ESI Calculation: Importance and process

October 10, 2023

6 minutes read

With the help of this article, we look at understanding what ESI is, what ESI calculation is, its significance and how it is calculated using ESI contributions and employee gross salary. By diligently carrying out the various ESI procedure requirements, employers can not only fulfil mandatory legal compliance, timely contribution remittance, and ensure the availability of various medical and healthcare benefits to employees but also attract and retain top talent for the organisation and foster a sense of security among the employees.

What is the meaning of ESI?

ESI stands for Employee State Insurance. It is a self-contributing social security and health insurance scheme that not only caters insurance protection to employees in the public and private sectors but also provides additional health and medical benefits to employees, their families, and dependents. The ESI scheme’s most integral part is ensuring that employees can avail themselves of quality health, medical, and hospitalisation services and compensations at affordable rates.

Read More: ESI Full Form, History, Benefits, and Registration

Importance of ESI Calculation for employees and employers

Understanding ESI calculation is a critical requirement for employers and employees, as it helps maximize the benefits of the government-sanctioned scheme. ESI calculation helps employers determine the ESI contribution amount they must submit by tallying the ESI contribution rates and adding the employee’s gross wages. This, in turn, ensures timely benefit remittance. Additionally, this process ensures that the ESI fund remains financially viable and meets employees’ healthcare needs, while also assisting employers in fulfilling their legal compliance obligations.

Another requirement of performing ESI calculations involves assisting employers in keeping records and documentation of the employees. These records are crucial and may be required during audits and inspections conducted by government authorities.

Who is eligible for ESIC Coverage?

Organisations falling under the Shops and Establishment Act or the Factory Act and employing more than 10 employees can come under ESIC coverage. However, there is an exception to this rule in Maharashtra and Chandigarh, where the threshold for employees is 20, unlike other states and Union Territories.

Under Section 2A of the Act and Regulation 10-B, the employer must register their business entity under the ESI Act within 15 days of its applicability.

Furthermore, employees wishing to avail themselves of ESI benefits should not earn more than Rs 24,000 monthly.

Components of ESI Calculation

ESI Contribution Rates

For the ESI contribution calculation, the employer contributes 3.25% of the employee’s wage, whereas the employee bears 0.75% of the contribution based on the employee’s monthly wages.

Furthermore, the employer contributes towards ESI every month by deducting the employee’s contributions from their wages, combining them with their own contribution, and depositing the total amount within 15 days of the last day of the calendar month.

However, an exception for ESI Calculation exists for employees who make an average daily wage of up to Rs 137. In such cases, only the contribution of the employer is calculated.

ESI Calculation process

Employee Gross Salary

At the time of calculating the employee’s contribution towards ESI, their gross monthly salary is calculated against the ESI contribution rates specified:

ESI Employer’s Contribution Rate: 3.25% of the payable wages
ESI Employees Contribution Rate: 0.75% of the payable wages

The gross salary mostly includes the following elements:

Basic pay
Dearness allowance
House Rent Allowance (HRA)
Incentives (including sales commissions)
City compensatory allowance
Meal allowance
Uniform allowance
Attendance & overtime payments
Any other special allowances.

However, not all of the elements of the employee’s salary make it to the calculation of the contribution amount. Below are some of the items that are included and excluded for factoring the contribution calculation:

Inclusions

Suspension Allowance or Subsistence Allowance
Overtime Allowance
Wages Paid During Layoff
House Rent Allowance
Night Shift, Heat, Gas and Dust Allowance
Conveyance Allowance
Medical Allowance

Exclusions

Washing Allowance
Annual Bonus
Incentive Bonus
Production Bonus
Inam/ Ex-Gratia Payment
Annual Commission
Service Charges
Gazetted Allowance
Ex-gratia Payment During Strike for Traveling Expenses
Saving Scheme

ESI Calculation Formula

After calculating the employee’s gross salary and determining their contribution towards ESI based on their contribution rate, one calculates the total ESI contribution by combining the contribution shares from both the employer and the employee.

Total ESI Contribution = Employer’s Contribution + Employee Contribution

Here is an example of an employee making the following:

Wages: Rs. 20,000 per month.
Employee Contribution: 0.75 % = Rs. 150 per month.
Employer Contribution: 3.25 % = Rs. 650 per month.

