ESI for employers: applicability, rates, registration and payment by the 15th

ESI applies once your shop, office, factory or restaurant has 10 employees (20 in a few states) and covers every employee whose gross wages are up to ₹21,000 a month. The employee pays 0.75% of wages, you pay 3.25%, and both are deposited on the ESIC portal by the 15th of the following month. In return, covered employees and their families get free medical care, sickness pay, maternity pay and disablement cover. This guide covers applicability, registration, contribution periods, monthly payment and what happens when a salary crosses the limit.

What ESI is and who runs it

The Employees' State Insurance Act, 1948 is a social security law administered by the Employees' State Insurance Corporation (ESIC). Unlike PF, which builds a retirement balance, ESI is insurance: contributions go into a common fund and covered employees draw benefits from ESIC hospitals, dispensaries and cash schemes when they fall sick, have a child, suffer an injury at work or lose their job.

The Act was originally written for factories, and Section 1(5) lets states extend it to other classes of establishments. Almost every state has extended it to shops, hotels, restaurants, cinemas, road transport undertakings, newspaper establishments, private medical and educational institutions and, more recently, to most other establishments. ESI also only operates in "implemented areas" notified by ESIC; nearly the whole country is now covered, but a business in a remote area should check the ESIC district list before assuming it applies.

Applicability: the 10 or 20 employee test

ESI becomes applicable when your establishment employs 10 or more persons. A few states apply a 20-person threshold for shops and commercial establishments (Maharashtra is the best-known example; factories using power are at 10 everywhere). Check the state extension notification on esic.gov.in, or ask your CA, because the threshold is set state by state and has moved in some states over the years.

Three things about counting matter more than owners expect:

• Everyone counts for the headcount, whatever they earn. A manager on ₹80,000 is outside ESI for contributions but still counts as one of the 10.
• Contract, casual and temporary workers count. If you take staff through a contractor, the principal employer is responsible for ensuring their ESI is paid, and those workers are included in your headcount.
• Once covered, always covered. Section 1(6) says an establishment that has come under the Act stays under it even if the number of employees later drops below the threshold.

Employees who earn more than ₹21,000 a month (₹25,000 for persons with a disability) are excluded from coverage but not from the count. Apprentices under the Apprentices Act are excluded from both.

The ₹21,000 wage limit and what counts as wages

Coverage is tested on gross monthly wages, not on basic. "Wages" under Section 2(22) means all remuneration paid under the terms of employment: basic, dearness allowance, HRA, conveyance, special or other allowances, attendance and production incentives, and overtime. It excludes the employer's PF contribution, gratuity, travelling allowance actually spent on travel, and an annual bonus paid at intervals exceeding two months.

Two rules apply the limit differently for coverage and for contribution:

So an employee whose regular monthly wages are ₹20,500 stays in ESI even in a month when overtime takes them to ₹24,000, and contribution is payable on the full ₹24,000 for that month.

Contribution rates and who pays

Since 1 July 2019 the rates are 0.75% of wages from the employee and 3.25% from the employer, a total of 4%. Rates are notified under Rule 51 of the ESI (Central) Rules and have not changed since; check the latest notification if you are reading this much later.

Employees whose average daily wage is up to ₹176 are exempt from paying their own 0.75% share, though you still pay the 3.25% employer share for them. This mainly affects very low-paid part-time or piece-rate workers.

You deduct the employee share from wages at the time of payment and pay both shares together. The employer share is your cost; never recover it from the employee. Round each employee's contribution up to the next rupee, which is what the ESIC challan does automatically.

Contribution periods and benefit periods

ESI works on two fixed half-years, and they are the key to understanding why an employee stays covered after crossing the wage limit.

Contributions made during a contribution period earn the right to cash benefits during the corresponding benefit period. For example, contributions paid for April to September 2026 unlock sickness benefit for January to June 2027. Medical treatment, however, is available from the first day of insurable employment for the employee and their family.

This structure produces the rule everyone asks about. If wages cross ₹21,000 in the middle of a contribution period, say a raise on 1 July, the employee continues to be covered and contributions continue on the full higher wage until 30 September. From 1 October, the start of the next contribution period, they exit ESI. Their benefit period for the April to September contributions still runs until June of next year, so they are not left without cover the day their salary increases.

The same logic applies at the start: an employee hired at ₹19,000 on 20 March is covered from day one, and you pay contributions for the 12 days in March under the October to March period.

Registering your establishment and your employees

Employer registration

Registration is online and free. Within 15 days of becoming applicable, register on the ESIC portal (esic.gov.in) or through the Shram Suvidha portal, which handles PF and ESI together. You will need your PAN, the business's registration proof (GST certificate, Shops and Establishments registration, factory licence or partnership deed), address proof, a cancelled cheque, the date on which you reached the threshold, and a list of employees with wages. On approval, ESIC issues a 17-digit employer code number and a user login. If you run branches in more than one state, you usually need a sub-code for each unit.

Employee registration

Register each coverable employee on the portal on the day they join or, at the latest, within 10 days. You enter their name, date of birth, Aadhaar, bank details, nominee and family particulars, and the portal generates a 10-digit insurance number (IP number) and a temporary e-Pehchan card. The employee and family members then complete biometric enrolment at the ESIC branch office or dispensary. An employee who already has an insurance number from a previous job keeps it; you just link it to your code. Ask for it in the joining form, along with the documents listed in hiring your first employee.

