ESI applicability in 2026: the ₹21,000 rule explained with examples
By the True HR editorial team · Reviewed by empanelled labour law lawyers
Published · Updated · 10 min read
The short answer
ESI applies once your establishment employs 10 or more people, in every state, and covers each employee whose wages are ₹21,000 a month or less. Wages now means the Code's definition, not gross pay, so some employees with higher gross pay fall inside. The employee pays 0.75% and the employer 3.25% of wages.
Which establishments does ESI cover?
ESI (Employees' State Insurance) is the social security scheme run by the ESIC (Employees' State Insurance Corporation). It funds medical care, sickness pay, maternity benefit and disablement compensation for covered employees and their families. Since 21 November 2025 it runs under Chapter IV of the Code on Social Security, 2020; the Employees' State Insurance Act, 1948 is repealed.
The threshold is now uniform: every establishment in which 10 or more persons are employed is covered, in every state. The old state-by-state thresholds for shops and offices, 20 in some states, are gone. Only seasonal factories are left out. Headcount is total persons employed, including those above the wage ceiling, and once covered you stay covered even if headcount later falls below 10.
One geographic caveat survives: contributions start only from the date ESIC benefits are notified for your area. Most of the country is notified and more districts are added every few months, but a unit in a district that is not yet notified stays outside until it is. Check your district's status with ESIC before concluding you are exempt.
An establishment with fewer than 10 people can come in voluntarily if the employer and a majority of employees agree and ESIC notifies it. It can leave only after five years of coverage, with all dues cleared.
Who is covered: what does the ₹21,000 rule actually say?
Once your establishment is covered, every employee whose monthly wages are ₹21,000 or less must be insured. The ceiling is ₹25,000 for a person with disability. Employees above the ceiling are not covered and cannot opt in individually.
The change that matters is the base. The test is no longer on gross pay; it is on wages as section 2(88) of the Code defines them. House rent allowance, conveyance, overtime and similar heads are left out of wages, but only up to 50% of total pay. So an employee whose gross is above ₹21,000 can now be inside ESI. In ESIC's own illustration, an employee with basic pay and dearness allowance of ₹18,000 and other allowances of ₹8,000 has a gross of ₹26,000 but wages of ₹18,000, and is covered.
The 50% rule works the other way too. With basic and dearness allowance of ₹20,000 and allowances of ₹30,000, the allowances are more than half of the ₹50,000 total, so the excess is added back and wages become ₹25,000: outside ESI.
| Basic pay and dearness allowance | Other allowances | Gross pay | Wages for ESI | Against the ₹21,000 ceiling |
|---|---|---|---|---|
| ₹18,000 | ₹8,000 | ₹26,000 | ₹18,000 | Covered |
| ₹20,000 | ₹30,000 | ₹50,000 | ₹25,000 | Not covered |
| ₹15,000 | ₹6,000 | ₹21,000 | ₹15,000 | Covered |
What counts as wages for ESI?
Section 2(88) defines wages as all remuneration under the terms of employment, and names basic pay, dearness allowance and retaining allowance as included. It then lists what is left out: bonus payable under a law, the value of housing and amenities provided in kind, the employer's contributions to provident fund and pension, conveyance allowance, house rent allowance, sums paid to cover special expenses of the job, remuneration under an award or settlement, overtime, commission, gratuity and retrenchment compensation.
The safeguard is the 50% rule: if the excluded heads, other than gratuity and retrenchment compensation, add up to more than half of total remuneration, the excess is treated as wages. Overtime is now left out both when testing the ceiling and when computing the contribution; the old split treatment is gone.
One point is not settled. ESIC's illustrations treat every allowance other than basic pay and dearness allowance as left out. The section itself leaves out only the heads it lists, so a general special allowance that is not on the list is arguably wages on the plain text. Reading it that way puts fewer employees under the ceiling. ESIC's illustration is the one its officers will apply, and the calculators on this site follow it. Take a written view with your adviser and apply it the same way every month.
What are the ESI contribution rates in 2026?
The rates are unchanged: the employee contributes 0.75% of wages and the employer 3.25%, a combined 4%. What changed is the base, which is now wages as defined rather than gross pay. Each share is rounded up to the next rupee for the wage period. A covered employee contributes on full wages, not on the ceiling figure.
Two reliefs are worth knowing. The employer's share is waived for up to three years for an employee with disability. And ESIC's published guidance continues to exempt employees earning up to ₹176 a day from their own share, though the employer still pays; confirm the current figure with ESIC before relying on it.
| Monthly wages | Employee 0.75% | Employer 3.25% | Total |
|---|---|---|---|
| ₹15,000 | ₹113 | ₹488 | ₹601 |
| ₹20,000 | ₹150 | ₹650 | ₹800 |
| ₹21,000 | ₹158 | ₹683 | ₹841 |
How do contribution periods work when wages cross ₹21,000?
ESI runs on two fixed contribution periods: April to September and October to March. The rule that trips up most payroll teams is unchanged: an employee whose wages cross the ceiling after a contribution period has begun stays covered until that period ends. Contributions for the remaining months are on the revised wages.
Take Rahul, with wages of ₹20,000 from April and a raise that takes his wages to ₹24,000 from 1 July. He was under ₹21,000 when the April to September period began, so he remains insured until 30 September and contributes on ₹24,000 from July. He exits ESI only on 1 October, the start of the next period. The matching benefit periods (January to June and July to December) mean he can still claim benefits for some months after that.
| Months | Monthly wages | ESI status | Employee 0.75% | Employer 3.25% |
|---|---|---|---|---|
| April to June | ₹20,000 | Covered | ₹150 | ₹650 |
| July to September | ₹24,000 | Still covered till period end | ₹180 | ₹780 |
| October onwards | ₹24,000 | Out of ESI from 1 October | Nil | Nil |
What benefits do employees get under ESI?
