Every corporate operation, including payroll, is governed by a set of rules and regulations. If you’ve been managing your employees’ payroll in India for a while, you’ve probably heard of Employee Provident Fund (EPF) and Employees’ State Insurance Corporation (ESIC) Scheme. In this article, we’ll go over what EPF/ESIC is, how it works, and what it takes to get registered so you can stay compliant.
What is EPF and ESIC?
Employees’ Provident Fund (EPF) is a scheme introduced for a bright and better future for the employees. Under this scheme, a small portion of your employee’s wages is deducted and contributed to the EPF account. Being an employer, you have to match the same amount put in the employee and deposit the whole amount in the EPF account. It is further linked to the Employees’ State Insurance Scheme (ESIC).
The ESIC scheme is a workers’ compensation plan that provides medical coverage for the insured. In addition, their dependents are also protected. Finally, ESIC provides a number of monetary compensations in the event of a wage loss or disability. The scheme provides a pension known as dependant benefit to the insured person’s family members, in the event of death or injury caused by occupational dangers while at work. ESI, along with Provident Fund (EPF), Professional Tax (PT), and TDS, are some of the most important payroll compliances.
How does EPF and ESIC work for businesses?
You must already be familiar with the Employee Provident Fund (EPF). Though it is referred to as a retirement benefits scheme designed to provide financial stability to your employees, do you know how it works in your favour?
First, we must understand that EPF is not just one scheme. Instead, it comprises three different schemes directed to three different benefits.
- The first part is EPF where your monthly contribution is added to your employee’s retirement funds. This is basically the wealth generation part of the scheme.
- The second part of EPF is the employee pension scheme (EPS). A small portion of your monthly EPF contribution is added to this to generate a pension for employees after retirement.
- The third and final part of EPF is the Employee Deposit Linked Insurance Scheme (EDLI). This is basically an insurance cover that every entity has to offer to its employees. However, companies can go for group employee insurance from any life insurance provider as well.
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Let’s simplify its structure.
For instance, let’s assume you deduct Rs. 5,000 per month from your employee’s salary as part of the EPF scheme. Now, you will have to match the contribution and contribute another Rs. 5,000 towards the scheme. A sum of i.e. Rs. 10,000 will be then deposited in EPF Organisation. Your employees will get 8.5% interest every year on this amount. However, the interest rate was recently changed to 8% in Feb 2022.
Now that it’s clear on EPF, let’s talk about ESIC.
Employees and employers jointly contribute to the fund at a rate of 12% of basic salary, dearness allowance, and retention allowance (if applicable) payable to employees per month, according to an amendment to the Employees’ State Insurance Act, 1997.
By completing an application, the applicant is assigned a social security number. Delinquent reporting, underreporting, or non-reporting of employment size is highlighted by the Provident Fund registration. If the number of employees in your company surpasses 20, you must initiate the Provident Fund.
Because the E.S.I. Scheme is a contributory scheme, all employees in factories, offices or establishments to which the Act applies must be insured in accordance with the Act’s provisions. Employer contribution and employee contribution at a stipulated rate shall be included in the contribution payable to the corporation/company in respect of an employee. Rate adjustments are performed on a regular basis. Currently, the employee contribution rate is 1.75 percent of wages (effective 1.1.97), while the employer contribution rate is 4.75 percent of wages paid/payable in respect of employees in each wage period. Employees earning a daily average remuneration of up to Rs.50/- are free from paying the contribution. Employers, on the other hand, will not be excluded from contributing in the case of these employees.
Registration is the process of analysing every employer and every wage earner for the purposes of the medical insurance plan, and creating separate records for each of them.
How are EPF and ESIC applicable?
Now you know how the EPF and ESIC process works, but do you know about their applicability? Here is when these schemes are applicable to your business.
EPF applicability and contribution
As per the present rule, every organisation with 20 or more employees is obliged to register with EPF and provide employees with EPF benefits. Organisations with less than 20 employees can also join the EPF programme but on a voluntary basis only.
The act does not apply to the following:
- 16(1)(a) Cooperative societies with fewer than 50 members that operate without the use of electricity.
