Employees’ State Insurance (ESI) Contribution

Employees’ State Insurance (ESI) contribution is the monthly payment an employer and employee make into India’s statutory health and social insurance fund, administered by the Employees’ State Insurance Corporation (ESIC). It is worth separating from provident fund early, because payroll teams routinely reason about the two as if they behave alike. They do not.

EPF is savings. ESI is insurance. An EPF contribution accumulates in a named account the employee eventually withdraws. An ESI contribution buys cover – medical care, sickness pay, maternity benefit, disablement compensation – and if it is never claimed, nothing comes back. That difference explains almost every structural oddity below: why coverage is capped by a wage ceiling rather than contributions being capped, why the scheme runs on six-month cycles rather than months, and why an employee who gets a raise stays covered anyway.

ESI is also, right now, the more legally unsettled of the two. The ESI Act, 1948 has been repealed, but the scheme has not yet been rebuilt under the new framework the way provident fund has. That gap has a deadline attached to it, and it is the single most important thing on this page for anyone running Indian payroll in 2026.

Part 1 – What is settled

These figures are stable and safe to configure against today.

The rates

Employer: 3.25% of wages. Employee: 0.75% of wages. Total: 4%.

These have been in force since 1 July 2019, when the combined rate was cut from 6.5% – the employer share falling from 4.75% and the employee share from 1.75%. It was one of the largest reductions in the scheme’s history, and it has not moved since.

Unlike provident fund, ESI is calculated on gross wages, not on a basic-plus-DA figure. Basic pay, dearness allowance, house rent allowance, city compensatory allowance, attendance allowance and similar regular payments generally form part of ESI wages. Bonus, gratuity and reimbursements generally sit outside. This is the most common configuration error in ESI: applying a provident-fund wage base to an ESI calculation understates the liability across the whole covered population.

The coverage ceiling – and why it works backwards

Coverage applies to employees earning up to ₹21,000 per month in gross wages, and up to ₹25,000 per month for persons with disability. The ₹21,000 figure has stood since 2016–17, when it rose from ₹15,000.

Note the mechanism carefully. The ceiling determines whether an employee is covered at all, not how much of their wage is contributory. There is no ESI equivalent of provident fund’s ₹1,800 cap. A covered employee contributes on their full gross wages; an employee above the ceiling contributes nothing. It is a cliff, not a taper.

There is one relief at the bottom of the scale. Employees whose average daily wages fall at or below ₹176 are exempt from paying their own 0.75% share. The employer’s 3.25% remains payable for them. The intent is that the lowest-paid workers receive full cover without bearing the cost.

Which establishments are covered

The general threshold is 10 or more employees, though some states continue to apply 20 for shops and commercial establishments. Coverage also depends on the district being notified for ESI implementation.

Two misconceptions worth retiring. First, ESI is not a manufacturing-only scheme – commercial establishments, IT and software firms, BPOs, hotels and cinemas fall within it in notified areas. Second, headcount is not limited to employees on your own payroll: contract workers, temporary staff and daily-wage earners working in a covered establishment count, and are themselves covered if within the wage ceiling.

Contribution periods and benefit periods

This is the mechanic that most distinguishes ESI from provident fund, and the one that generates the most avoidable errors.

ESI runs on two six-month contribution periods: 1 April to 30 September, and 1 October to 31 March. Each is matched to a later benefit period, which is when contributions made translate into entitlement.

Two consequences follow:

A mid-period raise does not end coverage. If an employee’s wages cross ₹21,000 in, say, January, they remain covered – and contributions continue on their actual wages – until 31 March, the end of that contribution period. Stopping the deduction in the month the salary crosses the threshold is a compliance breach, and it is a frequent one.

New joiners face a built-in lag. Because entitlement to certain cash benefits flows from the corresponding benefit period, an employee generally needs to complete a contribution period before those benefits become claimable. Medical care, by contrast, is available from the start of employment. Explaining this distinction at onboarding avoids a difficult conversation later.

