What Is Health Insurance?
Health insurance is a contract where an insurer picks up an employee’s medical bills (hospitalisation, surgery, diagnostics) in return for a premium the employer, the employee, or both pay each month or year. Under current rules (2026), Indian SMEs deal with two tracks: the government-mandated ESI scheme for workers earning up to Rs.21,000 a month, where the employer contributes 3.25% of gross wages and the employee 0.75%; and voluntary group health insurance (GHI) from private insurers at Rs.4,500 to Rs.14,000 per head per year for staff above that ceiling.
Most owners treat these as either-or. They are not. A 40-person garment unit in Rajkot with 30 staff under ESI and 10 above it needs both running at the same time.
How Does Health Insurance Work for Indian Businesses?
ESI (mandatory). Your factory crosses 10 workers, or your shop crosses 20? Every employee earning up to Rs.21,000 gross must be enrolled. Employer pays 3.25% of gross wages; employee parts with 0.75%. ESIC pays sickness benefit at 70% of wages (up to 91 days), full-wage maternity for 26 weeks, and a Rs.15,000 funeral grant.
Group cover (voluntary). Nobody forces you to buy this. For staff above the Rs.21,000 ceiling, though, a group policy is the only real medical cover you can provide. Premiums sit between Rs.4,500 and Rs.14,000 per head depending on age mix and sum insured. Pre-existing conditions? Covered from day one in group policies, while individual plans make employees wait two to four years.
| Feature | ESI | Group Cover (GHI) |
|---|---|---|
| Mandatory? | Yes, if thresholds met | No |
| Who pays | Employer 3.25% + Employee 0.75% | Employer (fully or partially) |
| Wage ceiling | Rs.21,000/month gross | None |
| Hospital network | ESIC dispensaries only | Any insurer-network hospital |
| Regulator | ESIC | IRDAI |
What Does Employee Health Cover Look Like in Practice?
Hypothetical, for illustration only.
Priya owns a bakery chain in Nashik, 26 people on the rolls. Eighteen production staff pull between Rs.12,000 and Rs.19,500 a month (ESI-covered). Her eight supervisors earn Rs.24,000 to Rs.38,000, above the ceiling and outside ESIC entirely.
| Category | Count | Cover type | Monthly cost to Priya |
|---|---|---|---|
| Production staff (ESI) | 18 | ESI at 3.25% employer share | Rs.8,775 |
| Supervisors (GHI) | 8 | Group policy, Rs.3 lakh sum insured | Rs.5,200 |
| Total | 26 | Rs.13,975/month |
If Priya drops the group policy to save Rs.5,200 a month, one hospitalisation wipes out two months of that saving. Across our Payroll clients we see it constantly: ESI gets done because inspectors can fine you, but nobody bothers with the private cover for higher-paid staff.
Why Does Health Insurance Matter for Indian Businesses?
A single appendectomy at a mid-tier hospital in Visakhapatnam costs about Rs.1.2 lakh without cover. On 8% to 12% net margins, one uninsured admission eats the quarter’s profit.
Section 85 of the ESI Act charges 12% annual interest on late contributions; inspectors do pull these records. The PF & ESI compliance checklist lays out every filing deadline.
What catches owners off guard is the tax angle. Employer-paid group premiums are deductible under Section 37(1) of the Income Tax Act, and the employee pays zero tax on that benefit. If staff co-pay, their share qualifies under Section 80D, up to Rs.25,000 a year. Hard to find another employee benefit with a tax break on both sides.
How Does Petpooja Payroll Handle Health Insurance?
Petpooja Payroll reads each employee’s gross wage and tags them as ESI-applicable or not. Give someone a raise in October that pushes them past Rs.21,000? The tag flips from the next contribution period without you touching anything. ESI shares land as separate line items in the salary structure, and GHI co-pay deductions sit in the deductions column, carrying through to the CTC breakdown.
Frequently Asked Questions
Depends on the type. ESI is mandatory once your establishment hits the headcount and wage thresholds under the ESI Act, 1948. GHI from a private insurer is voluntary today, though the Code on Social Security, 2020 may change that.
Government vs. private, basically. ESI is funded by a fixed wage percentage and limits treatment to ESIC dispensaries. With GHI you buy a policy from an insurer like ICICI Lombard or Star Health, and employees can visit any hospital in that insurer’s network.
The ESI employee share of 0.75% is a statutory deduction; no consent needed. For GHI, you can only deduct the co-pay portion if the policy allows it and the employee has agreed in writing.
Group policies usually cover them from day one because the risk spreads across the whole group. Individual plans impose waiting periods of two to four years, which is why group cover is better value per rupee.
Rs.4,500 to Rs.14,000 per head per year is the range we hear from clients, for a Rs.3 lakh to Rs.5 lakh sum insured in a tier-2 city. Talk to at least three insurers before signing; premiums vary more than you would expect.
