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What is Employee State Insurance Scheme (ESI)?
The ESI or Employees State Insurance Scheme is an insurance cover provided to workers to aid them in uncertain and challenging times. It is a self-financed fund governed by the Employee State Insurance Corporation and comes under the ESI Act, 1948.
This fund is self-financed by employees out of their gross salary, with additional contributions from the employer.
As per the ESI Act, all establishments with more than 10 employees are covered under the ESI Act and have to maintain an ESI fund. All factories, shops and establishments are covered under the ESI Act unless otherwise specified by the Act. Also, employees are covered only if their salary is below Rs. 21,000 per month and the organisation is covered under ESI.
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What is the Full Form of ESI?
How are Wages defined as per the ESI Act?
According to the ESI Act, “wages” refer to the total amount received by an employee in exchange for services provided. Wage includes basic salary and allowances.
The ESI contribution of both the employer and the employee is calculated on the basis of the employee’s wages. To determine the eligibility and the wages on which ESI contribution should be calculated, some items are included, and some of the components are excluded.
Given below is the list of the items that should be included and excluded while doing ESI calculation on salary.
| Items Included | Items Excluded |
| Basic Pay | Entertainment Allowance |
| Dearness Allowance | Leave Encashment |
| City Compensatory Allowance | Compensation for Retrenchment |
| House Rent Allowance | Gratuity |
| Sales Commission | Deduction for Health Insurance Premium |
| Meal Allowance | Tax Deductions |
| Medical Allowance | Annual Bonus |
| Special Allowance and Overtime | Annual Commission |
| Newspaper Allowance | Petrol Allowance |
| Education Allowance |
Important Note: Regarding conveyance allowances
The Supreme Court has passed an order recently (dated 8 March 2021) stating that conveyance allowance or travel allowance does not fall under the definition of ESI wages. Hence, employers have to exempt conveyance allowance from ESI contributions and for computing the ceiling limit of Rs. 21,000 per month.
This is applicable to you only if you are using custom salary structures which include an allowance called “Conveyance Allowance”.
ESI Calculation
The ESIC act, 1948, has fixed the percentage contribution of the employer at 3.25% of the wages and that of the employee at 0.75% of the wages.
ESI Calculation Formula
ESI is calculated on total earnings every month (excluding any employer contribution to PF/ESI, if included in the employee’s CTC).
The wages are calculated by adding the basic pay and the Allowances (DA + HRA + Medical + City Compensatory Allowance, etc.).
How to Calculate ESI with Example
Let’s say the calculated wages of Mr X as per the ESI Act, 1948 is INR 20,000. Then the contributions will be calculated using the ESI calculation formula as below.
| Particulars | Calculation | Amount |
| Employer’s Contribution (@3.25%) | 20,000*3.25% | 650 |
| Employee’s Contribution (@0.75%) | 20,000*0.75% | 150 |
| Total Contribution | — | 800 |
After calculating the contributions and deduction of Rs. 150 from Mr X’s wages, the employer is responsible for depositing the total contribution, i.e., Rs. 800, to the corporation within the stipulated time.
Collection of ESI Contribution
The employer is required to pay his contribution as well as deduct the employee’s contribution of their salary every month. This amount of contribution (employer’s contribution + employee’s contribution) needs to be deposited with the corporation within 15 days of the last day of the month in which it was deducted.
SBI and some other banks have been authorised by ESIC (Employees’ State Insurance Corporation of India) to collect payments on its behalf.
What is Contribution Period and Benefit Period?
The ESI scheme divides the calendar year into two contribution periods of 6 months each. These contribution periods have a corresponding benefit period in the following year. In other words, for the contribution made during the first 6 months, the employee receives its benefits during the next 6 months (benefit period).
This provision benefits those employees whose salary increases above the threshold limit of Rs. 21,000 during the contribution period.
| Contribution Period | Benefit Period |
| 1st April to 30th September | 1st January to 30th June |
| 1st October to 31st March | 1st July to 31st December |
ESI in case of Salary Increase
Let’s say that the salary of Mr X was Rs. 18,000 in May 2021. It increased to Rs. 23,000 from June 2021. In this case, the ESI contribution of both the employer and the employee is calculated on 18,000 for April to May and on 23,000 from June to September.
