What Is ESI (Employees’ State Insurance)?
ESI is a wage-linked social security scheme that covers medical care, sickness pay, maternity leave, disablement, and dependants’ benefits for Indian workers. The ESI Act, 1948 governs it. ESIC (the corporation that runs the scheme) sits under the Ministry of Labour.
Who falls under it? Any employee drawing gross wages of Rs.21,000 or less per month. That ceiling was Rs.15,000 until 2017. The scheme kicks in at 10 workers for factories, 20 for shops, hotels, and restaurants (though Maharashtra and a few other states have pulled that down to 10). Once covered, the worker gets an IP number tied to ESIC’s hospital and dispensary network, and that number follows them across jobs.
How Is ESI Calculated?
Employer pays 3.25% of gross wages. Employee pays 0.75%. Total: 4%. Before July 2019, the combined rate was 6.5%, so the current number is a relief measure that stuck.
Gross wages for ESI purposes include basic, DA, HRA, conveyance, overtime, and attendance bonuses. What stays out: annual bonus, retrenchment compensation, leave encashment, and the employer’s PF share.
A machine operator at a packaging unit in Ludhiana earning Rs.15,280 per month:
| Wage Component | Amount |
|---|---|
| Basic | Rs.8,500 |
| DA | Rs.1,700 |
| HRA | Rs.2,550 |
| Conveyance | Rs.800 |
| Overtime (12 hrs) | Rs.1,230 |
| Attendance Bonus | Rs.500 |
| Gross Wages | Rs.15,280 |
| ESI Head | Rate | Amount |
|---|---|---|
| Employee share | 0.75% | Rs.115 |
| Employer share | 3.25% | Rs.497 |
| Total deposit | 4.00% | Rs.612 |
Challan due date: 15th of the following month. Miss it and ESIC charges 12% annual interest.
What Does ESI Look Like for a Real Business?
Take a garment stitching unit in Ludhiana. Fourteen workers, wages ranging from Rs.10,000 to Rs.18,500 gross. Monthly wage bill: Rs.1,97,400. The employer’s ESI share alone is Rs.6,416. Add the employee share at Rs.1,481 and the combined monthly deposit hits Rs.7,897.
That part is straightforward. The part that trips people up is the contribution period logic. ESI runs on two fixed cycles (April to September and October to March), and an employee must clock 78 days of contributions within one cycle before sickness benefit kicks in. Most owners find this out after a worker files a claim and ESIC rejects it because the 78-day threshold was not met. By then, the worker is upset, and the owner has no good answer.
Why Does ESI Matter for Indian Businesses?
Section 85 of the ESI Act is not gentle. Imprisonment up to two years, fine up to Rs.5,000, or both. In practice, the inspector shows up, the establishment has no ESIC registration, and back-contributions for every month of default land on the owner’s desk with 12% interest compounding on top.
Across 30,000+ Attendo clients, the most common ESI mistake we see is the opposite: employers keep deducting ESI after someone’s wages cross Rs.21,000, which creates refund complications that drag on for months. The threshold is not a band; once wages breach it in a contribution period, that employee exits the scheme.
On the benefits side, covered employees get medical treatment at ESIC facilities for themselves and their families. Sickness benefit runs at 70% of wages for up to 91 days. Maternity: 26 weeks at full wages. Disablement: 90% of wages (temporary) or a proportional lifetime pension (permanent). If an employee dies from an employment injury, dependants receive 90% of wages. Funeral expenses are capped at Rs.15,000.
How Does Attendo (formerly Petpooja Payroll) Handle ESI?
Attendo picks up gross wages each pay cycle and splits the ESI contribution into employer and employee shares without manual input. At Petpooja, the system flags the wage-ceiling breach the same month it happens, so deductions stop before they overshoot. Every payslip carries the statutory breakup (PF, ESI, TDS), and the compliance dashboard tracks challan status, something clients like Zepto rely on across hundreds of staff.
Frequently Asked Questions
Anyone earning Rs.21,000 or less per month, working in an establishment that meets the state headcount threshold. Factories: 10 workers. Shops, hotels, restaurants: 20 in most states, 10 in Maharashtra and a handful of others. Contract workers and daily-wage staff count toward the number.
4% of gross wages. The employer’s share is 3.25%, the employee’s is 0.75%. That has been the rate since July 2019; before that, the total was 6.5%.
Six categories under Section 46. Medical treatment at ESIC hospitals for the worker and family comes first. Then sickness benefit (70% of wages, up to 91 days), maternity benefit (26 weeks, full wages), temporary disablement (90%), permanent disablement (proportional, payable for life), dependants’ benefit if death results from a work injury, and Rs.15,000 toward funeral expenses.
It depends on the state. Most require registration once you cross 20 employees; Maharashtra and some others set it at 10. If even one person on your rolls earns under Rs.21,000, check whether your salary structure triggers the obligation. Ignoring it until an inspector shows up is, frankly, the most expensive way to find out.
The employer owes both shares (their 3.25% plus the employee’s 0.75%), with 12% annual interest on delayed amounts. Section 85 allows imprisonment up to two years. Most payroll mistakes like this surface during audits and end with back-payment orders, compounded interest, and a compliance notice that takes months to close.