For a combined cost of 4% of wages, the cover is broad. This is worth explaining to employees who see only the deduction line.
- Full medical care for the employee and dependants at ESIC hospitals and dispensaries.
- Sickness benefit at 70% of the benefit rate for up to 91 days across two consecutive benefit periods, and extended sickness benefit at 80% for up to 730 days for specified long-term illnesses.
- Maternity benefit at 100% for 26 weeks; 12 weeks for a mother with two or more surviving children and for adoption or commissioning mothers; 6 weeks for miscarriage.
- Disablement benefit at 90% of the benefit rate for an employment injury, and a pension where loss of earning capacity is permanent.
- Dependants' benefit at 90%, shared among the family, if death occurs due to an employment injury.
- Funeral expenses of ₹20,000 and confinement expenses of ₹15,000.
- Unemployment allowance, subject to conditions, under the Rajiv Gandhi Shramik Kalyan Yojana and the Atal Beemit Vyakti Kalyan Yojana (50% for up to 90 days, notified up to 30 June 2027).
What are the due dates, and what does non-compliance cost?
Contributions for a month must be paid within 15 days of the end of that month, filed online with ESIC. Late payment attracts simple interest at 12% a year from the due date. Damages are added after a hearing: 5% to 25% a year, graded by the length of delay and capped at the arrears. That damages scale comes from the 1950 Regulations, which continue for now; new ESI regulations are in draft and propose a monthly rate, so check the scale in force when a default occurs.
Deducting the employee's share and not depositing it is the most serious default: imprisonment of at least one year, up to three, with a fine of ₹1,00,000 under section 133. Other failures to pay carry two to six months and a fine of ₹50,000. A written chance to comply comes before a first prosecution.
A short compliance checklist for employers:
- Register the establishment in the common Form-I on the Shram Suvidha Portal as soon as you reach 10 people. The certificate issues within seven days or is deemed issued; an establishment already registered under another central labour law does not register again.
- Test every employee's wages, not gross pay, against ₹21,000 at joining and at the start of each contribution period, April and October.
- Register every covered employee with ESIC on or before the day they join, with Aadhaar, and complete their declaration within 30 days so the insurance number does not lapse.
- Pay contributions and file the monthly return within 15 days of the end of every month.
- Continue deductions till period end for anyone whose wages cross the ceiling mid-period.
- Report every employment injury to ESIC: serious accidents immediately, others within 24 hours under the regulations in force.
- Keep an accident book, wage records and payment receipts available for ESIC inspection.
Sections and Acts cited
- Code on Social Security, 2020, section 1(4), 1(7), 1(8) and the First Schedule: applicability of the ESI chapter
- Code on Social Security, 2020, section 2(26), with S.O. 2351(E) of 8 May 2026: employee, and continuity within a contribution period
- Code on Social Security, 2020, sections 2(88) and 2(89): wages and the wage ceiling
- Code on Social Security, 2020, sections 28, 29 and 31, with rules 5, 18 and 19 of the Social Security (Central) Rules, 2026: registration and contributions
- Code on Social Security, 2020, section 32, with rules 21 and 22: benefits
- Code on Social Security, 2020, sections 127 and 128: interest and damages
- Code on Social Security, 2020, sections 133, 134 and 137: offences
- Employees' State Insurance (General) Regulations, 1950, so far as saved by section 164(2)
Frequently asked questions
01Is the ₹21,000 ESI limit on gross salary or basic salary?
Neither. Since 21 November 2025 the ceiling is tested on wages as section 2(88) of the Code on Social Security defines them: basic pay and dearness allowance, with house rent allowance, conveyance, overtime and similar heads left out up to 50% of total pay. CTC items like employer PF are also left out. An employee with a gross above ₹21,000 can therefore still be covered.
02Our employee's gross pay is above ₹21,000. Can they still be under ESI?
Yes. In ESIC's illustration, basic pay and dearness allowance of ₹18,000 with other allowances of ₹8,000 is a gross of ₹26,000, but wages are ₹18,000, so the employee is covered and contributions are paid on ₹18,000. Re-test every employee whose basic pay and dearness allowance are ₹21,000 or less.
03What happens to ESI when an employee gets a raise above ₹21,000?
Coverage continues until the running contribution period ends. If the raise takes effect in July, the employee contributes on the revised wages until 30 September and exits ESI only from 1 October. A raise effective December keeps them in until 31 March. Stopping the deduction immediately after a raise is the single most common ESI mistake payroll teams make.
04Is ESI applicable in every state at 10 employees?
Yes. Under the Code on Social Security the threshold is 10 or more persons for every establishment, and the separate state thresholds for shops and offices no longer apply. Two limits remain: seasonal factories are excluded, and contributions start only once ESIC benefits are notified for your district, so check your district's status.
05What is the ESI due date and the penalty for missing it?
Pay within 15 days of the end of the month. Delay attracts simple interest at 12% a year plus damages of 5% to 25% a year depending on how late you are, capped at the arrears. Deducting the employee's share and failing to deposit it is separately punishable with imprisonment of at least one year, so treat the date as immovable.
06Are apprentices and interns covered under ESI?
Apprentices engaged under the Apprentices Act, 1961 are excluded. Anyone else employed on wages, directly or through a contractor, is an employee under section 2(26) and is covered if their wages are within the ceiling. If you run a mixed programme, document which trainees are statutory apprentices, because that distinction decides both coverage and headcount.