Payment and filing

Contributions must reach ESIC by the 15th of the month following the wage month – April’s contributions by 15 May – through an electronic challan generated on the ESIC portal. Returns are filed half-yearly, aligned to the contribution periods. Late payment attracts interest at 12% per annum, alongside damages and, in serious cases, prosecution.

What the contribution actually buys

Because ESI is insurance, the employer’s 3.25% is best understood as a premium rather than a deduction. It funds:

• Medical benefit – full medical care for the insured person and their family through the ESIC hospital and dispensary network, with no monetary ceiling on treatment
• Sickness benefit – around 70% of wages during certified illness, for up to 91 days across two consecutive contribution periods
• Maternity benefit – paid leave for 26 weeks, extendable on medical grounds
• Disablement benefit – cash compensation for temporary or permanent disablement from employment injury
• Dependants’ benefit – a pension to dependants where death results from employment injury
• Funeral and confinement expenses, and cash relief on certain job losses under ESIC’s unemployment-allowance provisions

Exact quanta and conditions are set by ESIC regulations and are periodically revised, so treat the above as the shape of the entitlement rather than a benefits schedule.

Part 2 – What is in flux

Here the ground is genuinely moving, and a glossary that reports only Part 1 misleads by omission.

The Act is repealed but the scheme survives on borrowed time

The Code on Social Security, 2020 came into force on 21 November 2025. ESIC confirmed the position for its own purposes by notification dated 30 December 2025: the ESI Act, 1948 stands repealed, and ESI now sits in Chapter IV of the Code.

What has not happened is the rebuild. Provident fund received a full replacement scheme – the EPF Scheme, 2026, notified on 29 June 2026 – but no equivalent ESI scheme has been notified. Instead, the rules, regulations and schemes made under the repealed 1948 Act continue in force under the Code’s savings provisions, so long as they are not inconsistent with the Code, for a one-year transition period expiring on 20 November 2026.

So the rates, the ceiling and the periods in Part 1 remain operative – but they are operative by saving, not by fresh notification. That is a materially weaker footing than provident fund is on, and it has a visible expiry date.

The Central Social Security Rules were notified on 8 May 2026, moving the framework closer to operationalisation for multi-state employers, but ESI-specific provisions are not yet fully operational pending enabling notifications, regulations and a scheme.

The missing wage-ceiling notification

Under the Code, wage ceilings are set by notification. The Central Government has issued one for Chapter III (provident fund), confirming ₹15,000 per month, in a notification dated 29 May 2026. No corresponding notification has been issued under Chapter IV for ESI.

The practical reading is that ₹21,000 continues by virtue of the savings clause. But the position is not free of doubt, and commentators have flagged it as awaiting clarification. Employers should treat an ESI ceiling notification as a live watch item rather than a settled question.

Separately, proposals to raise the ESI ceiling – figures of ₹25,000 and ₹30,000 have circulated – remain proposals. No notification revising ₹21,000 had been issued at the time of writing. Treat commentary suggesting otherwise with caution.

The wage-definition question

The Code introduces a single statutory definition of “wages” with a 50% test on excluded allowances, which is the change that reshaped the provident fund base. Whether ESI wages are now determined on the Code definition or continue on the erstwhile gross-wages interpretation during the transition is not uniformly settled in practice – some commentary takes the Code definition as already applicable to ESIC, while other analysis holds that the previous basis persists until a new ESI scheme is rolled out.

For employers with allowance-heavy structures, this is not academic. It is worth forming a documented position with advisers rather than letting the payroll engine decide by default.

Definitions that have already changed

One change is not waiting for the transition. Following the Code’s commencement, an ESIC headquarters circular dated 28 November 2025 notified revised definitions of “dependant” and “family”, replacing those under the repealed Act. The revised scope is wider, which affects benefit eligibility, claim processing and the declarations employers collect. Employee master data and dependant records captured under the old definitions may need review.

