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The Employees’ State Insurance Act 1948 (ESI Act) provides for medical, maternity, disability and other benefits. Employees covered by ESI are called “Insured Persons”. The ESI Act is administered by the Employees’ State Insurance Corporation (ESIC).

The ESI Act, 1948, applies to organisations with 10 or more employees, drawing wages * up to ₹21,000. Benefits provided under the ESI Act are funded by the contributions made by the employers and the employees.

The government recently reduced the rate of contribution from 6.5% to 4%. The contributions, henceforth, shall be as under

Particulars Existing Contribution Contribution after amendment
Employers Contribution 4.75% of Wages 3.25% of Wages
Employee Contribution 1.75% of Wages 0.75% of Wages

Let’s see how much is the net benefit for employer and employee. Suppose an employee Wage for the purpose of ESI is INR 21,000/-

Wages Existing Contribution Contribution after Amendment Net Benefit
Employers Contribution Rs.998/- Rs.683/- Rs.315/-
Employee Contribution Rs.368/- Rs.158/- Rs.210/-

The healthcare benefits under the ESI scheme will remain the same, but employees would now have to contribute just 0.75% of their wages, instead of the existing 1.75%, while the employers’ contribution will come down from 4.75% to 3.25%.

The reduced rates will be effective from 1 July 2019.

The government had recently carried out a special programme to register more employers and employees between December 2016 and June 2017. It had also decided to extend the coverage of the ESI scheme to all the districts across the country in a phased manner. The wage ceiling for availing benefits under the programme was also increased from ₹15,000 per month to ₹21,000 from 1 January 2017.

These efforts resulted in an increase in the number of registered employees and employers and led to a substantial jump in the revenue income of the ESIC. While the number of insured increased from 31 million in 2016-17 to 36 million in 2018-19, the total contribution jumped from ₹13,662 crore to ₹22,278 crore.

Consequently, the amount of funds available with the government has increased. This has led to the reduction of contribution rates.

Possible Benefits

  • The reduced rate of contribution will bring relief to workers and it will help in expanding the coverage of ESI to new employees thereby, bringing more employees to formal sector.
  • Reduction in employers share is a welcome move as the entity will have additional cash to funds its operation without change in benefits extended by ESI.
  • As per the report by Financial express, the reduction in ESI contribution is due to the fact that ESI department’s income has far exceeded the expenses and has over the years accumulated huge amounts as reserve funds.
  • Experts feel the Centre’s move will improve compliance and coverage of the scheme and will benefit 36 million employees working in more than 1.3 million organisations.

Please note that “wage” includes:
1. All remuneration paid or payable in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled.
 2. And includes any payment to an employee in respect of any period of authorized leave, lock-out, strike which is not illegal or lay of.
 3. and other additional remuneration, if any paid at intervals not exceeding 2 months

In case of any questions, please do not hesitate to reach out to us on CA Nikhil Jain or CA Pavan Sharma. You can also write to us through bclindia.in/contact/. We would be glad to be of your assistance.

Government Reduces the Rate of ESI Contribution from 6.5% to 4%
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