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:
| Inclusions | Exclusions |
| Basic Pay | Entertainment Allowance |
| Dearness Allowance | Retrenchment Compensation |
| City Compensatory Allowance | Encashment of leave and gratuity |
| House Rent Allowance | Deduction of health insurance |
| Incentives (including sales commission) | Tax Deductions |
| Medical Allowance | |
| Meal allowance | |
| Any other special allowances | |
| Attendance and Overtime Payments |
How is ESI Computed?
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 the 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.
| Name | Salary revision | Contribution Period | Benefit Period |
| Mr. Hard Working | July 2020 | 1 st April 2020 – 30th September 2020 | 1st January to June 2021 |
| Mr. Diligent | November 2020 | 1st October to 31st March 2021 | 1st July to 31st December |
Hence ESI contribution must be made by both employee and employer and the benefits help the employee in unfortunate circumstances.
What are the ESI contribution rates?
The ESI contribution payable to the ESI corporation comprises employer’s and employee’s contribution at specified rates. These rates are subject to revision from time to time.
Currently, the employer’s contribution is 3.25% of the wages, and that of employees is 0.75% of the wages payable or paid in every wage period. Usually, the wage period is a month. Such rates came into effect from the 1st of July 2019.
Employees earning up to Rs 176 on a daily average basis are exempted from payment of their contribution. But, the employer has to contribute their share for such employees.
What are the due dates for the ESI payment and return filing?
An employer should pay their contribution and the employees’ contribution on a monthly basis to the ESIC. The due date for paying ESI contributions is 15th of the following month.
Further, an employer needs to file ESI return on a half-yearly basis. Here are the due dates for filing half-yearly ESI returns:
| Period of return | Due date of filing returns |
| April to September | 11th November |
| October to March | 11th May |
However, these due dates can be extended or changed through an official notification by the ESIC department.
For instance, due dates of ESI contributions for the month of February 2020 & March 2020 were extended to the 15th of May 2020. Also, the due date to file ESI return for Oct’19 to Mar’20 was extended to 11th of June 2020 from 11th of May 2020.
What is the penalty for non-payment or late payment of contributions?
Simple interest of 12% per annum for each day of delay in payment will apply to every employer who fails to pay the ESI contributions on time.
Also, non-payments, delayed or false payments under the ESI Act may attract imprisonment for a period extending up to 2 years and fine up to Rs 5,000.
Further, the income tax act also disallows ESI contributions deposited after the due date. The employers shall not get the deduction benefit of such contributions and will end up paying income on it.