Sections 30-31 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 30 caps what the ESI Corporation may spend on administration. Section 31 is the working rule for employers: the employer pays both the employer's and the employee's contribution, may recover only the employee's share and only from wages, and can claw back contribution paid for contractor-engaged workers from the contractor.
The employer pays the employer's contribution and the employee's contribution for every employee, whether directly employed or engaged by or through a contractor (s.31(1)). The employer may recover only the employee's share, and only by deduction from wages (s.31(2)). The employer's share can never be deducted from wages or recovered from the employee, "notwithstanding any contract to the contrary" (s.31(3)). A sum deducted is deemed entrusted to the employer to pay the contribution (s.31(4)).
Section 30: a ceiling on administrative expenses
Section 30 leaves two points to the Central Government: which types of expense count as "administrative expenses", and what percentage of the Corporation's income may be spent on them. The Corporation must keep within that limit.
Rule 20 of the Central Rules, 2026 supplies both. It lists the items, including fees and allowances of members and committees, staff salaries, allowances, gratuities, pension and provident fund contributions, office costs, audit and valuation costs, the cost of Employees' Insurance Courts, sums under contracts and court decrees, litigation costs, publicity of the ESI Scheme and evaluation studies. Rule 20(2) then says the share of total revenue income spent on administrative expenses in a year shall not exceed fifteen per cent. Compare the purposes for which the Fund itself may be spent in sections 25 to 27.
For an employer, section 30 has no direct compliance duty. It matters because it restricts how your contribution can be used. The duty that does bind you sits in section 31, and our ESI and PF return filing service is built around it.
Section 31: who pays and who bears the cost
| Sub-section | Rule |
|---|---|
| 31(1) | Employer pays both the employer's and the employee's contribution for every employee, directly employed or engaged by or through a contractor |
| 31(2) | For a directly employed employee (not an exempted employee), the employer may recover the employee's contribution by reduction from wages and not otherwise. Proviso: no deduction from wages other than those relating to the period for which contribution is payable, and none above the employee's share for the period |
| 31(3) | Despite any contract to the contrary, neither employer nor contractor can deduct the employer's contribution from wages or recover it from the employee |
| 31(4) | A sum deducted is deemed entrusted to the employer by the employee for paying the contribution |
| 31(5) | Employer bears the expenses of remitting contributions to the Corporation |
| 31(6) | Employer who paid for a contractor's employee may recover both shares from the contractor, by deduction from amounts payable under the contract or as a debt |
| 31(7) | Contractor maintains a register of employees as the regulations provide and submits it to the employer before settlement under (6) |
| 31(8) | Contractor may recover the employee's share from the employee by deduction from wages and not otherwise, subject to the sub-section (2) proviso |
| 31(9) | Corporation may make regulations on payment and collection of contributions |
Directly employed staff
Take an employee whose ESI wages for a wage period give an employee's share computed under rule 19 (three-fourth per cent of wages payable, rounded to the next higher rupee; see our sections 28 and 29 article). The employer deducts that amount from that wage period's wages, adds the employer's share (three and one-fourth per cent under rule 19) from its own pocket and remits both. The employer cannot deduct more than the employee's share, cannot deduct the employer's share, and cannot collect the employee's share from anything other than wages.
Section 31(2) excludes "an exempted employee" from this deduction right. The sub-section does not define the term, so check the terms of any exemption notification before relying on or skipping a deduction. For exemption of Government establishments, see our article on sections 44 to 47.
Deduction is held in trust
Section 31(4) deems a deducted sum to be entrusted to the employer for paying the contribution. That wording matters. Deducting the employee's share from wages and not remitting it is not treated like an ordinary unpaid bill; it is money held for a stated purpose. The Code's consequences for default, including interest, damages and offences, sit in later chapters; see sections 127 and 128 and section 133.
Contractor-engaged workers
Section 31(1) puts the principal employer's liability in plain words: "whether directly employed by him or by or through a contractor." The principal employer pays both shares, then recovers them from the contractor, either by deducting from sums it owes the contractor under the contract or as a debt (s.31(6)). The contractor, in turn, must keep a register of employees as the regulations provide and give it to the principal employer before settlement of the amount (s.31(7)). Only after that settlement can the contractor recover the employee's share from the worker, again by deduction from wages (s.31(8)).
Example: a factory engages a contractor who supplies 40 workers. The factory pays both shares for all 40 through its ESI account, deducts the total from the contractor's bill after receiving the contractor's register, and the contractor recovers the employee's share from each worker's wages for the matching wage period. If the factory skipped the register step, it would be settling the bill without the document s.31(7) requires.
For how the Code treats contract labour in general, read our post on contract labour under the new Labour Codes.
State or Central rules
The Central Rules apply where the Central Government is the appropriate Government. Where the State Government is the appropriate Government, the State's own rules apply to that establishment. Section 40(12) also provides that for establishments in States where medical benefit is provided by the Corporation, the Central Government is the appropriate Government, which is relevant when deciding which set of rules governs.
Need help with ESI payment and contractor compliance?
Getting the deduction right each month and keeping contractor registers in order is where most errors arise. If you would like the ESI position of your establishment reviewed, including contractor-engaged staff, our team can assist with ESI and PF return filing and related checks.
Key takeaways
- The employer pays both shares, including for workers engaged through a contractor (s.31(1)).
- Only the employee's share may be recovered, only by deduction from wages, and only for the period it relates to (s.31(2)).
- The employer's share cannot be deducted from wages or recovered from the employee, whatever the contract says (s.31(3)).
- Deducted money is deemed entrusted to the employer for paying the contribution (s.31(4)).
- Contractor recovery runs through s.31(6)-(8), with the contractor's register due before settlement.
- Administrative expenses of the Corporation are capped at 15 per cent of revenue income by rule 20(2).
Read next
- Sections 28 and 29: Insured persons and ESI contributions
- Sections 32 and 33: ESI benefits and power to promote health measures
- How to generate an ESI challan and pay online
- Penalties under the ESI Act for non-registration and default
Disclaimer: Based on the Code on Social Security, 2020 (as enacted) and, where noted, the Code on Social Security (Central) Rules, 2026 (G.S.R. 344(E), 8 May 2026), as on 30 September 2026. The Code is in force from 21 November 2025; some provisions may be notified later, and State Governments make their own rules for establishments where the State is the appropriate Government. Verify the current position before acting.