Two numbers settle almost every ESI question that lands on a payroll desk: 10 and ₹21,000. Ten is the headcount at which an employer has to register. ₹21,000 is the gross monthly wage at which an employee stops being covered. Everything else, including the deduction itself, follows from those two.
What trips people up is not the arithmetic. It is CTC being used where gross wages belong, overtime being counted in the wrong place, and mid-year raises being treated as if coverage ends the day the increment letter is signed.
The ESI eligibility test, in one line
Gross monthly wages of ₹21,000 or less, at a covered employer, in a notified area. The ceiling rises to ₹25,000 for an employee with a disability. That is the whole test, and the ₹21,000 figure has held since 1 January 2017, when it was raised from ₹15,000.
Note that this is a wage test, not a designation test. A machine operator on ₹23,000 is outside ESI. A management trainee on ₹19,000 is inside it. Job title, department and contract type do not enter into it. Contract workers, casual staff, trainees and part-timers are all covered on the same basis as anyone on your own payroll, and the principal employer carries the compliance risk if a contractor fails to pay.
ESI is decided on gross wages for the month, not on annual CTC. Running the test on CTC is the single most common reason an employee is left out who should have been enrolled.
Who has to register: the employer test
An establishment must register with the Employees' State Insurance Corporation once it employs 10 or more people. All 10 count toward the threshold whether or not they individually earn under ₹21,000, so a small office where only two people fall under the ceiling still has to register and enrol those two.
There are two caveats worth checking before you assume you are covered or exempt. First, a handful of states apply the Act to shops and establishments only at 20 employees rather than 10, Maharashtra and Chandigarh among them. Second, ESI runs on notified areas rather than nationwide coverage, so an establishment in a district where the scheme has not been implemented is outside it regardless of headcount. ESIC publishes the implemented areas state by state.
Registration is due within 15 days of the Act becoming applicable, and once an establishment is covered it stays covered even if headcount later falls below the threshold.
What counts as wages for ESI
The definition is wider than most people expect. Include basic pay, dearness allowance, house rent allowance, conveyance allowance, city compensatory allowance, and any other allowance paid monthly or at intervals of not more than two months.
Leave out annual bonus, gratuity, retrenchment compensation, leave encashment paid on exit, the employer's own PF and ESI contributions, and genuine reimbursement of expenses such as travel on work.
Overtime is the exception that catches people. It counts as wages when you calculate the contribution, but it is ignored when you decide whether the employee is covered. So an employee on ₹20,500 who earns ₹1,500 in overtime stays eligible, and pays contribution on ₹22,000.
ESI calculation examples on real salary figures
The rates have been 0.75 per cent for the employee and 3.25 per cent for the employer since 1 July 2019. Each side is rounded up to the next rupee. Here is what that looks like across the cases a payroll team actually meets.
| Case | Gross wages | Employee 0.75% | Employer 3.25% | Total |
|---|---|---|---|---|
| Covered, mid-range salary | ₹18,000 | ₹135 | ₹585 | ₹720 |
| At the ceiling exactly | ₹21,000 | ₹158 | ₹683 | ₹841 |
| ₹20,500 plus ₹1,500 overtime | ₹22,000 | ₹165 | ₹715 | ₹880 |
| Raise to ₹24,000 in July, period still open | ₹24,000 | ₹180 | ₹780 | ₹960 |
| Daily wage ₹170, employee share waived | ₹5,100 | ₹0 | ₹166 | ₹166 |
| Hired at ₹22,000, not covered | ₹22,000 | Nil | Nil | Nil |
A few of those rows need explaining. ₹21,000 is covered, because the ceiling is up to and including that figure, not below it. The ₹22,000 overtime row is covered because eligibility was tested on the ₹20,500 base. The ₹24,000 row is someone who was under the ceiling in April and got an increment in July, which is dealt with below.
The ₹5,100 row is the low-wage waiver. An employee whose average daily wage is ₹176 or less pays nothing themselves, but the employer still pays its 3.25 per cent. This gets missed often enough that it is worth a rule in your payroll system rather than a manual check.
What happens when a raise crosses the ceiling
ESI runs on two fixed contribution periods a year: 1 April to 30 September, and 1 October to 31 March. Coverage is tested at the start of a period, and it holds for the whole period.
So if someone on ₹20,000 is raised to ₹24,000 with effect from 1 July, they do not drop out of ESI in July. Contributions continue, calculated on the higher ₹24,000 wage, until 30 September. Membership ends on 1 October, the first day of the next contribution period. Stopping the deduction in July is a shortfall you will be asked to make good, with interest.
The benefit side lags deliberately. The contribution period 1 April to 30 September earns benefit entitlement from 1 January to 30 June of the following year, and 1 October to 31 March earns it from 1 July to 31 December. That gap is why an employee who leaves in October can still claim on contributions made months earlier, and it is worth explaining at exit rather than after a claim is refused.
Dates that decide the answer
- Register within 15 days of the Act applying to the establishment
- File the monthly contribution and pay the challan by the 15th of the following month
- Contribution periods: 1 April to 30 September, and 1 October to 31 March
- Benefit periods: 1 January to 30 June, and 1 July to 31 December, three months behind the matching contribution period
- Late payment carries interest at 12 per cent a year, and ESIC can levy damages on top
What the contribution buys
Worth knowing, because the deduction is easier for an employee to accept when they know what sits behind it. ESI covers medical treatment for the member and their family at ESIC hospitals and dispensaries with no cap on the amount spent.
Cash benefits need a contribution record. Sickness benefit pays about 70 per cent of average daily wages for up to 91 days in a year, and needs 78 days of contribution in the relevant contribution period. Maternity benefit pays full average daily wages for 26 weeks and needs 70 days of contribution across the preceding two periods. Temporary disablement from an employment injury pays about 90 per cent for as long as the disablement lasts, with no minimum contribution required, and dependants' benefit pays about 90 per cent as a monthly pension if an employee dies from a work injury. Funeral expenses are paid at ₹15,000.
Frequently asked questions
What is the ESI eligibility salary limit?
Gross monthly wages of ₹21,000 or less, and ₹25,000 or less for an employee with a disability. The ₹21,000 ceiling has applied since 1 January 2017.
How do I calculate the ESI deduction on my salary?
Take your gross wages for the month, excluding annual bonus and reimbursements, and deduct 0.75 per cent. On ₹18,000 that is ₹135. Your employer adds 3.25 per cent, or ₹585, making a total of ₹720.
Is ESI calculated on gross salary or basic salary?
On gross wages, which includes basic, DA, HRA, conveyance and regular allowances. Overtime is included in the calculation but ignored when testing eligibility.
What happens to ESI if my salary goes above ₹21,000 mid-year?
Contributions continue on your new salary until the end of the current contribution period, which closes on 30 September or 31 March. Coverage stops from the first day of the next period.
Is ESI mandatory for a company with 10 employees?
Yes, in most states, provided the establishment is in an area where the Act has been notified. A few states, including Maharashtra and Chandigarh, set the threshold at 20 for shops and establishments.
Do contract and part-time workers need ESI?
Yes, if their wages are within the ceiling. The principal employer is answerable for their contributions even when a contractor runs the payroll.
Can an employee opt out of ESI?
No. Unlike PF, there is no voluntary opt-out. If the wage and coverage tests are met, enrolment is compulsory for both sides.
If you are checking one employee, the order is: is the establishment covered, are gross wages ₹21,000 or less excluding overtime, and if yes, 0.75 per cent from them and 3.25 per cent from you. If you are checking a payroll, the two things worth auditing are people sitting just under the ceiling whose allowances have crept up, and anyone whose increment landed mid-period.