This benefits the employees as they receive more contributions. But, after September, when the contribution period gets over, the employee becomes disqualified from the ESIC act.
However, the employee receives the benefit during the corresponding benefit period, i.e., 1st January to 30th June.
ESI Return Filing
The establishments registered under the ESIC Act, 1948 are required to file ESI returns. The employers can download Form 1 from ESIC’s official website in PDF format, fill it and submit it online.
Deadlines for Filing ESI
The deadline for filing ESI returns for both the periods is as follows –
- For the contribution period of 1st April to 30th September – 12th November
- For the contribution period of 1st October to 31st March – 12th May
Documents Required for ESI Registration
To ensure compliance under the ESIC Act, 1948 and ensure that employees avail its benefits, every establishment covered under the Act has to register with ESI in Salary. Following is the list of documents that are required to get registered under ESI.
- Address proof of the business
- Business PAN Card
- Details about shareholders, partners and directors.
- Business licences
- Employee details and the details of their salary structure.
- Bank account details
- Memorandum of Association, Article of Association, the partnership deed or other business deeds.
Penalties for Non-payment of Employee Contribution
- The employer is responsible for depositing the employee as well as the employer’s contribution with ESI in salary.
- If the employee’s contribution is deducted from their salary but not paid by the employer is considered a punishable offence under the ESI act.
- Any non-payment, late payment or false payment can attract a penalty of Rs. 5000 and up to 2 years in prison.
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FAQs
1. How is ESI calculated from salary?
The wages are calculated by adding the basic pay and the Allowances (DA + HRA + Medical + City Compensatory Allowance, etc.). Please refer to the example in the blog post for more details.
2. What is the ESI limit?
Rs. 21,000 is the threshold for wages under the Employees State Insurance Act, 1948. This amount is calculated by adding basic pay and allowances like HRA, DA, Medical allowance, and commission.
3. How do I calculate ESI?
ESI is calculated on the gross salary paid to the employees. As per the ESI Act, the employer contributes 3.25% of the wages, and the employee contributes 0.75% of the wages to the contributory fund, which is then used to provide insurance cover to the employees in difficult times.
What are the advantages of being an ESIC member?
Being an ESIC member provides comprehensive medical benefits, ensuring free or subsidized healthcare for members and their families, including hospitalization and specialist care. It offers financial security through monetary benefits during periods of illness, maternity leave, or temporary disability, helping members sustain their income during tough times. Additionally, dependents are supported with a monthly pension in case of the insured member's death due to work-related injuries. ESIC also facilitates rehabilitation and skill development programs, aiding members in recovering from injuries and regaining employment.
How to check claim status of ESI online?
To check the claim status of ESI online, visit the official ESIC Portal at www.esic.in and log in using your credentials. Navigate to the "Insured Person Services" section and select the option to view claim status. Enter your ESIC insurance number to access and review the details of your claims. The system will display the status, including pending, approved, or rejected claims, along with relevant details.
What are the benefits for which ESI contribution can be claimed?
ESI contributions can be claimed for several benefits aimed at providing financial and medical support to employees. These include medical benefits, offering free or subsidized healthcare for the insured and their families, and sickness benefits, providing cash compensation during certified medical leave. Maternity benefits ensure income support and medical care for women during pregnancy, while disability benefits provide compensation for temporary or permanent loss of earning capacity due to workplace injuries. Additionally, dependents’ benefits offer a monthly pension to family members in case of the insured employee's death due to employment-related injuries.
What is disablement under ESI Act?
Disablement under the ESI Act refers to a condition resulting from employment-related injuries or occupational diseases that affects an employee’s ability to work. It is categorized as temporary disablement, where the employee is temporarily unable to perform duties but is expected to recover, or permanent disablement, which results in a lasting loss of earning capacity. Temporary disablement benefits are provided as long as the disability continues, while permanent disablement benefits are based on the extent of the disability determined by a medical board. These benefits ensure financial support to the insured person during their period of disability.
