What is ESI (Employee State Insurance)?
ESI (Employee State Insurance) is a social security and health insurance scheme for Indian workers. Managed by the ESIC (Employee State Insurance Corporation) under the Ministry of Labour & Employment, it provides medical, disability, maternity, and unemployment benefits to employees and their dependents. The scheme is governed by the ESI Act, 1948.
ESI Contribution Rates for 2026
| Contribution | Rate | On |
|---|---|---|
| Employee Contribution | 0.75% | Gross Monthly Salary |
| Employer Contribution | 3.25% | Gross Monthly Salary |
| Total ESI Contribution | 4.00% | Gross Monthly Salary |
These rates have been in effect since July 2019, when they were reduced from 6.5% (employee 1.75% + employer 4.75%) to encourage more employers to register under ESI.
Who is Eligible for ESI?
Employer Eligibility (Establishment)
- Factories: Employing 10 or more workers (in some states, 20+)
- Other establishments: Shops, hotels, restaurants, cinemas, road transport, newspaper establishments with 10+ employees
- Geographic coverage: ESI is applicable in notified areas/districts. Check ESIC portal for area-wise applicability
Employee Eligibility
- Wage limit: Employees earning up to Rs. 21,000 per month (gross salary) are covered under ESI
- For persons with disability: Wage limit is Rs. 25,000 per month
- Once covered: Even if salary exceeds Rs. 21,000 during a contribution period, the employee remains covered until the end of that period
ESI Calculation Example
Let’s calculate ESI for an employee earning Rs. 18,000/month gross salary:
| Component | Rate | Amount (₹) |
|---|---|---|
| Gross Monthly Salary | — | 18,000 |
| Employee ESI Contribution | 0.75% | 135 |
| Employer ESI Contribution | 3.25% | 585 |
| Total Monthly ESI | 4.00% | 720 |
| Employee Take-Home Impact | — | -135 |
| Employer Cost Above Salary | — | +585 |
What is Included in Gross Salary for ESI?
The following components are included when calculating ESI:
- Basic Salary
- Dearness Allowance (DA)
- House Rent Allowance (HRA)
- City Compensatory Allowance
- Special Allowance
- Incentives and production bonuses paid monthly
- Overtime wages
The following are excluded from ESI calculation:
- Annual bonus (under Payment of Bonus Act)
- Retrenchment compensation
- Encashment of leave on retirement
- Gratuity
- Conveyance allowance (for official duties only)
ESI Contribution Periods and Benefit Periods
| Contribution Period | Cash Benefit Period |
|---|---|
| April to September | January to June (following year) |
| October to March | July to December |
Benefits are available during the benefit period corresponding to the contribution period in which contributions were made. New employees get medical benefits from Day 1 of joining.
Benefits Under ESI Scheme
1. Medical Benefit
Full medical care for the insured person and their family (spouse, children, dependent parents). Includes outpatient treatment, hospitalization, surgery, medicines, and specialist consultations at ESI hospitals and dispensaries. There is no ceiling on medical expenditure.
2. Sickness Benefit
Cash compensation at 70% of average daily wages for up to 91 days in two consecutive benefit periods. Extended sickness benefit (80% of wages) for up to 2 years for specified long-term diseases like TB, cancer, and mental illness.
3. Maternity Benefit
Full wages (100%) for up to 26 weeks. Additional one month for complications. Applicable if contributions were paid for at least 70 days in the preceding two contribution periods.
4. Disablement Benefit
- Temporary disablement: 90% of average daily wages for the duration of disablement
- Permanent disablement: 90% of average daily wages as a monthly pension for life (proportionate to loss of earning capacity)
5. Dependants’ Benefit
Monthly pension equal to 90% of average daily wages paid to dependants if the insured person dies due to employment injury. Payable to widow/widower, children, and dependent parents.
6. Unemployment Allowance (Atal Beemit Vyakti Kalyan Yojana)
50% of average daily wages for up to 90 days if an employee loses their job due to closure, retrenchment, or permanent disability. Condition: Must have contributed for at least 2 years before unemployment.
ESI Registration and Compliance
- Registration deadline: Within 15 days of the ESI Act becoming applicable to the establishment
- Monthly payment: ESI contributions must be deposited by the 15th of the following month
- Half-yearly return: Form 5 must be filed within 42 days of the end of each contribution period (i.e., by 12th November and 12th May)
- Late payment penalty: Interest at 12% per annum on delayed contributions
- Damages: ESIC can impose damages of 5% to 25% of the contribution amount for delays
How INDPayroll Manages ESI Compliance
Tracking ESI eligibility, calculating contributions, and filing returns manually is complex. INDPayroll automates the entire ESI workflow:
- Auto-detect eligibility: Automatically identifies employees covered under ESI based on their gross salary
- Accurate calculation: ESI employee and employer contributions computed every pay cycle
- Wage ceiling tracking: Alerts when an employee’s salary crosses the Rs. 21,000 threshold
- Challan generation: Generate ESI payment challans ready for deposit
- Return data: Export ESI return data in ESIC-compatible format
- IP number management: Track employee ESI IP numbers and family declarations
Try INDPayroll Free → Auto-calculate ESI contributions and stay 100% compliant.
Frequently Asked Questions
Is ESI mandatory for all companies?
ESI is mandatory for establishments with 10 or more employees (20 in some states) located in ESI-notified areas, where at least one employee earns Rs. 21,000 or less per month. If no employee earns below the threshold, ESI may not apply.
What happens when an employee’s salary crosses Rs. 21,000?
If an employee’s salary exceeds Rs. 21,000 during a contribution period, they continue to be covered until the end of that contribution period. From the next contribution period, they are excluded from ESI if their salary remains above the limit.
Can an employee opt out of ESI?
No. ESI is a statutory scheme and employees earning within the wage limit cannot opt out. Both employee and employer contributions are mandatory.
Is ESI deduction shown in Form 16?
Employee ESI contribution is not a tax-deductible expense and is not shown in Form 16 tax computation. However, it appears on the salary slip as a deduction. Employer ESI contribution is part of CTC but not part of gross salary.
Can I use ESI benefits at private hospitals?
Yes, in emergencies and where ESIC has tie-ups with private hospitals. ESIC has been expanding its network of empanelled private hospitals. Check the ESIC portal for the list of empanelled hospitals in your area.
