PF and ESI for a Small Business: When It Applies

A distributor in Surat has grown from 8 people to 24 in two years. Salaries go out on time and the books are clean, but nobody has registered for PF or ESI, because nobody was sure when it started to apply. This post sets out when each one applies, what they cost, and what has to happen every month once you're in.

Is PF registration mandatory? 20 employees is the line

The EPF Act applies once an establishment employs 20 or more people. Count everyone on the payroll, including people hired through a contractor. Below 20 you can join voluntarily, if the employer and a majority of the employees agree. Once you're covered, you stay covered even if headcount later drops.

Being covered doesn't mean every employee joins. Anyone whose Basic plus DA is ₹15,000 or less when they join has to be a member. Somebody who joins above it can be left out, unless they were already a PF member in an earlier job.

ESI applicability wage limit

ESI applies to an establishment with 10 or more employees, and covers each employee whose gross pay is ₹21,000 a month or less. Above that, there's no ESI for that person at all: nothing deducted, nothing owed.

Coverage is decided for six months at a time, April to September and October to March. Somebody who gets a raise in June stays covered until September ends, and drops out from October.

What it costs each month

Four of the distributor's 24 people, worked out by the engine behind our PF and ESI calculator, with PF on the ₹15,000 ceiling:

The last two rows are ₹500 of gross apart, and the employer's cost goes down by ₹683 a month, because ESI stops at ₹21,000. The employee loses ESI's medical cover in the same step, which is worth telling them before the raise.

Employer PF contribution rate

The employer pays 12% of the PF wage, the same as the employee, and splits it. 8.33% goes to the pension scheme (EPS), capped at ₹1,250 a month, and the rest, ₹550 on the ceiling, goes to the employee's PF account. On top of the 12%, the employer pays EDLI insurance at 0.5% and admin charges at 0.5%. None of that comes out of the employee's salary.

ESI contribution rate, employer and employee

The employee pays 0.75% of gross and the employer pays 3.25%. Both are rounded up to the next rupee. At the ₹21,000 limit that's ₹158 from the employee and ₹683 from the employer.

PF on the basic salary ceiling

Most small employers contribute on Basic up to ₹15,000, so PF stops growing at ₹1,800 a month from each side. You can contribute on the full Basic instead, which costs you more and saves the employee more. Pick one, write it in the offer letter, and apply it to everyone. How Basic is set in the first place is in CTC to in-hand salary.

PF ESI compliance for a small business, month by month

1. Register the establishment on the EPFO and ESIC portals, and get each employee a UAN and an ESI number.
2. Deduct the employee's share from each month's salary.
3. File the PF return (the ECR) and pay both shares by the 15th of the next month.
4. Pay ESI by the 15th of the next month too.
5. Keep the challans. An inspector will ask for them before anything else.

The compliance calendar lists every PF, ESI and TDS due date for the year, and you can add them to your own calendar in one click.