Monthly payment by the 15th

Each month you upload a contribution file for all covered employees (the portal accepts an Excel upload or manual entry), which generates a challan. Pay it online by the 15th of the following month. April wages, for example, are paid to ESIC by 15 May. The portal also produces the half-yearly return of contributions from your monthly filings; confirm on the portal whether any separate half-yearly submission is required for your unit.

Late payment is expensive. Simple interest runs at 12% a year under Regulation 31A for every day of delay, and damages under Section 85B are levied on the amount in default at 5% a year for delays up to two months, 10% for two to four months, 15% for four to six months and 25% beyond six months. Non-payment of the employee share that you have already deducted is treated as a criminal breach of trust under Section 85 and can lead to prosecution, so never hold back deducted amounts.

Keep the monthly challan, the contribution file and the wage register. During an ESIC inspection these three, plus the attendance register and appointment letters, are what the inspector will ask for.

What covered employees get

The benefits are the reason ESI is worth explaining properly to staff, who often see only the deduction.

• Medical benefit. Full medical care for the insured person and dependants at ESIC hospitals and dispensaries from day one, with no ceiling on cost of treatment. Retired insured persons can continue on a small annual contribution.
• Sickness benefit. Cash at about 70% of average daily wages for up to 91 days in any two consecutive benefit periods, provided the employee contributed for at least 78 days in the corresponding contribution period. Extended sickness benefit at 80% for up to two years applies to 34 listed long-term diseases.
• Maternity benefit. 100% of wages for 26 weeks (extendable by a month on medical advice), with 70 days of contribution in the preceding two contribution periods.
• Disablement benefit. 90% of wages for the period of temporary disablement from an employment injury, and a life pension in proportion to loss of earning capacity for permanent disablement.
• Dependants' benefit. 90% of wages as a monthly pension to the family if an employee dies from an employment injury.
• Unemployment allowance. Under the Atal Beemit Vyakti Kalyan Yojana, 50% of wages for up to 90 days for an employee who loses the job involuntarily after two years of coverage, subject to the scheme's conditions.
• Funeral expenses of ₹15,000 and confinement expenses where ESIC facilities are not available.

Benefit amounts and conditions are revised periodically; the current figures are on esic.gov.in.

Worked example: a Bengaluru cloud kitchen crosses 10 staff

A Bengaluru cloud kitchen run as a proprietorship has been growing. In April 2026 it has 8 people; on 1 June it hires two more and reaches 10, so ESI applies in Karnataka (where the threshold for shops and establishments is 10). The owner registers on the ESIC portal by 15 June and enters the employees.

Monthly ESI for June: employee share = (2 × ₹135) + (3 × ₹105) + (2 × ₹94) + ₹158 = ₹931. Employer share = (2 × ₹585) + (3 × ₹455) + (2 × ₹407) + ₹683 = ₹4,032. Total challan ₹4,963, payable by 15 July. The employer cost of ₹4,032 a month is about ₹48,400 a year, which the owner adds to the kitchen's cost base when pricing menus (see break-even analysis).

In September the delivery coordinator gets a raise to ₹23,000. Because it is still within the April to September contribution period, ESI continues on ₹23,000 for September (₹173 and ₹748). From 1 October the coordinator is out of ESI, and the October challan drops accordingly. The coordinator's benefit period for April to September 2026 contributions runs from January to June 2027.

Common mistakes

• Waiting for a notice instead of registering within 15 days of crossing the threshold. Contributions are recoverable from the date of applicability with interest and damages, whether or not you registered.
• Testing coverage on basic salary instead of gross wages. An employee with basic ₹12,000 and gross ₹24,000 is outside ESI; one with gross ₹20,000 is inside, whatever the basic.
• Stopping deduction the month a raise crosses ₹21,000. Coverage runs to the end of the contribution period.
• Deducting ESI on employees above ₹21,000 "to be safe". They are not covered and cannot claim benefits; the money is simply lost to them.
• Leaving contract housekeeping or security staff out because "the contractor handles it". As principal employer you must verify the contractor's challans or pay yourself.
• Forgetting to register a new joiner within 10 days, which leaves the employee without a valid insurance number when they fall sick.
• Ignoring the 12% interest and 25% damages on delays. A ₹5,000 monthly challan paid a year late can cost nearly ₹2,000 extra.

How VyaparKit helps

VyaparKit's payroll run applies the ₹21,000 coverage test on gross wages, computes 0.75% and 3.25% with rupee rounding, keeps an employee covered until the contribution period ends, and gives you an NEFT bank file for net salaries plus an ESI summary you can enter on the ESIC portal. Each salary slip shows the ESI deduction so employees see what was paid for them. Log paid days on the attendance sheet so prorated wages and contributions match. The free plan covers one payroll run of up to three employees a month; Pro removes the limits.

Next steps

• Count all your employees, including contract and casual staff, and check your state's ESI threshold on esic.gov.in.
• If you are at or above the threshold, register on the ESIC or Shram Suvidha portal within 15 days and enter every employee earning up to ₹21,000.
• Set a calendar reminder for the ESIC challan on the 15th of every month, alongside PF and professional tax.
• Note the contribution period rule in your payroll so raises above ₹21,000 are handled correctly.
• Read the EPF guide for employers and the professional tax state-wise guide for the other two payroll deductions.