ESI Calculation: Formula, Contribution Rate & Example

The Employee State Insurance (ESI) scheme is a fund contributed to by both employers and employees, and the ESI calculation is a measurement process based on this shared contribution. It provides employees with access to self-financed healthcare and insurance benefits during their employment.

However, it seems similar to EPF; the purpose is different. EPF is a retirement savings scheme, whereas ESIC focuses on medical and social security benefits, including healthcare, sickness, and maternity support.

In this blog, we will discuss the ESI calculation, its advantages, disadvantages, and examples.

ESI Full Form

The Full Form of ESI is Employee State Insurance

What is ESI Calculation?

ESI calculation is the process of determining the contribution made by both the employer and employee toward the Employees’ State Insurance (ESI) scheme based on the employee’s gross salary. Currently, the employee contributes 0.75% of gross wages, while the employer contributes 3.25%. ESI applies to employees earning up to ₹21,000 per month.

The total contribution provides medical, maternity, sickness, disability, and other social security benefits through Employees’ State Insurance Corporation.

Preliminaries for ESI Calculations

ESI funding is not eligible for all employees. Here are some key highlights on who is eligible for ESI and what employees should not ignore when calculating ESIC.

1. ESI Eligibility Limit

ESI applies to employees earning up to ₹21,000 per month (₹25,000 for persons with disabilities). Employees who receive more than 21000 per month are not eligible for ESIC; they have to go for EPF funding.

2. Definition of Wages

ESI is calculated on gross wages, which include basic salary, DA, HRA, overtime, and other regular allowances.

3. Contribution Rate

In ESIC, the employee contribution 0.75% of gross wages and the employer contribution 3.25% of gross wages.

4. Contribution Period

The contribution of ESIC is submitted and calculated monthly, but it falls into two fixed contribution periods: April to September and October to March.

5. Employer Responsibility

The employer deducts the employee’s share and deposits the total ESI contribution with ESIC every month and also submits the employer’s share to the ESIC fund.

ESI Calculation Formula and Example

According to the ESIC rules, the total ESI Contribution = Employer’s Contribution + Employees’ Contribution. Out of which the employee contribution is 0.75% of wages paid/payable, and the employer contribution is 3.25% of wages paid/payable.

Let’s assume,

Ms Nisha’s monthly gross payment is ₹ 20,000. Hence the ESIC from employee’s side will be 0.75%*20,000 = Rs.150. And on the other hand, the employer contribution will be 3.25%*20,000 = Rs.650

So, the total contribution the employees receive is Rs. 800 (650 + 150).

Advantages of ESIC Members

Before discussing ESI calculation, one thing everybody should acknowledge is that employees in the lower salary range can receive financial protection through ESIC, just as higher-salaried employees benefit from savings and retirement security through EPF. The rest of the advantages are,

• Employees receive sick benefits of 70% (in the form of pay).
• The sick benefits (amount) will be paid for any certified illness lasting more than 91 days in any year.
• A certain percentage of medical benefits to an employee and his/her family members.
• Pregnant women are entitled to a minimum of 26 weeks of maternity leave (paid leave).
• If any employees die during their employment, 90% of their pay is paid to their dependents monthly for life.
• ESIC provides a lump sum amount to cover the funeral expenses of the insured employee.

In certain cases, such as company closure or job loss due to injury, employees may receive a temporary unemployment allowance and medical care.

Documents Required for Registration of ESI

So, as of now, we get acquainted with ESI calculation with an example and its advantages. Yet during ESIC registration, employees often face challenges aggregating documents and verifying them. Here are the following documents that employees need during registration for the ESIC.

• Address Proof of the Business
• Employees PAN card details
• Name and add-on details of includes partners, directors and shareholders
• A License certificate under the Factories Act or the Shop Establishment Act
• Employee Salary and related bank details.

Penalties for Employee Contribution Non-Payment or Late Payment

Even though we are going to talk about the penalties of late payment or non-payment of the employee’s side, the employer is legally responsible for depositing both the employee’s and the employer’s contributions to the ESIC portal on time. Here are the in details of the penalties for non-payment or late payment mentioned below.

Non-payment or delayed payment of the Employee’s contribution deducted from the wages of the employee amounts to ‘Criminal Breach of trust’ is punishable under IPC Section(s) 406, 409 and also an offence u/s 85 (b – g) of ESI Act. In case of non-payment, delayed payment, or falsification of payments under the ESI Act, it may lead to imprisonment for up to 2 years and a fine of up to Rs 5,000.

Besides, the Corporation has the authority to recover damages for mismanagement in paying ESIC contributions. The damages are calculated based on the duration of the delay and will not exceed the total contribution amount due.

In addition to these damages, employers may also face legal action under Section 85(a) for failing to make timely contributions. If the same violation occurs again, stricter penalties may apply for each repeated offence.

Automation of ESI Calculation

With the assistance of the recent HRMS solution and associated payroll software, calculating ESIC and related contributions is easier. The Pocket HRMS payroll software helps companies manage their employees’ ESIs, PF and other compliances within just a few clicks.

Conclusion

The Employees’ State Insurance (ESI) scheme plays a crucial role in providing financial protection and healthcare benefits to employees, especially those in lower income brackets. From understanding eligibility and wage definitions to calculating contributions and ensuring timely compliance, both employers and employees must stay informed to fully benefit from the scheme. Proper documentation, awareness of penalties, and the use of automated payroll solutions can further simplify the process. Ultimately, a right ESI calculation provides security, stability, and well-being for the workforce.

FAQs on ESI Calculation

1. What is the difference between EPF and ESIC?

EPF is a retirement savings scheme where both employer and employee contribute to build a long-term fund for financial security after retirement. It applies to employees earning any salary level.

ESIC is a health insurance and social security scheme that provides medical care, sickness benefits, maternity support, and financial assistance during employment. It is applicable only to employees earning up to INR 21,000 per month.

2. Is ESI Calculated on the monthly bonus?

The ESI is not included in the monthly bonus unless it is treated as a regular wage component rather than a performance or annual bonus.

3. What is ESI in CTC?

ESI in CTC is the employer’s contribution, i.e. 3.25% of gross salary, towards the Employee State Insurance scheme, while the employee contributes 0.75%, which is deducted from their salary. It is applicable only to employees earning up to INR 21,000 per month, and the contribution is calculated on gross wages.

4. Is ESIC Calculated on basic salary or on gross wages?

ESIC is calculated on gross salary, which is a commutative amount of Basic Salary, HRA, Special Allowance and Other Allowances. Therefore, ESIC contributions are determined based on total eligible earnings rather than just basic salary.

5. How to Calculate ESI on salary?

Here is the ESI calculation in detail.

ESI is calculated on the employee’s gross salary.
Employee’s contribution: 0.75%; employer’s contribution: 3.25% of gross wages.

If an employee earns ₹20,000/month:

Employee contribution = 0.75% = ₹150
Employer contribution = 3.25% = ₹650

Total ESI = ₹800