Exemptions are no longer indefinite

Employers providing benefits at least as favourable as ESIC could historically obtain exemption. Under the Code, exemptions are subject to periodic review and renewal rather than running indefinitely. Anyone relying on a legacy exemption should confirm its status and renewal path well before it is tested.

What to do before 20 November 2026

A short, concrete list:

• Re-test the ESI wage base. Confirm you are applying gross wages, not a provident-fund base, and form a documented position on the Code’s wage definition.
• Audit the ceiling logic. Verify your system continues deductions to the end of the contribution period when an employee crosses ₹21,000 mid-cycle, rather than stopping in that month.
• Check the ₹176 daily-wage exemption is implemented correctly – employee share suppressed, employer share still paid.
• Confirm state-wise thresholds across your locations, since some states still apply 20 employees for shops and commercial establishments.
• Refresh dependant and family records against the November 2025 definitions.
• Verify any exemption’s renewal position under the Code.
• Monitor for the Chapter IV notifications – a wage-ceiling notification and an ESI scheme are both awaited, and the transition window closes on 20 November 2026.

How Mercans supports ESI compliance in India

Mercans is a global leader in payroll technology and Employer of Record services, operating across 160 countries through proprietary SaaS platforms and in-country delivery teams. Mercans runs its own legal entity in India, so ESIC registration, contribution and filing sit inside a single accountable chain rather than being subcontracted.

On ESI specifically, Mercans determines coverage against the applicable state threshold and wage ceiling, calculates contributions on the correct gross-wage base, handles mid-period ceiling crossings and the daily-wage exemption, generates and deposits monthly challans by the 15th, files half-yearly returns, and maintains records alongside EPF, TDS, Professional Tax, Labour Welfare Fund and gratuity obligations.

Because the labour-code transition is still running, legislative movement is tracked in the Mercans statutory alerts library – including the alert on India’s new EPF, EPS and EDLI Schemes 2026. See also Mercans’ India payroll and EOR capabilities, global payroll outsourcing, local statutory compliance services and the HR Blizz platform.

Frequently Asked Questions (FAQs)

1. What is the ESI contribution rate in India, and on what wages is it calculated?

The employer contributes 3.25% and the employee 0.75%, a combined 4%, unchanged since 1 July 2019. Critically, ESI is calculated on gross wages rather than the basic-plus-DA base used for provident fund, and a covered employee contributes on their full gross wages with no per-employee cap. Employees whose average daily wages are ₹176 or less are exempt from their own share, though the employer’s 3.25% is still payable for them.

2. What happens when an employee’s salary crosses ₹21,000?

Coverage does not stop that month. ESI operates on six-month contribution periods – 1 April to 30 September and 1 October to 31 March – and an employee who crosses the ceiling mid-period remains covered until that period ends, with contributions continuing on actual wages. An employee crossing ₹21,000 in January stays covered until 31 March. Stopping the deduction early is a common and easily detected breach.

3. Has ESI changed under the new labour codes?

The legal foundation has changed; the numbers have not. The ESI Act, 1948 was repealed when the Code on Social Security, 2020 came into force on 21 November 2025, and ESI now sits in Chapter IV of the Code. But unlike provident fund, no replacement ESI scheme has been notified. The old rules and scheme continue under the Code’s savings provisions during a one-year transition expiring 20 November 2026. A Chapter IV wage-ceiling notification is still awaited, and revised definitions of “dependant” and “family” already took effect via an ESIC circular dated 28 November 2025.

4. Is the ESI wage ceiling being raised to ₹25,000 or ₹30,000?

Not yet. Those figures have circulated in proposals and commentary, but no notification revising the ₹21,000 ceiling had been issued at the time of writing. The ceiling was last changed in 2016–17, when it rose from ₹15,000. Given that a Chapter IV notification is pending in any case, employers should watch for official Ministry of Labour and Employment and ESIC notifications rather than acting on reported proposals.