This blog describes rules for ESI and PF Deduction where ESI is Employee State Insurance (ESI) and PF is Provident Fund (PF). These are two social security schemes available to employees working in India.
We have often found that Payroll administrators face challenges in identifying the most updated standards in these 2 areas – leading to wrong deductions and deposits, queries from government departments, the dreaded scrutiny and even fines.
There is significant information available on the web and even on the government websites, but that is often contradictory, confusing, poorly written or sometimes even wrong or misleading.
This blog explains both schemes and describes the Rules of ESI and PF Deduction in detail. These rules are updated in this post whenever there are changes in government schemes. This helps you implement Best Practices of Payroll Processing in your organization.
Employees’ State Insurance (ESI) Scheme
ESI is a contributory fund that enables Indian employees to participate in a self-financed, healthcare insurance fund with contributions from both the employee and their employer.
The scheme is managed by Employees’ State Insurance Corporation, a government entity that is a self-financing, social security, and labor welfare organization.
The entity 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. The scheme protects employee interest in uncertain events such as temporary or permanent physical disability, sickness, maternity, injury during employment, and more. The scheme provides both cash benefits and healthcare benefits.
Eligibility for ESI
ESI scheme applies to all types of establishments, including corporates, factories, restaurants, cinema theaters, offices, medical and other institutions. Such units are called Covered Units.
What is the criteria for Covered Units
- – All units that are covered under Factory Act and Shops and Establishment act are eligible for ESI.
- – Where 10 or more people are employed irrespective of their monthly earnings.
- – Units which are located in the scheme-implemented areas. The government plans to implement ESI across the entire country by 2022 so all units will be considered as Covered Units.
All the establishments covered under the ESI act and all the factories that employ more than 10 employees and pay wages below Rs. 21,000 per month (Rs. 25,000 for employees with disability) must register with ESIC and contribute towards the ESI scheme.
How to identify eligible employees?
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. The ESIC has fixed the contribution rate of the employees at 0.75% of their wages and the employer’s contribution at 3.25% of the wages for FY 2023-24.
Employees earning daily average wage up to Rs. 176 are exempted from ESIC contribution.
However, employers will contribute their share for these employees.
What salary components are applicable to ESI deductions?
ESI contributions (from the employee and employer) are calculated on the employee’s gross monthly salary.
Most people face challenges in understanding ESI deduction rules because they aren’t clear about the concept of Gross Salary. So let us explain this concept first.
Gross salary is described as the total income earned by the employee, while working in their job, before any deductions are made for health insurance, social security and state and federal taxes.
For ESI calculation, the salary comprises of all the monthly payable amounts such as
- – Basic pay,
- – Dearness allowance,
- – City compensatory allowance,
- – House Rent Allowance (HRA),
- – Incentives (including sales commissions),
- – Attendance and overtime payments,
- – Meal allowance,
- – Uniform allowance and
- – Any other special allowances.
The gross monthly salary, however, does not include Annual bonus (such as Diwali bonus), Retrenchment compensation, and Encashment of leave and gratuity.
Collection of ESI Contribution
It is the employers responsibility to contribute to the ESI fund by deducting the employees’ contribution from wages and combining it with their own contribution.
An employer is expected to deposit the combined contributions within 15 days of the last day of the Calendar month. The payments can be made online or to authorized designated branches of the State Bank of India and some other banks.
The rates of contribution, as a percentage of gross wages payable to the employees, is explained in the table below
|Percentage of Gross Pay||Example Gross Salary||Contributions|
|Employee Deduction||0.75%||Rs 15,000||15,000 * 0.75% = 112.50|
|Employer Contribution||3.25%||15,000 * 3.25% = 487.50|
|Total Contributions for this employee||112.50 + 487.50 = Rs 600.00|
In case, the gross salary of the employee exceeds Rs. 21,000 during the contribution period (explained next), the ESI contributions would be calculated on the new salary and not Rs 21,000.
For example, if the salary of an employee increases to Rs. 22,000 per month, then the ESI would be calculated on Rs. 22,000 instead of Rs. 21,000 during the contribution period.
Contribution Period and Benefit Period
Payroll administrators often face confusion when employees salaries change – especially when the monthly salary exceeds the ESI limits of Rs 21,000.
To handle this situation, ESI has a concept of contribution periods during which the ESI contributions have to continue, even when the salary exceeds the maximum limits.
