The Employees’ State Insurance scheme runs on two eligibility tests that have to be read together, and getting either one wrong is where most payroll teams slip. An establishment becomes liable once its headcount crosses a fixed threshold, and within that establishment, individual employees qualify based on what they earn.
Both conditions carry recent changes worth tracking closely, because the four Labour Codes took effect on 21 November 2025 and the Employees’ State Insurance Corporation issued implementing circulars in December that quietly redrew how “wages” are counted.
As of 31 March 2024, 3.14 crore employees were covered under the ESI Act, translating to 3.72 crore insured persons and 14.44 crore beneficiaries once families are counted, which makes accurate classification a compliance question with real scale behind it.
This guide separates the employer coverage test from the employee coverage test, then works through the edge cases that trip up even seasoned HR teams: the daily-wage contribution exemption, the mid-period wage jump, apprentices, and the new wage-definition rule that is pulling previously excluded staff into the net.
When an Employer Becomes Liable to Register
Employer liability turns on headcount and establishment type, not on whether anyone in the office wants the coverage. Section 1(5) of the Employees’ State Insurance Act, 1948 makes the scheme applicable to every notified factory and establishment once it employs a threshold number of persons, and the count includes contract, casual, and temporary staff, not only those below the wage ceiling.
The threshold is not uniform across the country, which is the first place employers go wrong. The core rule and its main exceptions look like this:
| Establishment type | Standard threshold | Notes |
| Factories | 10 or more persons | Applies regardless of whether the manufacturing process uses power |
| Shops, hotels, restaurants, cinemas, road transport, newspaper establishments, private educational and medical institutions | 10 or more persons | Applies in states that have notified the reduced threshold under Section 1(5) |
| Non-factory establishments in states retaining the higher limit | 20 or more persons | Maharashtra and Chandigarh still apply 20 for certain categories |
Software firms, BPOs, and commercial offices are covered on the same basis as any other establishment in a notified state, a point IT companies frequently miss because they assume ESI belongs to manufacturing.
Registration is mandatory within 15 days of crossing the threshold on any day in the preceding 12 months, and once an establishment is covered, it cannot exit simply because headcount later drops below the trigger.
The Nationwide Rollout Closes the Old Escape Route
Geography used to be a defence, since the scheme only applied in districts ESIC had formally notified. That gap has narrowed to almost nothing.
Coverage now reaches 668 of the country’s districts, and expansions continue: in March 2025, ESIC notified 15 additional districts in Uttar Pradesh, taking that state to 74 of 75 districts and bringing an estimated 30 lakh insured persons into scope. An establishment that was outside a notified area a year ago may sit inside one today, so the registration test needs rechecking whenever ESIC gazettes a new district.
When an Employee is Covered
Employee eligibility rests on the wage ceiling. An employee of a covered establishment earning monthly wages up to ₹21,000 is covered, and the ceiling rises to ₹25,000 for an employee with a disability. Coverage attaches from day one of employment, with no minimum age and no waiting period for medical care.
Two features of this test cause the most confusion, and both reward precise handling:
- Gross wages drive the calculation. ESI eligibility and contribution are calculated on gross wages, unlike provident fund, which sits on basic pay. Teams porting PF logic across to ESI routinely under-deduct as a result. The distinction between the two schemes matters at the design stage of any salary structure.
- The contribution split. Total contribution is 4% of wages, unchanged since the July 2019 revision: 3.25% from the employer and 0.75% from the employee. The employer deducts the employee share and deposits both by the 15th of the following month.
The Daily-Wage Exemption Most Systems Ignore
A worker whose daily average wage is up to ₹176 is exempt from paying the employee share, yet the employer must still contribute its full 3.25% for that person. The exemption removes only the deduction while leaving coverage fully intact, which means the lowest-paid workers stay insured without losing anything from their pay packet.
Payroll software that treats these employees as “out of ESI” strips them of benefits they are legally entitled to, and the error surfaces during ESIC inspections.
The Mid-Period Wage Jump
A pay rise that pushes someone above ₹21,000 does not end coverage on the spot. The ESI scheme runs on two fixed six-month contribution periods, April to September and October to March, and an employee already covered at the start of a period stays covered until that period closes, regardless of when the increment lands
Contribution for the remaining months is calculated on the higher actual wage. Overtime sharpens the point: overtime is counted as wages for calculating the contribution, but it is excluded when testing whether someone has crossed the ₹21,000 ceiling, so a month of heavy overtime never on its own knocks an employee out of the scheme.
