How ESI is calculated
ESI (Employees' State Insurance) is run by ESIC. From 21 November 2025 it is governed by Chapter IV of the Code on Social Security, 2020, which replaced the ESI Act, 1948. If your monthly wages are at or below the coverage ceiling, a fixed percentage of those wages is paid every month: a small part by you, a larger part by your employer.
These rates have been in force since 1 July 2019, when the total was cut from 6.5% to 4%. They are unchanged as of October 2026.
What counts as wages (from 21 November 2025)
Section 2(88) of the Code on Social Security, 2020 defines wages as:
- Basic pay
- Dearness allowance (DA)
- Retaining allowance, if any
- Plus the amount by which excluded items (HRA, conveyance, overtime, commission and similar) exceed 50% of total remuneration
What changed for ESI
Under the old ESI Act, contributions were worked out on gross pay including HRA. ESIC's circular of December 2025 told offices to use the Code's definition from 21 November 2025. Two effects:
- Employees with a low basic and high allowances can now be covered even when gross pay is above ₹21,000.
- For people already covered, the contribution base can be lower than gross pay, because HRA and similar items count only above the 50% line.
Worked example with the sample values
| Step | Working | Result |
|---|---|---|
| 1. Total pay | Basic + DA ₹12,000 + allowances ₹14,000 | ₹26,000 |
| 2. Excluded items above 50% | ₹14,000 − 50% of ₹26,000 | ₹1,000 added back |
| 3. Wages for ESI | ₹12,000 + ₹1,000 | ₹13,000 (below ₹21,000, so covered) |
| 4. Employee share | 0.75% of ₹13,000 = ₹97.50, rounded up | ₹98 |
| 5. Employer share | 3.25% of ₹13,000 = ₹422.50, rounded up | ₹423 |
Under the old gross-pay rule this person (gross ₹26,000) would not have been covered at all.
Am I covered by ESI?
ESI is not deducted from every salary. It applies only up to a wage ceiling, tested on wages as defined in the Code, and mid period pay rises have their own rule.
The wage ceiling
- ₹21,000 or below in monthly wages (Code definition, not gross): you are covered and ESI is deducted. The Ministry of Labour confirmed this ceiling continues under the Code.
- ₹25,000 or below for a person with disability.
- Above the ceiling: ESI does not apply, so a plain 4% on any salary is wrong. This tool returns "Not covered" instead of a misleading number.
Overtime and allowances
Overtime, HRA and conveyance are excluded items under the Code. They do not raise your ESI wages unless, together with other excluded items, they take more than 50% of your total pay. Only the part above that line is added to wages.
- Employees with an average daily wage of ₹176 or less do not pay the employee share; the employer still pays 3.25%.
Once covered, stay covered
Coverage is decided at the start of each contribution period. If you were covered on 1 April or 1 October and your wages later rise above ₹21,000 mid period (say a November hike), you keep contributing on your actual wages until the period ends (30 September or 31 March). You do not drop out the day your salary crosses the ceiling, and your benefit eligibility continues into the matching benefit period.
Contribution periods and benefit periods
You earn a contribution in one half year and draw benefits in a later half year. There is a built in gap of about three months, which is why a benefit may not be active the moment you join.
What ESI actually gives you
The deduction is really an insurance premium. For 0.75% of your wages, you and your dependants get medical cover and cash benefits that would cost far more to buy privately.
| Benefit | What you get |
|---|---|
| Medical benefit | Full medical care for you and dependants from day one, with no cap on treatment cost |
| Sickness benefit | 70% of wages for up to 91 days a year (needs at least 78 days contributed in the period) |
| Extended sickness benefit | Up to 80% of wages for up to two years for 34 specified long term diseases |
| Maternity benefit | 26 weeks at full wage, extendable by one month on medical advice |
| Temporary disablement | 90% of wages for as long as the disability from employment injury lasts |
| Permanent disablement and dependants | 90% of wages as a monthly payment based on loss of earning capacity, or to dependants on death due to employment injury |
| Funeral expenses | ₹15,000, payable from day one of insurable employment |
Worked examples
Wages ₹20,950 (covered, shows the rounding)
| Employee share at 0.75% (₹157.13, rounded up) | ₹158 |
| Employer share at 3.25% (₹680.88, rounded up) | ₹681 |
| Total ESI per month | ₹839 |
Only ₹158 comes out of your salary. The ₹681 is paid by your employer on top.