- Employees who receive benefits in the nature of 16(1)(b) contributory P.F. or old age pension as per rules framed by the Govt. 16(1)(b) Establishments under the control of the state/central Govt. & employees who receive benefits in the nature of 16(1)(b) contributory P.F. or old age pension as per rules framed by the Govt.
- 16(1)(c) Establishments established under any central, provincial, or state act, as well as employees receiving benefits in the form of contributory pension funds or old age pensions in accordance with the laws.
Coverage that is provided on a voluntary basis:
If any of the establishments do not meet the above two coverage requirements, and the employer and the majority of the employees are willing, registration can be achieved voluntarily.
NOTE: This Act will continue to apply to the establishment in question even if the number of employees falls below 20 at a later date. [1(5)].
The following is how the PF contribution is split:
ESIC applicability and Contribution
The ESIC Plan for India is an integrated social security scheme designed to offer Social Production to organised sector workers and their dependents with respect to contingencies such as sickness, maternity, and death or disability owing to an employment injury or occupational hazard.
- Non–seasonal Factories that use power in, and employ ten (10) or more persons (Section 2(12)).
- Factories and companies employing twenty(20) or more people that are not seasonal and do not use electricity.
- The system has been expanded to include stores, hotels, restaurants, theatres, preview theatres, road-motor-transport ventures, and newspaper establishments employing 20 or more persons, according to Section 1(5).
The scheme is primarily funded by contributions raised from the employer and your Insured Employees’ payables. As per the latest revision, the contribution rates are as follows:
- Employers’ Contribution – 3.25% of the Wages
- Employees’ Contribution – .75% of the Wages
However, if your employee’s daily average wage is less than Rs. 137, they will not need to make a contribution, but the employer would have to make their contribution.
The employer can deduct the employee contribution from the employees’ salary and contribute at the rates specified above. This needs to be done within 15 days of the end of the month in which the deduction is done.
The below table specifies the due dates for paying ESIC contributions, as well as for the cash benefits.
Risks that businesses might expose themselves to if they don’t meet the requirements
EPF and ESIC are two compulsory provisions that you need to incorporate, to provide your employees with after-retirement/emergency financial security and healthcare insurance. Once you register your business under these schemes, there are certain things that your business needs to comply with. If your business doesn’t comply with these statutory compliances, it might lead to penalties, reputational damage, and legal action.
EPF and ESIC compliances are much more than just submitting your contribution by the end of the month. Your business might be subject to the following penalties if it fails to meet the EPF and ESIC requirements proposed by the government.
- 12% of interest for each delay in contribution
- Penalties for late payment contributions are as mentioned below.
- Delay of up to 2 months: 5% interest per year
- Delay of up to 2-4 months: 10% interest per year
- Delay of up to 4-6 months: 15% interest per year
- Delay of more than 6 months: 25% interest per year
- A penalty of 12% per year on each late contribution
moreover, if your business fails to meet the EPF/ESIC contribution requirement, it will fall under the purview of the income tax act and your business might be restricted from making further EPF/ESI deposits, which might lead to a failure to get dedication benefits.
How to stay compliant with EPF and ESIC regulations?
Payroll processing is perhaps one of the most difficult tasks for any business. Each business may carry out this process in different ways, but most businesses still follow a manual process of calculating and disbursing salaries, creating salary slips as well as maintaining compliances, which lead to flaws in your payroll process.
Most businesses manage the above mentioned payroll activities through spreadsheets, which means every time a new budget announcement is made or a contribution is revised, they will have to recheck the formulas and alter them to ensure that the right deductions are made.
This is where payroll software like Quikchex, and companies like Savage and Palmer come in to help businesses stay efficient. Right from calculations to filing and reporting, Quikchex automates all crucial tasks of payroll management and ensures you stay compliant with all the labour, EPF, and ESIC regulations.
The way to simplify payroll management with Savage and Palmer
Keeping your business compliant is no longer a choice but a necessity. And this is for some good reasons. Calculating and filing your deductions and contributions on time is the only way to stay compliant and avoid penalties. So many processes like leave and attendance calculation, as well as creating salary slips, will take away your most productive hours. Thankfully, Savage and Palmer can help you automate all your compliance tasks and process your payroll. Connect today to put your payroll on autopilot, or drop in your details here.