ESI Calculation – How to Calculate ESI (With Example)

In this detailed guide, learn ESI Calculation (Employees' State Insurance) contributions accurately with examples. Understand the ESI Act's wage definition, inclusions and exclusions, calculation formula, coverage criteria, and contribution and benefit periods. Discover the benefits of registering under the ESI Act for both employees and employers. Get answers to frequently asked questions about ESI calculation and its benefits.

What is ESI?

Employees' State Insurance (ESI) is a comprehensive government health insurance plan designed to assist workers in times of medical crises, injuries, workplace accidents, and other socioeconomic calamities. Because of the integrated nature of its services and benefits, it is one of the most popular social security schemes. It is a self-funded, contributory programme in which employees and employers each contribute a certain amount each month. One of the most significant issues that organisations encounter when providing ESI as an employee benefit is calculating ESI. In this blog, we will walk you through the ESI calculation process and present you with the simplest way to compute ESI contributions.

How Does the ESI Act Define Wage?

Wage, as defined by the ESI Act of 1948, is the amount payable/paid to a worker in accordance with the conditions of the employment contract. The earnings decide whether or not the company and employee will contribute to the ESI system and how much they will contribute. Workers may be paid on a contractual, weekly, monthly, or on a daily basis, depending on the terms of their employment (implied or explicit).

ESI - Inclusions and Exclusions

The salaries utilised in ESI calculations do not cover all of the benefits provided to the employee. The inclusions and exclusions are critical in determining the employee's gross salary/ pay. The list of inclusions covers - Basic Salary, Dearness Allowance, City Compensatory Allowance, Meal Allowance, Newspaper Allowance, Driver Allowance, Education Allowance, Suspension Allowance, House Rent Allowance, Special Allowance and Overtime, Interim Relief, Attendance Bonus, and so on.

The list of exclusions covers - Entertainment Allowance, Gratuity, Annual Bonus, Leave Encashment, Retrenchment Compensation, Petrol Allowance, Travel Allowance, Annual Commission, Service Charges, Savings Scheme, Commissions to Dealers/ Agents, Tax Deductions, and Health Insurance Premium Deduction.

Click Here for More Information - Statutory Compliance in Payroll

ESI Calculation and Formula

The 1948 ESIC statute set the employer's percentage contribution at 3.25% of earnings and the employee's percentage contribution at 0.75% of pay. Every month, ESI is calculated using gross income less any employer payments to PF/ESI that may have been included in the employee's CTC. The formula goes as such -

To calculate wages, the base salary and allowances (DA + HRA + Medical + City Compensatory Allowance, etc.) are combined together.

ESI Coverage

The ESI plan covers employees who earn Rs.21000 or less (Rs.25000 for individuals with disabilities). Employees are disqualified from the plan if their income exceeds the threshold limit before the payment period begins.

Contribution Period and Benefit Period - What are they?

The ESI system has set contribution and benefit periods during which participants can contribute and receive benefits.

The ESI contribution term is split into two 6-month increments. The first donation period runs from April to September, and the second from October to March. Both the employer and the employee are required to make ESI contributions on a monthly basis throughout each contribution period. For example, during the contribution period of April to September, both the employer and the employee are expected to make monthly ESI contributions by the 15th of the following month. Contributions paid during this period are deposited to the employee's ESI account, and the employee becomes eligible for the ESI scheme's many benefits.

The benefit term is divided into two 6-month installments, one from January to June and the other from July to December. Employees get rewards during the first benefit period for contributions made during the first contribution period. As a result, if employees' salaries rise, so will their benefits. They will be excluded from the plan if their wage surpasses the threshold level.

ESI Calculation - The Process

The following stages are involved in calculating the Employees' State Insurance (ESI) -

1. Determine the gross salary/wage of the employee - The first step is to determine the gross salary or the wage of the employee, making all the inclusions and exclusions.
2. Calculate the ESI contribution - The second step is to calculate the ESI contribution in accordance with the ESI calculation formula.
3. Deduct the contribution amount monthly - The final step is to deduct the contribution amount monthly and transfer the funds into the employee's ESIC account by the 15th of the following month.

How to calculate ESI with examples

The employee's gross pay is used to compute ESI contributions. The employee contribution is withdrawn from their gross wage, and the employer contributes on top of that. The whole is placed into the ESI fund.

• Employer Contribution - Employer Contribution is computed at 3.25% of the employee's gross wage.
• Employee Contribution - Employee Contribution is determined at 0.75% of the employee's gross wage.

• Total ESI Contribution - The total ESI Contribution is 4% of the gross salary of the employee. Basically,

(4% of the gross salary of the employee = Employer contribution + Employee Contribution)

Example 1:

Naina earns a salary of Rs. 20,000 every month. As per the ESI calculation formula, the contribution will be -

Naina's Contribution: 0.75% of Rs. 20,000 = Rs. 150

Employer's Contribution: 3.25% of Rs. 20,000 = Rs. 650

Total ESI Contribution: 150 + 650 = Rs 800

Example 2:

Benaisha works for a company that qualifies under the ESI Act. Her salary details are as follows -

• Basic pay = Rs. 15,000
• Medical allowance: Rs.2500
• Travel allowance: Rs. 1500
• Total monthly income: Rs. 19,000

As per the ESI calculation formula, Benaisha's total salary will be Rs. 17,500 because travel allowance is not included. Therefore,

The Benefits of Registering Under the ESI Act

We've listed the benefits of registering under the ESI Act -

For Employees ~

• Comprehensive healthcare coverage, including free inpatient and outpatient treatment at ESI dispensary/hospital with no spending cap.
• Sickness benefits, including paid time off.
• Maternity benefits include up to 26 weeks of paid maternity leave for two children, variable periods of paid maternity leave for adoption, miscarriage, medical termination of pregnancy, and other difficulties, confinement expenses, and so on.
• Disability benefits include worker compensation, prosthetic limbs and aids, psychotherapy, upskilling, and other services.
• Physical rehabilitation and vocational training programmes to assist workers who have been injured on the job in returning to paid employment.
• Unemployment benefits for up to 24 months in the event of an involuntary loss of job (factory closure, work accident, natural disaster, and so on).
• Old-age medical benefits to insured persons who have retired through the payment of a nominal token premium.

For Dependents of Employees~

• Comprehensive healthcare benefits are provided to all registered dependents of the insured individual, including free access to preventative and curative care at ESI dispensaries/hospitals with no maximum spending limit.
• Funeral expenses for dependents in the event of the insured's death.
• Dependents get financial help and pensions when the covered individual dies in service or becomes handicapped at work.

For Employers~

From the standpoint of the employer, the ESI programme promotes employee health and well-being by providing preventative and curative healthcare benefits to enrolled personnel. As a result, the system improves staff productivity and production while decreasing absenteeism and attrition. It demonstrates that the employer is concerned about the employee, their family, and their general well-being.