Rules To Calculate Contribution For ESI and PF Deduction
ESI and PF deduction rules

Employees’ State Insurance Scheme

ESI scheme is a contributory fund that enables Indian employees to take advantage of self-financing and healthcare insurance fund contributed by the employee and the employer. The scheme is managed by Employees’ State Insurance Corporation which is a self- financing social security and labor welfare organization. It administers and regulates ESI scheme as per the rules mentioned in the Indian ESI Act of 1948.

ESI is one of the most popular integrated need-based social insurance schemes among employees that protects their interest in uncertain events, such as temporary or permanent physical disability, sickness, maternity, injury during employment, and more.

Eligibility for ESI deduction

ESI scheme applies to all establishments, like corporate organizations, factories, restaurants, cinema theatres, offices, medical and other institutions which are located in the scheme-implemented areas, where 10 or more people are employed. All employees of a covered unit, whose monthly incomes (excluding overtime, bonus, leave encashment) does not exceed Rs. 21,000 per month, are eligible to avail benefits under the Scheme. Employees earning daily average wage up to Rs.176/- are exempted from ESIC contribution. However, employers will contribute their share for these employees. ESI fund provides cash and medical benefits to employees and their immediate dependents.

ESI deduction is calculated on an employee’s gross pay. Most of the employees face confusion in understanding ESI deduction rules because they aren’t clear with the concept of Gross Salary amount. Gross salary is described as the total income earned while working in a job, before any deductions made for health insurance, social security and state or federal taxes.

For ESI calculation, the salary comprises of all the monthly payable amounts such as basic pay, dearness allowance, city compensatory allowance, HRA, incentive allowance, attendance bonus, meal allowance and special allowance. The salary, however, does not include annual bonus, retrenchment compensation, encashment of leave and gratuity.

Collection of Contribution

An employer is liable to contribute for each employee and deduct employees’ contribution from their wages. Employer shall pay the contributions as per the specified rates (mentioned below) to the Corporation within 15 days of the last day of the Calendar month. The Corporation has authorized designated branches of the State Bank of India and some other banks to receive the payments on its behalf.

The contributions under the ESI Scheme is raised from the employees & employers. The rates of contribution, as a percentage of wages payable to the employees are:

Employees’ contribution 0.75% of the gross pay

Employers’ contribution 3.25% of the gross pay

Thus, 4% of the wages is to be paid as contribution to Scheme for each worker.

ESI Calculation

Consider the gross salary of an employee is Rs. 12,000 per month then the ESI calculation for the employee would be calculated as:

ESI = 12,000*(0.75/100) = 90
(Employees contribution is 0.75 percent)

The ESI calculation for the employer’s contribution would be calculated as:
12,000*(3.25/100) = 390
(Employer’s contribution is 3.25 percent)

Total ESIC contribution is Employee’s contribution + Employer’s contribution = 390 + 90 = 480 INR.

In case, the salary goes above Rs. 21,000 per month during the contribution period (as defined below), the ESI would be calculated on the higher salary. For example, if the salary of an employee is raised to Rs. 25,000 per month during the ESI contribution period, then the ESI would be calculated on Rs. 25,000 instead of Rs. 21,000.

Contribution Period and Benefit Period

There are two contribution periods each of six months duration and two corresponding benefit periods also of six months duration as under.

Contribution Period Cash Benefit Period
1st April to 30th September 1st January of the following year to 30th June
1st October to 31st March of the following year 1st July to 31st December

Important Rule for ESI deduction

Your payroll team may help you understand basics about ESI and the related deduction, but there’s an important rule that you ought to remember.

For ESI, there are two contribution periods each of six months duration as shown in the above table. If the gross salary of an employee exceeds Rs. 21,000 in a month after the commencement of the contribution period, the employee continues to be covered under ESI scheme till the end of that contribution period and the contribution is deducted on the total income earned by the person.

For example, during the first contribution period (April to September) if an employee’s gross pay is increased from Rs. 18,000 (below ESI limit) to Rs. 25,000 (above ESI limit) in the month of June, the deductions will continue to happen till the end of the ESI contribution period i.e. September. And the deducted amount will be calculated on the increased gross salary, i.e. Rs. 25,000. When the 6 months contribution period ends, if the employee salary is more than the ESI limit, no further deductions will take place.

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Statutory Compliance Requirement for PF Deduction

The statutory compliance requirement for PF deduction is as follows:

Just like ESI, the Employees Provident Fund (EPF) is also a contributory fund in which both the employee and employer contribute amount. EPF is a compulsory and contributory fund for the Indian organizations under “The Employees’ Provident Fund and Miscellaneous Provisions Act 1952”.

