After the commencement of a contribution period, even if the gross salary of an employee exceeds Rs. 21,000 monthly, the employee continues to be covered under the ESI scheme till the end of that contribution period.
The contribution is deducted from the new salary. Let us look at an example to understand this better.
If an employee’s gross salary increases in June from Rs. 18,000 (within ESI limit) to Rs. 22,000 (above ESI limit), the deductions for ESI will continue to happen till the end of the ESI contribution period, i.e., September.
And the deduction amount for both the employee and employer will be calculated on the increased gross salary of Rs. 22,000.
At the end of the contribution period, if the employee salary is more than the ESI limit, no further deductions and contributions are required. The employee will still be covered under ESI till 30th June of the following year.
Similar rules apply when an employee's salary increases in the 2nd contribution period.
In case the gross salary of the employee exceeds Rs. 21,000 during the contribution period (explained next), the ESI contributions would be calculated on the new salary and not Rs 21,000. For example, if the salary of an employee increases to Rs. 22,000 per month, then the ESI would be calculated on Rs. 22,000 instead of Rs. 21,000 during the contribution period.
The comparison of income is made with Full Income, and ESI's calculation is done on the actual payout (income).
Employees earning daily average wage up to Rs.176 are exempted from ESIC contribution. However, employers will contribute their share to these employees.