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ESI Contribution Rate Revision: What It Means for You


ESI Contribution Rate Revision

According to the national government, the percentage of contributions made by both companies and employees to the Employee State Insurance (ESI) program will decline. Starting on July 1, 2019, the reduction will take effect and will be 4% lower than the existing rate of 6.5%. An estimated 3.6 crore employees and 12.85 lakh employers participating in the ESI scheme are expected to benefit from this modification. The adjustment is anticipated to result in a 5,000 crore rupee annual cost reduction.

The Employee State Insurance Corporation (ESIC), a separate organization working under the direction of the Ministry of Labour and Employment, is in charge of managing the Employee State Insurance (ESI). The main goal of the ESI system is to provide Indian workers with additional medical, financial, and related benefits.

A non-seasonal factory or business entity is legally required to formally register with the ESIC if it employs more than 10 employees (in some states, this number is set at 20 employees) and pays them a maximum remuneration of Rs. 21,000 per month. As a result, these companies are compelled to provide the ESI plan benefits to their employees.

Important ESI Contribution Adjustment Factors

The following details emphasize the key components of the revision in the ESI contribution:

Reduced Contribution Rate: The percentage of pay that employers and employees contribute to the ESI system is called the ESI contribution rate. Previously, this rate was fixed at 6.5 percent, meaning a worker would pay 6.5 percent of their earnings into the ESI fund. This amount, however, has since been lowered to 4%, indicating that less of the wage will be paid into the ESI plan. The contribution rate was altered and became effective on July 1, 2019.

Cost Savings Expected: It is anticipated that the drop in the contribution rate from 6.5% to 4% will result in considerable cost savings. These savings are principally attributable to the fact that the ESI fund will receive a lesser amount of contributions from both employers and employees. As a result, companies and employees are expected to save over Rs 5,000 crore yearly. Both employers and employees may get financial relief due to this cost reduction.

Employee Benefits: Many employees are expected to benefit from the change in the ESI contribution. The benefits of this contribution rate reduction are estimated to be felt by about 12.85 lakh workers eligible for ESI payments. Access to medical facilities, financial assistance in the event of a medical emergency, and other advantages offered by the ESI system are the main components of these benefits.

In conclusion, the revised ESI contribution involves reducing the proportion of salaries employers and employees jointly contribute to the ESI fund. The contribution rate was reduced from 6.5% to 4% as of this modification, which took effect on July 1, 2019. This change is expected to result in significant cost reductions, projected to total roughly Rs 5,000 crore annually. Additionally, a sizable number of employees—roughly 12.85 lakh people—are anticipated to profit from this change, which is in line with the primary goals of the ESI plan, which are to give workers access to healthcare and financial security.

Impact of ESI Contribution

The government’s news declaration highlights numerous significant effects of the ESI contribution reduction, including:

Historic Decision: The choice to cut the Employees’ State Insurance (ESI) Act’s contribution rate from 6.5% to 4% is historic. This implies that the adjustment size is significant, and the ESI contribution structure has shifted significantly.

Relief for Workers: The relief this reduction provides workers is one of its main effects. A larger amount of employees’ salaries will stay in their hands because the employer contribution rate dropped from 4.75% to 3.25%, and the employee contribution rate dropped from 1.75% to 0.75%. This results in higher take-home income for workers, giving them greater financial freedom and

Inclusion of the Formal Workforce: More workers are anticipated to enter the Formal Sector due to the contribution reduction. The formal sector often provides a range of advantages, including access to social security programs like ESI, regulated working conditions, and job security. This modification may encourage more unregistered or informal workers to enter the formal sector by lessening the financial burden on employers and employees. As a result, the coverage of ESI benefits may be increased.

Ease of Doing Business: Businesses are also anticipated to benefit from decreased contribution rates. The ease of doing business is predicted to increase due to establishments having less financial burden due to the reduced contribution rates. Having less debt to pay off might help organizations spend more, grow faster, and produce more money overall.

The decision to lower ESI contribution rates has a variety of impacts. It aims to give workers financial assistance, draw more people into the official labour force, and make it easier for businesses to conduct business. This all-encompassing strategy aims to balance the needs of businesses and employees while advancing the nation’s overall economic growth.

ESI Coverage Expansion for Better Health and Formal Employment

A social security program known as the Employee State Insurance (ESI) Act offers employees a variety of advantages, including medical, financial, maternity, and other dependent-related benefits. Contributions provided by both businesses and employees help pay for these benefits. Employees who make up a certain amount of money are eligible for ESI coverage. In December 2016, the wage ceiling, or the highest salary that employees can earn and still be eligible for ESI coverage, increased from Rs. 15,000 to Rs. 21,000. The strategic goal of introducing this adjustment was to increase the formal workforce in this country.


Contribution: Contributions are the primary source of funding for the ESI scheme and are essential to its operation. According to the employee’s pay, both organizations consistently contribute to the ESI fund. The varied benefits provided by the scheme are supported financially by these pooled contributions.

Elevation of the Wage Ceiling: An increase in the wage ceiling means an employee will now be eligible for ESI coverage up to a higher income level. The salary threshold increased from Rs 15,000 to Rs 21,000 in December 2016. Employees earning Rs 21,000 are now eligible for ESI benefits, an impressive rise from the previous cap. This change was made to make sure that more employees may benefit from the ESI scheme’s advantages.

Promoting the Growth of the Formal Workforce: The primary driver for raising the salary ceiling was to encourage the growth of the formal workforce. A bigger group of workers was included within the scope of ESI coverage by raising the salary cap to Rs 21,000. This tactic persuaded companies to formally sign up their staff for the program, giving workers access to health insurance, maternity benefits, and other ESI provisions. The expansion of the official workforce results in several positive effects, such as improved working conditions, more job security, and easier access to social security benefits.

In summary, the ESI Act’s wage ceiling increase, which resulted in a cap of Rs 21,000, was planned to extend the range of benefits to a larger employee base. This tactical move was in line to encourage the expansion of the official workforce. As a result, it improves job conditions and strengthens the foundation of social security for a wider range of employees across the country.

ESI Calculation

Employers contribute 3.25% of wages under the ESIC Act of 1948, and employees contribute 0.75%. IF IN CTC, employer PF/ESI contributions are subtracted from the total earnings for calculating ESI each month. Basic pay and allowances (DA, HRA, Medical, City Compensatory Allowance, etc.) are included in total earnings. Employer Contribution = Total Earnings * 0.0325; Employee Contribution = Total Earnings * 0.0075 is the formula. The sum of both contributions is the ESI contribution. This calculation ensures the provision of medical benefits.


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