Employee State Insurance & PF is Provident Fund Deduction where Employee State Insurance & Provident Fund (PF). These are two (2) social security schemes available to employees working in India.

 

There is significant information available on the web & even on the govt. websites, but that’s often contradictory, confusing and poorly written, or sometimes even wrong/misleading.

 

This blog explains both schemes & describes the Rules of Employee State Insurance & Provident Fund Deduction in detail, is updated whenever there are changes and helps you implement Best Practices of Payroll Processing in your Organization.

ESI Scheme And What are the criteria for Covered Units

 

Employees’ State Insurance (ESI) Scheme

 

Employees’ State Insurance (ESI) is a contributory fund that enables Indian Employees (IE) to participate in a self-financed, healthcare insurance fund with contributions from both the employee & their employer.

 

The scheme is managed by Employees’ State Insurance Corporation (ESIC), a govt. the entity that’s self-financing, social security, & labor welfare organization.

 

The entity administers & regulates the ESI scheme as per the rules mentioned in the Indian ESI Act of 1948.

 

Employees State Insurance is one of the most popular integrated need-based social insurance schemes among employees. The scheme protects employee interest in uncertain events such as temporary/permanent physical disability, sickness, maternity, injury during employment, & more. The scheme provides both cash benefits & healthcare benefits.

 

Eligibility for ESI

 

Employees State Insurance (ESI) scheme applies to all types of establishments, including corporate, factories, restaurants & cinema theatres, & offices, medical & other institutions. Such units are called Covered Units (CU).

 

What are the criteria for Covered Units?

 

•All units that are covered under Factory Act & Shops & Establishment act are eligible for ESI.

• Where 10 / more people are employed irrespective of their monthly earnings.

Note: Some states (such as Gujarat and Punjab) have upper limits on the number of employees for eligibility of the Employees State Insurance (ESI) scheme.

 

What salary components are applicable to ESI deductions?

 

Employees State Insurance (ESI) contributions (from the employee and employer) are calculated on the employee’s gross monthly salary.

 

Most people face challenges in understanding Employees State Insurance (ESI) deduction rules because they aren’t clear about the concept of Gross Salary.

 

Gross salary is described as the total income earned by the employee while working in their job before any deductions are made for health insurance, social security & state & federal taxes.

 

For Employees State Insurance (ESI) calculation, the salary comprises of all the monthly payment amounts such as:

 

• Basic pay,

• Dearness allowance,

• City compensatory allowance,

• House Rent Allowance (HRA),

• Incentives (including sales commissions),

• Attendance and overtime payments,

• Meal allowance,

• Uniform allowance and

• Any other special allowances.

 

The gross monthly salary, however, does not include an Annual bonus (such as dewily bonus), Retrenchment compensation, & Encashment of leave & gratuity.

 

Collection of ESI Contribution

 

It’s the employer’s responsibility to contribute to the Employees State Insurance (ESI) fund by deducting the employees’ contribution from wages & combining it with their own contribution.

 

An employer is expected to deposit the combined contributions within fifteen (15) days of the last day of the Calendar month. The payments can be made online / to authorized designated branches of the State Bank of India (SBI) & some other banks.

 

ESI Calculations

 

The rates of contribution, as a percentage of gross wages payable to the employees, is explained in the table below

 

 

	Percentage of Gross Pay	Example Gross Salary	Contributions
Employee Deduction	0.75%	Rs 15,000	15,000 * 0.75% = 112.50
Employer Contribution	3.25%		15,000 * 3.25% = 487.50
Total Contributions for this employee			112.50 + 487.50 = Rs 600.00

 

For e.g., if the salary of an employee increases to Rs. 22,000 per month, then the Employees State Insurance (ESI) would be calculated on Rs. 22,000 instead of Rs. 21,000 during the contribution period.

 

Contribution Period and Benefit Period

 

Payroll administrators often face confusion when employee’s salaries change – especially when the monthly salary exceeds the Employees State Insurance (ESI) limits of Rs 21,000.

 

To handle this situation, Employees State Insurance (ESI) has a concept of contribution periods during which the Employees State Insurance (ESI) contributions have to continue, even when the salary exceeds the maximum limits.

 

 

Contribution Period	Cash Benefit Period
1st April to 30th September	1st January of the following year to 30th June
1st October to 31st March of the following year	1st July to 31st December

 

.The contribution is deducted on the new salary. Let us look at an e.g., to understand this well.

 

At the end of the contribution period, if the employee salary is more than the Employees State Insurance (ESI) limit, no further deductions & contributions are required. The employee will still be covered under Employees State Insurance (ESI) till 30th June of the following year.

 

Similar rules apply when an employee’s salary increases in the second contribution period.