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.

“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..

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.