ESI Calculation – Formula, Example & Contribution Guide

The Indian government introduced a new scheme, a worker welfare program. This scheme is called the Employees’ State Insurance or ESI. This scheme tends to provide a lot of benefits to employees under different medical conditions. If your organization meets the criteria for ESI registration then it is essential you understand what is ESI. It is also mandatory for your organization to comply with all the rules that are put down by the Indian government. Through the article, you will get to know how the ESI calculation is done and what is its formula and contribution involved.

Key Takeaways:

• What is ESI Calculation?
• ESI Wage Definition as per the ESI Act
• ESI Calculation Formula & Percentage
• How to Calculate ESI with Example?
• ESI Contribution Payment & Due Dates
• ESI Contribution Period & Benefit Period
• ESI in Case of Salary Increase
• Documents Required for ESI Registration
• ESI Penalties for Non-Payment
• Automate ESI Calculation & Filing
• FAQs
• Conclusion – Mastering ESI Calculation & Compliance

What is ESI Calculation?

ESI also called Employee State Insurance is a contributory fund that has contributions from both the employee and the employer that enable Indian employees to take part in a self-financed insurance fund and healthcare fund.

Employees’ State Insurance Corporation or ESIC is a social security body that tends to manage ESI. The Ministry of Labour and Employment manages the insurance corporation. According to a report prepared by B.P. Adarkar in 1943, it was understood that there was a need for social insurance for industry workers. This led to the formation of the ESI Act in 1948. The Act was however first implemented in the year 1952 and it mainly focused on factory workers. But as time went by all the organizations were an active part in this.

According to the ESI Act, any organization with 10 employees or more must maintain this fund. However, it is essential to note that only employees with a monthly salary less than Rs. 21,000 are eligible for ESI. The key features of this scheme are cash benefits, medical care, dependent benefits, and retirement and pension benefits for all the eligible employees.

ESI Wage Definition as per the ESI Act

The Employee State Insurance Scheme usually sets a salary limit for the employees who are eligible for its benefits in India. The Central government of India is the one who reviews and revises this scheme regularly as and when it is required. The maximum salary limit for the scheme benefits is Rs. 21,000 per month. However, for other specially abled employees, the ESI contribution salary limit is considered to be Rs. 25,000 per month.

If any employee’s monthly salary is above this limit then they will not be considered as eligible for this scheme. If however the employee’s monthly salary in any month falls under the maximum limit that is set then they are still eligible for the benefits for that particular month.

It is essential to note that the maximum salary limit of this scheme may differ based on India’s various states and establishment types. For most up-to-date information you are also recommended to consult your HR professional. Some of the items included and excluded from this scheme and the ESI calculation can be provided as follows.

Items included	Items excluded
Basic Pay	Gratuity
House Rent Allowance	Tax Deductions
Education Allowance	Leave Encashment
Medical Allowance	Deduction for Health Insurance Premium
Newspaper Allowance	Entertainment allowance
Special Allowance	Compensation for Retrenchment
City Compensatory Allowance	Annual Bonus
Dearness Allowance	Petrol Allowance
Meal Allowance	Annual Commission
Overtime Allowance	Service Charges
Drivers Allowance	Washing Allowance
Wages and Dearness Allowance for unsubstituted holidays	Productions Allowance
Attendance Bonus	Gazetted Allowance
Shift Allowance	Service contract
Compensatory Allowance
Interim Relief
Sales Commission

ESI Calculation Formula & Percentage

The ESI calculations are based on the gross salary of the employee. The critical components that are needed for the scheme contribution for mentioned as follows.

Employer Contribution

This is the contribution that is made by the employer on behalf of the employees present in the organization. The rate of the employer’s calculation will vary based on the monthly salary.

Employee Contribution

This is the contribution that is made by the employee towards the scheme. The rate at which the employees are supposed to calculate is generally lower as compared to the employer’s contrition rates.

Here is a general overview of the current rates of contribution

Monthly Wages	Employee Contribution Percentage	Employer Contribution Percentage
Up to Rs. 21,000	0.75%	4.75%
Above Rs. 21,000	—	1.75%

Along with the above rates the contributions may also have certain freedoms in specific areas. For example, small establishments that consist of less than 10 employees are exempt from registering and contributing to the scheme. You can also consult the authorities or visit the official website of ESIC to read the guidelines for more detailed information on what rates may apply according to your situation.

The wages are calculated by using the ESI formula and by adding the basic pay along with the allowances such as DA + HRA + Medical + City Compensatory Allowance, etc.

How to Calculate ESI with Example?

Total ESI Contribution could be said to be as follows:

Total ESI Contribution = Employee’s Contribution + Employer’s Contribution

Now let’s take an example to further understand how the ESI contribution works. Mr. Daniel is working for an establishment where it qualified under the ESI Act. The monthly wage of Mr. Daniel is INR 15,000. The contribution in this case towards the ESI scheme would be as follows:

Employer Contribution = 15,000 * 3.25% = INR 487.50

Employee Contribution = 15,000 * 0.75% = INR 112.50

Total ESI Contribution = 487.5 + 112.5 = INR 600

ESI Contribution Payment & Due Dates

The employer is responsible for the collection of the employee’s contribution and finally submitting the total amount to the corporation. Under the ESI Act 1948, an employer will need to register and pay the ESI calculation while also filing a return.

Methods of Payment

There are majorly two major payment methods that are available for submitting the contribution which are the online method and the offline method. Employers can conveniently choose the online payment method through the official portal and make the payment by using methods such as UPI, net banking, debit, or credit cards. If not then they can also avail of the offline payment method where they need to go to the designated banks and government treasuries to deposit the amount.

