Rules for ESI and PF Deduction to Calculate Employee & Employer Contribution
Rules for ESI and PF Deduction

This document describes the 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, is updated whenever there are changes, and 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 theatres, 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. Note: Some states (such as Gujarat and Punjab) have upper limits on the number of employees for eligibility of the ESI scheme.
  • 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.

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.

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.

ESI Calculations

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 duration 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.

Employees can contribute more than 12% of their salary voluntarily, however the employer is not bound to match the extra contribution of the employee.

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).

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:

Employee Employer>
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

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

Note: The post has been updated to incorporate latest ESIC rules as of 1st July 2019.

empxtrack-free-payroll-software
Free Payroll and HR Software

Manage Employees data, Leave, Attendance and Payroll with complete peace of mind

Start Now !

48 Comments

  1. MY COMPANY DEDUCT THE PF AND ESI AMOUNT FOR THE MONTH OF APRIL, 2020 ON 5TH MAY, 2020. BUT THE PF ESI REGISTRATION HAS BEEN COMPLETED ON 7TH MAY, 2020. SO, MY QUESTION IS “CAN THEY PAY THE AMOUNT IN THE PORTAL FOR THE MONTH OF APRIL, 20???”

    1. It is not mandatory but if you fill 15G and 15H forms, you can save your Tax based on below conditions:

      Form 15H is a self-declaration form which helps individuals above 60 years of age save Tax Deducted at Source (TDS) on the interest income earned by him on his fixed deposits. The assessee is supposed to submit a declaration form to his banker to apply for no deduction or lower deduction for fixed deposits made by him

      Form 15G needs to be submitted for no TDS deduction. For EPF withdrawal if your contribution to EPF is less than 5 years and amount is more than 50,000 then TDS at the rate of 10% will be deducted. Remember EPF withdrawal before 5 years is taxable.

  2. Whats the minimum amount has to contributed toPF deduction by both the side contribution added together, if my Basic is 30000/-

    1. If there is a capping for PF deduction i.e. 1800/- for employee and employer then your PF contributions would be 3600/- per month i.e. 1800/- from employee and 1800/- from employer contribution. If there is no limit and it is 12% of basic salary then your PF contributions will be 7200/- per month i.e. 3600/- from employee and 3600/- from employer contribution. In addition to these you can voluntary contribute as employee contribute over and above of fixed or 12% of basic salary and employer will contribute only capped amount.

    1. Your ESIC deduction i.e. employee contribution, would be 0.75% of your gross salary i.e. 85.51/-, it will be upper round and final value would be 86/-. The employer contribution would be 3.25%, i.e. 370.56/-,it will be upper round and final value would be 371/-.

  3. My Basic is 15,000
    Gross is 28,003
    PF 1800
    PT 200
    Gratuity 722
    CTC 30,525

    This is the calculation given by my company to me
    Can you please help me with the in-hand salary that I am supposed to receive.

  4. Hi, can you help me with the clarification of PF calculation, as you said PF is calculated as per revised PF rules, if the employee’s basic salary is less than 15000/- then pf deduction will be calculated @12% on monthly gross salary excluding HRA/Food Allowance. I need more details, it excluding HRA / FOOD ALLOWANCE / MEDICAL ALLOWANCE/ CONVENCY ALLOWANCE AS WELL.
    Apart From above is there any way if we change the Head instead of “Special allowance” into “Travel – Projected Allowance” than its excluded from PF calculation.

    1. For revised PF rules, formal notification still awaited about deduction of PF on gross salary if salary is less than 15000/-. Till final notification, you can deduct PF only on Basic component of a salary structure.

    1. There are two ESIC contributions, employee ESIC contribution will be @0.75% i.e. Rs. 94 and company ESIC contribution will be @ 3.25% i.e Rs. 407. If 12500 is inclusive of both contributions i.e. company and employee, then both the contributions will deduct from your salary otherwise only employee contribution will deduct from your salary.

  5. Gross per month is 40000, employer capped the same @15000 for employer contribution. Suppose he worked for 15 days. What will be the Gross for PF 15000/26*15 or 20000 or 15000??

      1. Than you for your reply..
        Can you please be specific.
        What is appropriate method as per relevant rules in these regard?
        can you please advice/quote the relevant section/case-law?
        Is it mentioned as discretionary to the choice of employer?

