How is ESI calculated on salary?

 

How is ESI calculated?

It might seem like a silly question at first sight. But HR consultants, personnel managers, and software developers know the pain. However accurately you calculate it, your figure may not match the amount arrived at in the challan generated by the portal. In the end, you have to adjust the accounts by a small amount. This is because of the rounding-off rules.

Let’s see what the law says:
The Employees’ State Insurance (Central) Rules, 1950
Rule 51. Rates of contribution.
The amount of contribution for a wage period shall be in respect of—
(a) employer's contribution, a sum (rounded to the next higher rupee) equal to three and one-fourth per cent of the wages payable to an employee; and
(b) employee's contribution, a sum (rounded to the next higher rupee) equal to three-fourth per cent of the wages payable to an employee.

Although it simply says “rounded to the next higher rupee”, it is not as simple as that when it is implemented in the portal. As you have no other option but to follow the portal challan amount, let us see how the portal does it.

Employee Contribution (0.75%): 
1. The portal calculates 0.75% of the wages for each individual employee.
2. It first rounds the amount (standard rounding) to 2 decimal places for each employee.
3. It then rounds the amount upward to the next higher integer (0 decimals) for each employee.

Formula:
=ROUNDUP(ROUND(A1*0.75%,2),0)

Employer Contribution (3.25%): 
1. The portal calculates 3.25% of the wages for each individual employee.
2. It rounds the amount to 2 decimal places for each employee.
3. It then calculates the total of the contributions.
4. The total is then rounded upward to the next higher integer (0 decimals).

Formula:
=ROUND(A2*3.25%,2)
=ROUNDUP(SUM(B2:B10),0)

Although the employer contribution is retained at 2 decimal places at the employee level, for practical accounting purposes it needs to be rounded off; otherwise, the final payment will contain decimals. Thus, the difference in the total will have to be adjusted finally through an adjustment voucher.