There are two contribution periods each of six months duratio n and two corresponding benefit periods also of six months duration.
|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|
After the commencement of a contribution period, even if the gross salary of an employee exceeds Rs. 21,000 monthly, the employee continues to be covered under ESI scheme till the end of that contribution period.
The contribution is deducted on the new salary. Let us look at an example to understand this better.
If an employee’s gross salary increases in June from Rs. 18,000 (within ESI limit) to Rs. 22,000 (above ESI limit), the deductions for ESI will continue to happen till the end of the ESI contribution period i.e. September.
And the deduction amount for both the employee and employer will be calculated on the increased gross salary of Rs. 22,000.
At the end of the contribution period, if the employee salary is more than the ESI limit, no further deductions and contributions are required. The employee will still be covered under ESI till 30th June of the following year.
Similar rules apply when an employees salary increases in the 2nd contribution period.
Rules related to Employee Provident Fund (EPF)
Just like the ESI scheme, the Employees Provident Fund (EPF) is a Contributory fund with contributions from both the employee and their employers.
While the focus of the ESI scheme is healthcare, Provident Fund is focused towards post Retirement Income and Benefits.
EPF is a compulsory and contributory fund for Indian organizations under “The Employees’ Provident Fund and Miscellaneous Provisions Act 1952”.
Employee and Employer Contributions to the Employee Provident Fund (EPF)
For EPF, both the employee and the employer contribute an equal amount of 12% of the monthly salary of the employee. The contributions are payable on maximum wage ceiling of Rs 15,000.
Employees can voluntarily contribute more than 12% of their salary, however the employer is not bound to match the extra contribution of the employee.
The PF deduction rate of 10% is only applicable to some establishments where less than 20 employees are employed and they meet the following conditions:
- – If it is a sick industry declared by BIFR
- – If industry belongs to brick, jute, beedi, gaur and coir industries
- – If an organization is operating with a wage limit of Rs 6,500
- – If an organization has seen annual loss which is more than its net value
For PF contribution, the salary comprises of fewer components:
- – Basic wages,
- – Dearness Allowances (DA),
- – Conveyance allowance and
- – Special allowance.
The employers monthly contribution is restricted to a maximum amount of Rs 1,800. Even if the employee’s salary exceeds Rs 15,000, the employer is liable to contribute only Rs 1,800 (12% of Rs 15,000).
For international workers, wage ceiling of Rs 15,000 is not applicable.
Details of EPF
The statutory compliance associated with PF contribution has some lesser known facts associated with it.
The contributions by the employee and employer are divided into two separate funds:
- – EPF (Employee Provident Fund) and
- – EPS (Employee Pension Scheme).
The breakup happens as follows:
|Total contribution||12% of monthly salary||12% of monthly salary (subject to a maximum of Rs 1,800)|
|Employee Pension Scheme (EPS)||0||8.33% (of the 12%)|
|Employee Provident Fund (EPF)||Full amount||3.67% (of the 12%)|
|Example Monthly Salary: Rs 12,000|
|Total Contribution||12,000 * 12% = Rs 1,440||12,000 * 12% = Rs 1,440|
|EPS||0||12,000 * 8.33% = Rs 999.60|
|EPF||Rs 1,440||12,000 * 3.67% = Rs 440.40|
Provident Fund Withdrawal Rule
A PF account holder can withdraw up to 75% of the total amount if he/ she has been unemployed for more than a month.
The offline PF withdrawal process usually takes upto 20 working days, and online PF withdrawal takes upto 3 working days.
An employee cannot withdraw full or partial PF until he/ she is employed. Full PF balance can be withdrawn only if the employee has been unemployed for at least 2 months or the joining date of the new job is more than 2 months from the last working day at the previous employer.
In any case, if an employee withdraws ₹50,000 or more within 5 years of opening a PF account, then a TDS of 10% is applicable on the withdrawal (provided you have a valid PAN card) or 30% (if you don’t have a PAN card).
How an Automated Payroll Software helps implement Rules for ESI and PF Deduction
Manual computation of statutory compliances involves lot of paperwork and filling in of challans and forms on paper and submitting them to banks. This makes the process time-consuming, can introduce inaccuracies and can often lead to mistakes.
Both the ESI and PF departments encourage online filing and payments.
It is advisable to use automated payroll processing tools to calculate ESI, PF and income tax deductions.
A good payroll management software puts an end to increased complexities of payroll processing and offers following benefits:
- – Accuracy in PF, ESI and other statutory calculations
- – Increased transparency in payroll processing
- – Reduced number of queries from employees
- – Higher compliance
- – Lower load on payroll administrators
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