  6. Thanks for sharing this article with us. It’s very easy to read and understand. I hope you will publish more article on ESI

  7. My wages now more then 22000 now esic not cut from my salary. employer esic 1075 and employee esic is 396 so total amount 1471 that is also part of my ctc. so which amount will credit in my ctc total amount 1471 or just only 396 employee amount. please reply me.

    1. It totally depends on your CTC breakup. If CTC breakup consists of employer ESIC contribution then both the ESIC contributions will get added in your monthly salary. In case employer contribution is outside from CTC breakup then your ESIC contribution will be added in your monthly salary and net payment will increase accordingly. There is an ESIC rule that any ESIC contribution can be stopped post Half Yearly return submission. ESIC return periods are Apr-Sep and Oct-Mar every year.

    1. Under the current rules, it is mandatory for company employing 20 or more employees to provide EPF benefits to workers . I have replied to a similar query on 09th Sep 2019, Please refer to same for further clarifications.

  8. Hello Sir,
    I have a doubt regarding the way the EASI scheme is implemented. The employee and employer contribution has been reduced (1.75% to 0.75%) and (4.75% to 3.25%) respectively. This will be in effect from 01/07/2019. Does that mean the salary that will be credited to the employer on 01/07/2019 will be calculated using the revised rates? Or will the revised rates will be used for calculation from the month after that??

    1. It is effective from 1st July 2019. It should reflect in your July salary which is usually payable in month of August.

  9. Hello Sir. Can you please tell me PF contribution of Employees from salary. From April 2019, my PF amount is deducted 12% of gross salary less HRA payable means (basic payable+DA payable+CCA payable+Special Allowance+ Local conveyance+ tiffin allow payable). Before it, only 12% of Basic payable +DA payable. So please help me to figure out correct calculation for PF contribution of Employees. Thanks in advance.

    1. As per revised PF rules, if employee’s basic salary is less than 15000/- then pf deduction will be calculated @12% on monthly gross salary excluding HRA/Food Allowance. It is applicable for contributions made by company and employee both.

  10. Salary increased to 30k + pm and before it was under the esi scheme. So the amount we contributed before can that be reimbursed???

    And as per the current salary can we get any esi type deduction or there is no medical benefits from company side.

    One of my fried is getting 6L + pa and he did his fathers operation <> and he told will be reimbursed as medical benefit from company. How????

    1. As per ESIC rule, if any employee falls out of ESIC deduction due to increase in salary, then employee is suppose to contribute till the ESIC half yearly return period i.e. April – Sept and Oct – Mar. Once the ESIC Half Yearly period is complete ESIC deduction deduction will stop. There will not be any reimbursement of ESIC paid contribution. Regarding Medical benefits : This depend upon the company policy.

  11. 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%

    The above calculation is continuing or changed. If changed kindly provide the update calculation.

    1. There are some changes.
      1) A/C No. 1 (PF Contribution ac.) – Employee-12%; Employer-3.67%
      2) A/C No. 2 (PF Admin ac.) – Employer-0.50%
      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-0.0%
      6) In case company is exempted under PF Scheme, Inspection charges @ 0.18%, minimum Rs5/- is payable in place of Admin charges. In case the company is exempted under EDLI Scheme, Inspection charges @ 0.005%, minimum Re 1/- is payable in place of Admin charges.

  12. how s calculated on esi deduction from employer and employee share
    on which basis
    CTC OR GROSS SALARY
    WHICH ONE IS CORRECT – CTC OR GROSS SALARY
    OUR COMPANY ESI CONTRICBUTION OF EMPLOYER SHARE DEDUCTED BY EMPLOYEE SALARY
    IS IT CORRECT

    1. Please find below PF and ESIC rules for companies.

      PF Rule
      According to the EPF rules, any Firm which has a minimum of 20 employees has to be registered with the Employees’ Provident Fund and Miscellaneous Provisions Act. It is up to the Firm to implement it as capping per month as 1800 i.e. 12% of minimum PF wages i.e. 15000/- or 12% of employee wages.

      ESIC Rule
      Any organization having 10 or more employees, drawing the wages of up to Rs.21,000 per month are required to be registered for ESIC under the ESIC Act 1948.

  13. 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.

  14. 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.

  15. 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%

Leave a Reply

Your email address will not be published.

*

four − two =