The Edge Cases That Decide Real Payrolls
Standard thresholds settle most classifications. The remainder turn on definitions, and three of them have shifted or are widely misread.
Apprentices and Trainees Are Not the Same Thing
Only apprentices engaged under the Apprentices Act, 1961 are excluded from ESI. This is a narrow carve-out that employers over-apply. A trainee hired under a company’s own internal scheme, rather than a certified apprenticeship under the 1961 Act, is an employee for ESI purposes and is covered if they earn within the ceiling. Labelling ordinary trainees as “apprentices” to avoid contribution is a classification error that inspections routinely reverse.
The 50% Wage Rule Pulls Staff Into the Net
The ESIC circulars dated 10 and 11 December 2025 aligned the scheme with Section 2(88) of the Code on Social Security, 2020, which requires that basic pay plus dearness allowance make up at least half of total remuneration.
Where allowances are inflated to keep the “wage” component artificially low, the excess is added back and reclassified as wages. Employers spent years structuring packages so that a nominally high-CTC employee fell below the ESI wage figure on paper.
That workaround is now closed, and the effect runs in the direction of wider coverage: an employee whose gross looks above the ceiling can be pulled back inside it once the reclassification is applied. This mirrors the broader formalisation push that the Labour Codes have set in motion across compensation design.
Contract, Casual, and Gig Workers
Contract and casual employees working in or in relation to a covered establishment are covered, and the principal employer carries the compliance liability for them even when a contractor runs their payroll.
The Code on Social Security also opens a statutory route toward extending social security to gig and platform workers, a shift that reshapes obligations for aggregator-model businesses that had treated these workers as entirely outside the formal net.
Who Stays Outside ESI
A short set of categories sits genuinely outside the scheme, and it helps to hold them clearly against the wide coverage above:
- Employees drawing gross wages above ₹21,000, or above ₹25,000 for a person with a disability, from the start of a contribution period
- Apprentices engaged specifically under the Apprentices Act, 1961
- Establishments below the applicable headcount threshold that have not been notified
- Establishments granted a Section 87 exemption, where staff already receive benefits substantially similar or superior to ESI, renewable one year at a time
Central and state government employees typically fall outside ESI because they receive comparable protection under separate service rules, not because the scheme rejects them.
In the End…
Both tests belong in every contribution cycle rather than in a one-time registration event. The headcount check needs to include contract and casual staff and match the threshold for the specific state, since Maharashtra and Chandigarh differ from the rest.
Each employee’s ESI wage should be recalculated on gross, with the 50% basic-plus-DA reclassification applied before deciding who sits under ₹21,000, and anyone whose daily average wage falls at or below ₹176 flagged so their employer share still goes out. District notifications deserve a cross-check against ESIC gazette updates before any location is assumed exempt, and trainee classifications need to hold up against the Apprentices Act, 1961.
The scheme’s own numbers show why the discipline pays off: a compliance base of 3.14 crore covered employees means an inspection has a well-mapped trail to follow, and the cheapest correction is the one made before the return is filed.
FAQs
What is the salary limit for ESIC eligibility?
An employee of a covered establishment earning monthly gross wages up to ₹21,000 is covered under ESI. The ceiling rises to ₹25,000 for an employee with a disability. Eligibility is calculated on gross wages, not basic pay.
How many employees make an establishment liable for ESIC registration?
Factories are covered once they employ 10 or more persons. Shops, hotels, restaurants, cinemas, and similar establishments are also covered at 10 or more in states that have notified the reduced threshold. Maharashtra and Chandigarh still apply 20 for certain non-factory categories. The count includes contract, casual, and temporary staff.
Is ESIC applicable to IT companies and BPOs?
Yes. Software firms, BPOs, and commercial offices are covered on the same basis as any other establishment in a notified state once they cross the applicable headcount threshold. ESI is not limited to manufacturing.
What is the ESIC contribution rate?
Total contribution is 4% of wages: 3.25% from the employer and 0.75% from the employee. The employer deducts the employee share and deposits both by the 15th of the following month.
Are apprentices covered under ESI?
Only apprentices engaged under the Apprentices Act, 1961 are excluded from ESI. A trainee hired under a company’s own internal scheme is an employee for ESI purposes and is covered if they earn within the wage ceiling.
Does a mid-year pay rise above ₹21,000 end ESI coverage immediately?
No. The scheme runs on two fixed contribution periods, April to September and October to March. An employee covered at the start of a period stays covered until that period closes, with contribution for the remaining months calculated on the higher actual wage.
