AS | Ankit Sarawagi|Founder, CFOmatrix·August 2026·8 min read | Payroll & Labour Law |
The month you hire your tenth person, a quiet new liability switches on: ESI registration, due within 15 days, with a 4% payroll cost most first-time founders never budgeted for.
This guide covers the whole thing in plain language: when ESI applies, how to register on the ESIC portal, how the 0.75% and 3.25% split works, and when to pay and file. Start with the summary, then jump to the section you need.
- When it applies
- At 10 or more employees (20 in a few states) when any employee earns gross wages of ₹21,000/month or less.
- Contribution
- 4% of gross wages: employee 0.75% plus employer 3.25%.
- Where to register
- Online on the ESIC portal, within 15 days of the Act becoming applicable.
- Payment & due date
- Deposit both shares by the 15th of the following month.
- Penalty
- Interest at 12% p.a. on late dues, plus damages of up to 25% p.a.
1 Does ESI apply to you?
The Employees’ State Insurance Act, 1948, is India’s medical and cash social-security scheme for lower-wage employees. Two tests decide whether you must register.
- Headcount test: you employ 10 or more people. A handful of states have notified a higher threshold of 20, so confirm your state.
- Wage test: at least one employee earns gross wages of ₹21,000 a month or less. The ceiling is ₹25,000 for an employee with a disability.
Cross both lines and registration is mandatory. Coverage then attaches to each employee whose gross wage is at or under the ceiling. Someone earning above ₹21,000 is simply out of ESI (they may have other cover), but they still count toward your headcount of 10.
Kaveri Labs has 12 people: 4 founders and engineers on ₹60,000 plus a month, and 8 support, ops and junior staff earning between ₹14,000 and ₹20,000. The headcount is 12, and 8 of them are under the ceiling. Kaveri must register for ESI and cover those 8, even though its senior team is out of scope.
2 Registering on the ESIC portal
Registration is online and free. You have 15 days from the date ESI becomes applicable, so treat the day you hire employee number ten as the day the clock starts.
3 How the contribution splits
The total ESI cost is 4% of an employee’s gross monthly wages. It splits in a fixed ratio:
| Who pays | Rate | On ₹18,000 gross |
|---|---|---|
| Employee (deducted from salary) | 0.75% | ₹135 |
| Employer (company cost) | 3.25% | ₹585 |
| Total deposited | 4.00% | ₹720 |
You deduct the employee’s 0.75% from their pay, add your own 3.25%, and deposit the combined 4% in one challan. Contributions are rounded up to the next rupee per employee.
Brewly employs 9 covered staff on the ESI rolls with a combined gross payroll of ₹1,50,000 a month. The maths:
Employee share (0.75%) = ₹1,125, deducted across the 9 salaries.
Employer share (3.25%) = ₹4,875, borne by Brewly.
Total deposited each month = ₹6,000.
Over a year that is ₹72,000, of which Brewly’s own cost is ₹58,500. This is real cash the founder must build into the cost of every sub-₹21,000 hire.
4 Contribution periods and benefit periods
ESI runs on a six-month rhythm. There are two contribution periods a year, and each is tied to a benefit period that starts about six months later. This lag is why an employee’s contributions today decide the benefits they can draw next year.
| Contribution period (you pay) | Benefit period (employee can draw) |
|---|---|
| 1 April to 30 September | 1 January to 30 June (following year) |
| 1 October to 31 March | 1 July to 31 December (following year) |
You still pay monthly, by the 15th of the next month. The periods above govern the returns and the employee’s eligibility for cash benefits, not the payment frequency.
A Brewly barista covered from April 2026 pays contributions through the April to September 2026 period. Those contributions build her eligibility for sickness and maternity cash benefits in the matching benefit period, roughly January to June 2027. Contribute on time now and her cover is intact when she needs it later.
5 What ESI actually buys your team
ESI is not token insurance. For a ₹135 employee deduction, a covered worker and their dependants get a genuine safety net:
- Medical: full treatment for the employee and family at ESI dispensaries and hospitals, from day one of employment.
- Sickness: cash at about 70% of wages during certified sick leave, subject to the contribution-day condition.
- Maternity: paid leave benefit for confinement, subject to qualifying contributions.
- Disablement: cash for temporary or permanent disability from an employment injury.
- Dependants: a monthly benefit to the family if an employee dies from an employment injury.
For a startup hiring at the lower wage band, this is a real recruitment and retention advantage, not just a compliance line.
6 Late payment and penalties
Miss the 15th and ESI dues become expensive fast. Two charges stack:
- Interest at 12% per annum on the delayed amount, for every day of delay.
- Damages on top, on a rising scale up to 25% per annum depending on how long the delay runs.
Beyond the money, unpaid ESI is a red flag in any funding or acquisition diligence, and a deducted-but-not-deposited employee share can be treated as a serious default. Deducting the 0.75% and not depositing it is worse than never deducting at all.
7 Your ESI checklist
- Count everyone on the floor. At 10 (or 20 in higher-threshold states), run the wage test.
- Identify every employee earning ₹21,000 gross or less (₹25,000 if disabled). They are your covered set.
- Register on the ESIC portal within 15 days and get your 17-digit code.
- Register each covered employee for an Insurance Number and card.
- Each month, deduct 0.75%, add 3.25%, and deposit 4% by the 15th of the next month.
- Keep contributions unbroken so employees stay eligible in the matching benefit period.
- Continue contributing to the end of the contribution period even if a wage crosses ₹21,000 mid-way.
Not sure which rules apply at your headcount?
Use our free Compliance Applicability Checker: enter your team size, state and set-up, and see exactly which labour, payroll and HR filings you owe now, and which switch on as you grow.
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AS | Founder, CFOmatrix | Finance Strategy & Compliance CFOmatrix helps Indian startups build finance, tax and compliance functions that stand up to investor due diligence, from process and controls to the filings and the numbers behind them. |
Disclaimer: This article is general information as of August 2026 and is not legal or tax advice. The ESI Act, its rates, wage ceilings and state thresholds can change. Confirm your specific obligations with a qualified professional before acting.