Filing of Returns

Employers are advised to file the monthly return within the corporation and provide all the details regarding the employee’s wages and contributions. Under certain conditions, quarterly returns are also allowed.

Deadlines

The last date for the payment of the contribution is the 15^th of every single month. Employers who are registered under the act are supposed to pay and deposit the amount in any one of the authorized banks assigned by the statutory body before the deadline.  However, the exact dates for the payment will vary from state to state and depend on the types of establishments.

ESI Contribution Period & Benefit Period

The calculation of the Employees’ State Insurance Contribution is divided into two major periods such as the contribution period and the benefits period.

Contribution Period

This is the period of time during which the employee is supposed to contribute to the fund. This period is generally on a monthly basis. The contributions are calculated based on the salary of the employee. The scheme divides the year into two contribution periods. The periods could be mentioned as below:

• From 1^st of April to 30^th September
• From the 1^st of October to the 31^st of March

Benefit Period

This is when the employee is eligible to receive the benefits. The benefit period will however highly vary based on the type of benefits and the particular circumstances. Special circumstances such as the sick benefits period may be only a few days as compared to the maternity benefit period. This may range for a number of weeks. The benefit period can be provided as follows:

• From 1^st January to 31^st of June for all the contributions made from the 1^st of April to the 30^th of September.
• From 1^st July to 31^st December for all the contributions made during the period 1^st of October to 31^st of March.

ESI in Case of Salary Increase

Let’s say that the salary of Mr. Daniel was Rs. 18,000 in the month of May 2021. It has then increased to Rs. 23,000 from June 2021. In this case, the ESI contribution of both the employee and the employer is calculated at 18,000 for April to May, and from June to September it will calculated based on 23,000.

This benefits the employees since they get more contributions. However, after September when the contribution period is over the employee tends to become disqualified from the ESIC Act. However, the employee will receive the benefit during the corresponding benefit period which is from the 1^st of January to the 30^th of June.

Documents Required for ESI Registration

To ensure there is compliance under the ESIC Act 1948 and to ensure that employees can avail its benefits every establishment covered under the Act has to register with the ESI in Salary. Following is the list of documents that are required if you want to get registered under ESI.

• Business PAN Card
• Details about partners, shareholders, and directors
• Bank account details
• Employee details and the details of the salary structure
• Address proof of the business
• Memorandum of association, article of association, partnership deed, or other business deeds
• Business licenses

ESI Penalties for Non-Payment

The amount that is deducted from an employee’s pay as the employee contribution is considered to be entrusted into the employer’s hands. As a result, the employer is held more responsible for ensuring that the contribution is being deposited with the ESIC. There are penalties for those organizations who do not comply with the payment conditions. Here are a few of the ESI penalties for non-payment.

Non-payment or late payment of an employee’s contribution deducted from his or her wages is a punishable offense according to the ESI Act.

Late payment, non-payment, or falsification of any payments are punishable by up to three years in prison but not less than one year. This will also be added on by Rs. 10,000 as a fine under the ESI Act.

Employers will be asked to pay a simple interest at the rate of 12% per year for each day being delayed in payment.

Automate ESI Calculation & Filing

Asanify is one such platform where you can automate the calculations and filing of statutory compliances such as PF, PT, ESIC, and more. It is an all-in-one payroll and HR software that helps an organization to manage their employees along with compliance with just a few clicks.

Here are a few other benefits you get when you opt for a platform such as Asanify.

• Group health insurance for teams
• Automatic CTC calculation and payroll calculation while considering deductions such as TDS, PF, ESI, etc.
• Customized HR letters to make it easy for all the hiring processes
• Attendance and leave management system
• Tax calculation and filing are based on your country and respective government portal rules.

FAQs on ESI Calculation

1. How is ESI calculated from salary?

ESI is calculated as 0.75% of the employee’s gross monthly salary, contributed by the employee, and 3.25% contributed by the employer.

2. What is the ESI salary limit?

The ESI salary limit is ₹21,000 per month. For persons with disabilities, the limit is ₹25,000 per month.

3. What happens if an employee’s salary exceeds ₹21,000?

If an employee’s salary exceeds ₹21,000 (or ₹25,000 for persons with disabilities), they are no longer eligible for ESI benefits.

4. How to check ESI claim status?

ESI claim status can be checked online through the ESIC portal using the IP number, or by contacting the nearest ESIC branch office.

5. What benefits does ESI provide?

ESI provides medical, sickness, maternity, disablement, and dependent benefits to insured persons and their families.

6. What is disablement under the ESI Act?

Disablement under the ESI Act refers to temporary or permanent loss of earning capacity due to employment injury or occupational disease.

7. Can an employer refuse to pay ESI?

No, an employer cannot refuse to pay ESI contributions if the employee is eligible. It is a statutory obligation.

8. Can an employee opt out of ESI?

No, an eligible employee cannot opt out of ESI. It is mandatory for those within the salary limit.

Conclusion – Mastering ESI Calculation & Compliance

In conclusion, the ESI calculation scheme is one of the most important social security schemes in India that provides medical care and other financial benefits to all eligible employees and their dependents. Establishments with more than 10 employees and 20 employees in a few of the states are required to register under this scheme. Understanding and complying with this scheme will have its own perks. For organization benefits such as statutory compliance, positive brand image, and increased productivity, risk management can be observed. Whereas employees get benefits such as medical care, dependent benefits, financial security, etc.

So why wait try out automated ESI calculation via Asanify now!

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant  or Labour Law  expert for specific guidance.