Employee and Employer Contributions for PF Deduction Statutory Compliance

For EFP, both the employee and the employer contribute equal amount, which is 12% of the salary of the employee. However, the employee contributions may differ. Employees can contribute more than 12% of their salary voluntarily. However, in such a case, the employer is not bound to match the extra contribution of the employee.

For PF contribution, the salary comprises of components such as: basic wages, DA, conveyance allowance and special allowance.

For the PF deduction, the maximum limit of salary of the employee is Rs 15,000 per month. This means that even if the employee’s salary is above Rs 15,000, the employer is liable to contribute only on Rs 15,000 that is Rs 1,800.

The statutory compliance for PF contribution has some less known facts associated with it. The PF is divided into EPF and EPS (Employee pension Scheme) contributions. The employees’ contribution goes straight to EPF whereas from employer’s contribution, the 8.33% goes to EPS subject to Rs 1,250 a month and the rest goes to EPF. The payroll software providers take care about your ESI and PF deductions rules automatically.

How an Automated Payroll Software Manages ESI and PF Statutory Compliance

Empxtrack is one of the best payroll software providers that simplifies ESI and PF calculation. The software allows an employer to set its own and employees’ ESI and PF preferences. You can select the PF contribution of the company as:

12% of Basic salary.

Minimum of 12% of Basic salary or Fixed Monthly PF deduction.

PF deduction of the company as a fixed amount <= 1,800.

Once the ESI and PF preferences are set in the Empxtrack system, the Payroll Software automatically calculates the payroll for the employees accordingly and frees you from managing the ESI and PF statutory compliance for your company manually.

Manual computation of statutory compliance involves lot of paperwork which makes the process time-consuming, tiring and inaccurate. Thus, organizations prefer to use automated payroll tool to manage manage ESI, PF and income tax deductions.

Payroll management software puts an end on increasing complexities of payroll processing and it offers following benefits:

  • » Accuracy in PF and ESI calculation
  • » Increase transparency in the payroll process
  • » Maximize efficiency of payroll administrators

Still unsure?

Take a Free trial to understand how Empxtrack simplifies complex payroll calculations and allows organizations to work within the endowment of legal framework within estimated timelines & costs. Stop managing payroll calculations on spreadsheets, it’s high time to move to an advanced payroll management software for accurate deductions and meeting compliance needs effectively!

Disclaimer: The post has been updated to incorporate latest ESIC rules w.e.f. 1st July 2019.

Author Bio

Tushar Bhatia
Tushar Bhatia is CEO-founder of cloud-based global HR platform Empxtrack. His key goal is to help companies streamline their HR function, reduce costs and make employees engaged & productive. He writes on various HR related issues and trends that include strategic hr, performance management, best practices for recruitment, employee engagement and retention etc. On an average his blogs are read by about 2 Million professionals annually.

9 Comments

  1. Hi Sir,
    if employee new joins in the organisation and his salary excluding variable allowances and HRA is more than 15000 then we have to pay PF or we can exclude him from EPF.

    1. Hello,

      if the employee joins the organisation with the salary of more than 15000 and he/she joined as fresher the he/she has an option to become exclude from Pf Deduction. But, if any employee joins salary <15000 with the experience (having old UAN) and he/has withdrawal the PF/EPS amount form his/her last employer then he/she is also treated as Exclude member from PF with the permission of the employee.

      thanks.

    2. It is not compulsory for every employee to pay Provident Fund. Employees having basic salary+DA more than 15,000 have an option to opt out of PF at the time of joining the company. But once you opted for PF you cannot again opt out of it. If your basic salary+DA is less than 15,000 in a month, then you have no option to opt out the PF.

  2. Hi, i have one query regarding ESIC deduction i.e ” the employer can deduct employer’s share of contribution from the wages of employees? if you can resolve my query this it will be very helpfull for me. Thanks

    1. Rajesh, this is dependent on how your salary was setup and communicated to you. Typically many companies in their offer letters offer CTC – which means total cost to company. This includes the contributions of the company to ESIC, PF, gratuity etc. You will need to check your offer letter as also discuss with your HR about this.

  3. Aditya, well explained!

    here, I would like to add bifurcation of PF deductions from Employer’s side (13.36%) , as from employee’s side it is fixed i.e., of 12% monthly on basic salary.

    Employer’s contributions will go to following A/Cs.

    1) A/C No. 1 (PF Contribution ac.) – Employee-12%; Employer-3.67%
    2) A/C No. 2 (PF Admin ac.) – Employer-0.85%
    3) A/C No. 10 (EPS ac.) – Employer-8.33%
    4) A/C No. 21 (EDLI ac.) – Employer-0.50%
    5) A/C No. 22 (EDLI Admin charges ac.) – Employer-0.01%

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