Managing the Employees' State Insurance (ESI) contributions for a pay group

Modified on Thu, 28 Mar 2024 at 12:19 PM

TABLE OF CONTENTS

Introduction
Employer Contribution
Additional Settings

Introduction

ESI is a mandatory statutory contribution made by the employer and employee. This is applicable for employees who have a monthly gross salary of less than INR 21,000/- or who are a part of the contribution cycle already. So ensure that you are remaining compliant when you are deciding to enable or disable ESI for a pay group.

The window also shows the default contribution rates where the employee contributes 0.75% of their gross salary and the employer contributes 3.25% of their gross salary. Usually, the gross salary is limited to the statutory amount of INR 21,000/- for calculating the value of the monthly contribution.

To start editing the ESI settings, navigate to Payroll (1) and then go to Settings (2).

In the Pay Groups tab (3), you will see the various pay groups that you have configured on Keka.

Select the pay group and click on the Configure icon (4).

On the Pay Group Configuration window, select the Contributions tab (5). Here you can see the various settings in brief. Click on the three dots (6) on this window and from the drop-down, select Update ESI Settings (7).

In the Employee State Insurance Settings window, you can make changes to the ESI settings for the pay group.

Using the toggle button on top, you can toggle ESI settings on and off for the pay group.

Employer Contribution

The first setting to make is whether the employer's contribution to ESI is a part of the employee's annual salary or not. If the ESI contribution by the employer is not included in the employees' annual salary, select the No. Employer's contribution of ESI is paid by employer, over and above the Annual Salary of an employee checkbox.

If you include ESI contribution in the annual salary of your employees, select the other option Yes. Employer's contribution of ESI forms a part (and is deducted) from Annual Salary of an employee

If the ESI contribution is a part of the annual salary, you can also choose to exclude this from the payslip. Select the Hide Employers' contribution of ESI from Payslip checkbox.

Additional Settings

There are a few important additional settings to consider in this window. Let us take a look at each of these additional settings.

Allow overriding of ESI at salary structure level

Selecting this option allows you to override the value of ESI contributions at a salary structure level using formulae. You can define the formula you want to calculate the ESI contribution based on a higher amount than the statutory gross of INR 21,000/- or based on some other component.

If the employee share is a part of the annual gross salary of the employee, you can choose to remove the employer contribution from the gross salary while calculating the ESI contribution. This will give you a more accurate value.

Exclude Employee Gratuity contribution from gross in ESI calculation

Selecting this option will remove the gratuity contribution that the employee is making from the calculation of the ESI contribution.

Restrict ESI Gross to Statutory Gross during the contribution period

This option determines if you want to consider INR 21,000/- as the gross salary which is the statutory value for ESI calculations. If you do not select this option, the actual gross salary of the employee will be considered unless it has been overridden at the salary structure level or for individual employees.

Include Bonuses and One-Time payments in gross for ESI eligibility calculation

Employees are eligible for ESI only when their gross salary falls below the statutory minimum of INR 21,000/- or if they have contributed to ESI in the current contribution cycle. Selecting this option will include one-time payments and bonuses when calculating the gross salary of an employee to determine if they are eligible for ESI contribution.

Include Bonuses and One-Time payments in gross for ESI Contribution calculation.

This option lets you determine if you want to remove bonuses and one-time payments made to the employee when calculating the actual ESI contribution that has to be made by the employee.

Do not adjust (reduce) Special Allowance value, in case ESI contribution is impacted by LOP

ESI contributions are typically prorated based on the number of working days that an employee has, If there are losses of pay leave that the employee has taken in a month, the actual ESI contribution can vary. This option is relevant when the employer's ESI contribution is a part of the employee's annual salary and it is hidden on the pay slip.

if this is the case, the actual ESI contribution to be made and the prorated ESI contribution including ESI will be different and the additional amount paid as per the employee gross will be adjusted against Special Allowance to ensure that the promised CTC value is paid to the employee.

Let's take an example to illustrate this

Say the employee's gross salary is INR 30,000/- and that the employee has 5 days of LOP in the month of 30 days.

So the effective gross salary for the month would be 30,000*(25/30) = INR 25,000/-

Employer ESI contribution as per formula = 3.25% of 25,000=INR 812.5/-

Gross salary is taken as per statutory minimum = INR 21,000/-

Prorated gross salary including LOPs = 21,000 * (25/30)= INR 17,500/-

Actual employer contribution of ESI = 3.25% of 17,500/- = INR 568.75/-

The difference in actual ESI contribution v/s ESI contribution considering LOPs and statutory minimum =. 812.5 - 568.75 = INR 243.75/-

If this option is not selected the special allowance for that month will be reduced by INR 243.75/- to keep the CTC value constant.

Make the appropriate selections from the above options to get your ESI contribution settings to align with how you want them to be.

Once you have made the necessary selections, click Update to finalize your settings.

This will update the ESI settings for the pay group. More questions? Talk to us and we will be happy to help you out!