ESI Calculation Fix: Including Arrears in ESI Contributions

Introduction

Employee State Insurance (ESI) is a mandatory statutory deduction applied to eligible employees in India. It covers benefits like medical care, sickness, and maternity. ESI contributions are calculated as a percentage of the employee’s wages, which include basic salary and fixed allowances. However, when arrears are paid, they often get excluded from ESI calculations, leading to incorrect contribution amounts.

What’s the problem?

Issue: ESI contributions are being miscalculated when arrears are paid, because the system currently ignores arrear amounts in ESI calculation.

Impact: This leads to incorrect ESI values shown in payslips and statutory reports, violating statutory compliance.

What is the feature?

A fix is being introduced to include arrear amounts in ESI calculation—without changing how eligibility is determined.

• Eligibility: Still based on current month’s promised salary.

• Contribution: Will now include arrears paid during the ESI contribution period.

Why do we need this?

Customer Value

• Ensures accurate ESI amounts are auto-calculated.

• Reduces manual correction and reconciliation work for payroll teams.

Business Value

• Builds trust in Keka’s payroll accuracy.

• Improves product stickiness by eliminating statutory errors.

Strategic Value

• Increases customer satisfaction.

• Positions Keka as a compliant, automation-first payroll platform.

How it works

1. Activate ESI for an employee.

2. Run payroll with regular salary — ESI calculates correctly.

3. Add arrears (from a previous period) in the next cycle.

4. Run payroll again.

5. New logic will include arrears + salary for ESI contribution:

   • ESI gross = Current month salary + Arrears paid

6. View corrected values in:

   • Pay Register

   • Payslip

   • ESI ECR Report

Example:

Correct ESI Calculation:

• Employee (0.75%): ₹18,890 × 0.0075 = ₹141.675 → ₹142

• Employer (3.25%): ₹18,890 × 0.0325 = ₹614.925 → ₹615

Incorrect (current):

• Only ₹10,556 considered:

  • Employee: ₹80

  • Employer: ₹344