Confused About ESI Deductions: Why Is 6.5% Taken from Salary Instead of 4.75%?

Hi, I am new to HR and working with an IT organization. Here employees are hired from outsource vendors. For any grievance of OS employees, we have to deal with their respective vendor. I need some clarification on one issue before I speak with them. One of the employees comes under the ESI scheme. His gross salary is 8000/- and ESIC is deducted Rs. 520/- pm (6.5% of gross), the same is included in his CTC as part of the salary. However, as per the ESIC scheme, the employer's contribution is 4.75% and the employee's is 1.75%. Can anyone clarify why a total of 6.5% is deducted from the salary?

Thanks & Regards,
Marufa

Hi Sanjeev,

Thanks for the feedback. However, my doubt about ESIC is still not clear. Could you please clarify?

Is ESIC deducted flat at 6.5% from the employee's gross salary? If yes, then what does it mean by employee and employer contribution?

Thank you.

Hi Sanjeev,

If the CTC is Rs. 8000/-, the Gross will definitely be less than that.

On Gross, 1.75% will be deducted for the Employee contribution. Again, on Gross, 4.75% will be deducted for the Employer Contribution, and the total will be remitted to the ESIC.

When you are promised CTC, you have to make the breakup and arrive at the Gross Salary; on the Gross salary, only the above said calculation will be done.

For example, if the Gross Salary is Rs. 6000/- as below:

- Rs. 3000 Basic
- Rs. 1500 HRA
- Rs. 1500 Others

Rs. 72000/- gross salary per annum

PF

Employee:

Basic X 12% = PF = 3000 X 12% = 360 Per Month
Per annum = 360 X 12 = 4320/-

Employer:

Basic X 12% = PF = 3000 X 12% = 360 Per Month
Per annum = 360 X 12 = 4320/-

ESIC

Employee:

Gross X 1.75% = 6000 X 1.75% = 105
Per annum = 105 X 12 = 1260

Employer:

Gross X 4.75% = 6000 X 4.75% = 285
Per annum = 285 X 12 = 3420

The total of Employee's and Employer's PF and ESIC = 4320 + 4320 + 1260 + 3420 = 13320

This 13320/- is to be added to the Gross Salary, which is called CTC.

According to the company, other Components also need to be added and then calculated.

= 7200 + 13320 = 85320/- is the CTC per annum

The monthly CTC is = 7110/-

Calculations can be done in reverse as well.

Dear Marufa,

Deduction of the Employer's Share (4.75%) from the gross wage of employees is a criminal offense under Section 85 of the ESI Act and will also be a criminal offense under the Payment of Wages Act. So, stop this, and you can only deduct 1.75% from his wage, and the employer has to add 4.75% of the wage from his own source at the end of the month and pay a total of 6.5% before the 21st of the next month.

Since you are engaging contractors (called Immediate Employer) for some services, it is the contractor who has to pay the wage to his employees, provided to you, and he has to deduct 1.75% from the wage and pay 6.5% on the total wage to ESI and show proof thereof to you by giving a copy of the monthly challan and a copy of the half-yearly return so that you can show compliance to the ESI. However, in case the contractor fails to pay the ESI contribution for his worker, the law allows you to deduct the total 6.5% of the Contractor's Bill (and not from the wage of the employee) before payment of money to him. Though you could deduct 6.5% of the total bill of the contractor, the contractor can only deduct 1.75% of the wage from the worker. Do not get confused with these two situations.

O. Abdul Hameed
Formerly Add Commissioner ESIC
CEO of Santhi Hospital
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