Employees State Insurance Scheme will calculate the gross salary (Basic and LOP dependent allowances) up to ₹21,000. If the Gross is above ₹21,000, ESI will be constant.

The law legally obligates the employer to contribute towards ESI by deducting employees’ contributions from their wages, combining them with their own contribution, and depositing the summed-up total contributions within 15 days of the last day of the calendar month. However, failure, delay, or non-compliance may subject the employer to severe legal repercussions, penalties, and even imprisonment.

Documentation and record-keeping

Documentation and record-keeping are crucial aspects of ESI calculation and compliance. Employers must maintain accurate records and documents related to ESI contributions and employee details. Following is a list of documents and records an employer must maintain at all times:

1. Employee Register

2. Attendance Register

3. Wage Register

4. Contribution Register

5. Cash Book or Bank Statement

6. Monthly Challans

7. ESI Returns

8. Employee’s Nominations and Declaration forms

9. ESI Dispensary / Hospital Cards

10. Correspondence with ESI Authorities

11. Employee Records for Dependent family members

12. Annual report

13. Miscellaneous records

ESI Compliance and Reporting

Compliance with ESIC regulations is critical in ensuring employers follow government directions and guidelines. It requires employers to submit necessary documentation and reports promptly, holding them accountable for timely ESI contributions.

To ensure adherence to established compliance guidelines, employers and employees must perform specific tasks, facilitating the generation of valid and accurate reports.

For Employers

Registration of their organisation with ESIC if they have more than 10 employees within 15 days of becoming eligible
Ensuring legitimate deduction of employee contribution from their monthly wages, adding their own and timely deposit of the combined ESI contribution every month within 15 days of the end of the contribution period
Keeping valid records of all employees, including their attendance, wages, ESI contributions and more, for a minimum of 5 years
Timely submission of periodic returns and reports to ESIC, which include monthly contribution statements, annual reports and any other reports required by ESIC
Prominently displayed notices informing the employees about their ESI rights and the nearest ESI dispensary or hospital location.
Co-operating with ESIC officials during inspections.
Timely compliance with ESI regulations to avoid penalties and legal repercussions

For Employees

Ensuring they are successfully registered under the ESI scheme and all their details are valid and accurate
Contributing their share to the ESI scheme
If they are not registered with ESI, they must inform their employers and rectify the issue immediately.
Availing ESI medical benefits and claims as per directions
Compliance with the treatment plan as per regulations

Penalties for non-compliance with ESI?

To ensure employers are held accountable and diligently contribute towards the ESIC scheme on time, the court system of India has established punishments for failing to meet the scheme’s obligations. The following provisions describe the offences and the related penalties for non-compliance.

Section 84: Penalty for false statements

Making false statements while attempting to avail of scheme benefits can result in the person being fined up to Rs 2,000 and/or imprisoned for up to 6 months.

Section 85(a): Penalty for failure to pay a contribution

All employers must contribute to ESI Corporation to benefit the employees. Moreover, any delay or non-compliance to this rule can lead to imprisonment of up to 3 years and a Rs 5,000 fine.

Additionally, if the employer has deducted the contribution from the employee but not submitted it to ESI, the employer can face minimum imprisonment for up to 1 year and a fine of Rs 10,000.

Section 85(b) to (g): Penalty for non-compliance with other requirements

Apart from contribution payment, there are other obligations that an employer must follow. Non-compliance can lead to imprisonment of a maximum of 1 year and /or a fine of up to Rs 4,000

Section 85-A: Punishment for repeating an offence

If an employer repeats an offence they have been convicted for, they could receive imprisonment for up to 2 years and a fine of Rs 5,000

Section 85-B: Power of ESI Corporation to recover contributions

If the employer fails to make the contribution payment, the ESI Corporation is authorised to recover the payment from the employer.

Section 85-C: Court’s power to direct payment of contribution

When an employer has been previously convicted of non-compliance charges, the court can ask to pay his ESIC contribution for the duration of his sentence. The amount can also be extended periodically.

Section 86-A: Offences by companies

If a company commits an offence, the person running the company is held responsible for the offence and liable for punishment.

Conclusion

To sum up, ESI Calculation represents a valuable social security mechanism that extends financial and healthcare benefits to employees. Furthermore, it presents numerous advantages to employers, such as legal compliance, talent attraction, and overall employee contentment. ESIC plays a pivotal role in ensuring employees’ and employers’ security and assistance during challenging times.