Basic + DA ₹22,000, gross ₹40,000 (not covered)
Allowances are ₹18,000, which is 45% of total pay, so nothing is added back. Wages are ₹22,000, above the ₹21,000 ceiling, so ESI does not apply at the start of a new period.
Mid period hike
Wages of ₹20,000 in October (covered), then raised to ₹24,000 in December. Contributions continue on the actual ₹24,000 until 31 March, and medical benefit eligibility runs into the matching benefit period (up to 31 December of the next year).
For employers and HR
Who must register
ESI applies to establishments with 10 or more employees. Under the Code, coverage extends across India, establishments below 10 employees can join voluntarily, and establishments where even one employee does hazardous work must register. Confirm any state-specific notification before relying on headcount alone.
Deposit and returns
- Deposit contributions monthly, by the 15th of the following month, on the ESIC portal.
- File half yearly returns by 11 May (for the October to March period) and 11 November (for the April to September period).
Frequently asked questions
How is ESI calculated in 2026?
ESI = 0.75 percent of monthly wages from the employee plus 3.25 percent from the employer, 4 percent in total, each share rounded up to the next rupee. Since 21 November 2025 wages follow Section 2(88) of the Code on Social Security, 2020: basic + DA + retaining allowance, plus any allowances above half of total pay.
What is the ESI wage limit in 2026?
21,000 rupees a month, or 25,000 rupees for a person with disability. The Ministry of Labour has confirmed the 21,000 rupee ceiling continues under the Code on Social Security. Because the ceiling is now tested on wages as defined in the Code rather than gross pay, some employees with gross pay above 21,000 rupees are now covered.
Why did ESI start being deducted when my gross salary is above 21,000 rupees?
ESIC's December 2025 circular applies the Code's definition of wages from 21 November 2025. If your basic + DA, after adding back allowances above 50 percent of total pay, is 21,000 rupees or less, you are covered even if your gross is higher. For example, gross of 30,000 with basic of 12,000 gives wages of 15,000.
What happens if my wages cross 21,000 rupees mid-year?
Coverage is decided at the start of each contribution period (1 April or 1 October). If you were covered then and your wages rise above the ceiling later, you keep contributing until that period ends on 30 September or 31 March, and your benefits continue into the matching benefit period.
What is the difference between ESI and PF?
ESI is health and social insurance: medical care, sick pay, maternity and disablement benefits, funded by 0.75 percent from you and 3.25 percent from your employer, for wages up to 21,000 rupees. PF is retirement savings: 12 percent from you and 12 percent from your employer, with a wage ceiling of 25,000 rupees from 17 September 2026.
How many days of sick leave does ESI pay?
Sickness benefit pays 70 percent of wages for up to 91 days in a year during certified sickness, if you contributed for at least 78 days in the relevant contribution period. For 34 specified long-term diseases, extended sickness benefit pays 80 percent of wages for up to two years.
Do employees earning very little pay ESI?
Employees whose average daily wage is 176 rupees or less do not pay the employee share. The employer still pays its 3.25 percent share for them.
Rules checked October 2026 against ESIC and Ministry of Labour sources. Spotted a wrong value? Tell us at [email protected] and we will fix it.
Sources
- ESIC circular: New wage definition under Section 2(88) of the Code on Social Security, 2020 (December 2025)
- Ministry of Labour and Employment: Additional FAQs on Labour Codes (16 March 2026)
- ESIC: Frequently asked questions on the ESI scheme
- Code on Social Security, 2020 (full text)
- PIB: Government makes the four Labour Codes effective (21 November 2025)
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