Mr. X earns wages of ₹ 20,000 per month. What will be the contributions to the ESI Scheme under the Employees' State Insurance Act, 1948 ?

Correct — B, (b) Employer's contribution ₹ 650; Employees' contribution ₹ 150. Two things have to be right for this item: the rates, and which side of the pair each figure sits on.

First, is Mr. X covered at all? The Employees' State Insurance Act, 1948 applies through the wage ceiling fixed by rule 50 of the Employees' State Insurance (Central) Rules, 1950, which since 1 January 2017 has been ₹ 21,000 a month. Mr. X draws ₹ 20,000, which is under the ceiling, so he is an employee within the meaning of section 2(9) and contributions are payable on his whole wage.

Second, the rates. Contributions are payable under section 39 of the Act, and the rates are prescribed by rule 51 of the ESI (Central) Rules, 1950. With effect from 1 July 2019 the rates are:

employer's contribution — 3.25 per cent of the wages payable to the employee; employee's contribution — 0.75 per cent of the wages payable; total — 4 per cent.

Apply them to ₹ 20,000:

employer 3.25% × 20,000 = ₹ 650 employee 0.75% × 20,000 = ₹ 150 total ₹ 800

That is option (b), in that order. Third, the order matters as much as the arithmetic. The employer always pays the larger share under the ESI scheme — the whole design is that the enterprise carries most of the cost of insuring its workforce — so any option that gives the employee the bigger figure has the two parties swapped. Option (d) has exactly these two numbers the wrong way round, which is why the printed order within each option must be read and not skimmed.

Why the others are wrong

• (a)Employer's contribution ₹ 350; Employees' contribution ₹ 950 — Both figures belong to the old rate structure AND they are on the wrong sides. Until 30 June 2019 the ESI rates were 4.75 per cent for the employer and 1.75 per cent for the employee; on wages of ₹ 20,000 those give ₹ 950 and ₹ 350. This option prints ₹ 350 for the employer and ₹ 950 for the employee, so it is the pre-2019 pair reversed. Two separate errors have to be made to arrive here — using rates that were reduced with effect from 1 July 2019, and then attributing the larger share to the employee. Under the ESI scheme the employer's share is always the larger of the two.
• (c)Employer's contribution ₹ 950; Employees' contribution ₹ 350 — This is the arithmetically clean answer under the OLD rates: 4.75 per cent of ₹ 20,000 is ₹ 950 for the employer and 1.75 per cent is ₹ 350 for the employee, correctly attributed. It is the most tempting wrong option on the item and it is wrong only because those rates were superseded. By notification of 13 June 2019 the Government amended rule 51 of the ESI (Central) Rules, 1950 to reduce the total rate from 6.5 per cent to 4 per cent — employer 3.25 per cent, employee 0.75 per cent — with effect from 1 July 2019, the first reduction in the rates in over two decades. Anyone working from a pre-2019 textbook lands squarely on this option, and the fix is to carry the current rate pair and the date it took effect.
• (d)Employer's contribution ₹ 150; Employees' contribution ₹ 650 — The two amounts are the right ones — ₹ 650 and ₹ 150 are exactly 3.25 per cent and 0.75 per cent of ₹ 20,000 — but they are attributed to the wrong parties. This option makes the employer pay ₹ 150 and the employee ₹ 650, which would mean the worker bore roughly four-fifths of the cost of his own insurance. The ESI scheme is built the other way about: the employer's share is the larger one, and in addition the employer alone pays for an employee whose average daily wage is up to the exempted limit prescribed under the proviso to section 42(1), where the employee's own contribution is waived altogether. Read the semicolon in each option carefully; this pair and the pair in the correct option are the same two numbers in opposite order.

The ESI scheme is contributory and tripartite in its financing, and section 39 of the Employees' State Insurance Act, 1948 is where the obligation sits: the contribution payable in respect of an employee comprises the employer's contribution and the employee's contribution, both at rates prescribed by the Central Government, and both are payable to the Corporation. The rates live in rule 51 of the ESI (Central) Rules, 1950 rather than in the Act, which is why they can be changed by notification — and were, with effect from 1 July 2019, when the total came down from 6.5 per cent (employer 4.75, employee 1.75) to 4 per cent (employer 3.25, employee 0.75). Coverage is governed by the wage ceiling in rule 50, ₹ 21,000 a month since 1 January 2017 and ₹ 25,000 for a person with disability. Two further rules complete the picture. Under section 40 the principal employer pays both contributions in the first instance and may then recover the employee's share by deduction from wages, and section 40(3) forbids him from recovering his own share from the employee in any form. Under the proviso to section 42(1) an employee whose average daily wage is below the limit prescribed by the Central Government pays no contribution of his own, though the employer's contribution remains payable in full. Contribution periods are the two six-month blocks 1 April to 30 September and 1 October to 31 March, with the corresponding benefit periods beginning three months later.

Key facts

• ESI Act, 1948, section 39 — contribution comprises the employer's contribution and the employee's contribution, at rates prescribed by the Central Government.
• ESI (Central) Rules, 1950, rule 51 — with effect from 1 July 2019 the employer's contribution is 3.25 per cent of the wages and the employee's contribution 0.75 per cent, a total of 4 per cent.
• Before 1 July 2019 the rates were 4.75 per cent for the employer and 1.75 per cent for the employee, a total of 6.5 per cent.
• ESI (Central) Rules, 1950, rule 50 — the wage ceiling for coverage is ₹ 21,000 a month with effect from 1 January 2017, and ₹ 25,000 for a person with disability.
• On a wage of ₹ 20,000 the employer pays ₹ 650 and the employee ₹ 150, a total of ₹ 800.
• Section 40 — the principal employer pays both contributions in the first instance and may recover the employee's share by deduction from wages; section 40(3) bars recovery of the employer's own share from the employee.
• Proviso to section 42(1) — an employee whose average daily wage is below the prescribed limit is exempt from his own contribution, but the employer's contribution is still payable.
• Contribution periods run 1 April to 30 September and 1 October to 31 March, with benefit periods commencing three months later.

Common traps

• Using the pre-July-2019 rates of 4.75 and 1.75 per cent. They give ₹ 950 and ₹ 350 and land on option (c).
• Swapping the employer's and employee's shares. The employer's is always the larger; the same two numbers appear in reverse order in another option.
• Forgetting to check the wage against the ₹ 21,000 ceiling before computing anything.
• Confusing the ESI coverage ceiling of ₹ 21,000 with the EPF wage ceiling of ₹ 15,000, which serves a different purpose under a different Act.

• practice — not a real PYQ

  With effect from 1 July 2019, the total rate of contribution under the Employees' State Insurance Act, 1948 is :

  • (a)4 per cent of wages, comprising 3.25 per cent by the employer and 0.75 per cent by the employee
  • (b)6.5 per cent of wages, comprising 4.75 per cent by the employer and 1.75 per cent by the employee
  • (c)4 per cent of wages, comprising 2 per cent by the employer and 2 per cent by the employee
  • (d)5 per cent of wages, comprising 3.75 per cent by the employer and 1.25 per cent by the employee

  Answer(a) 4 per cent of wages, comprising 3.25 per cent by the employer and 0.75 per cent by the employee

• practice — not a real PYQ

  Under the Employees' State Insurance Act, 1948, the employer's own share of the contribution :

  • (a)May be deducted from the employee's wages with his written consent
  • (b)May be recovered from the employee only where his wages exceed the ceiling
  • (c)Shall not be recovered from the employee in any manner
  • (d)Is payable by the employee where the establishment is a seasonal factory

  Answer(c) Shall not be recovered from the employee in any manner