Understanding ESI Deductions: Why It's Taken from Gross Salary, Not Basic Salary

ESI stands for Employee State Insurance and it is deducted from the gross salary of an employee, not from the basic salary.

Thank you for reaching out with your question.

Hi, ESI is deducted from the Gross Salary, with 1.75% of the Gross Salary deducted as Employee Contribution and an additional 4.75% deposited by the Employer.

Anurag

Dear Priyanka,

Mr. Anurag is right. You can visit www.esic.nic.in for more information about ESI.

Regards,
Amith R.

Yes, Anurag is right. ESI is deducted on the gross per month salary (employee 1.75% and employer 4.75% of gross salary). The maximum ceiling to be covered under ESIC is gross ₹10,000 per month.

Regards,
Amit Seth.

For the purpose of ESI, wages or salary means the Basic Wages + Dearness Allowance or Special pay or any other allowance by whatever name called, including House Rent Allowance, which are paid at intervals not exceeding two months. However, any travelling allowance paid shall not form part of the salary for the purpose of calculating ESI contributions. Similarly, any Overtime Wages paid will qualify for contribution, whereas overtime wages will not form part of the salary for determining the eligibility of an employee for coverage under the ESI Act.

Regards, Madhu.T.K

Hi ESI is deducted from the gross salary per month as (1.75% share from the employee and 4.75% from the employer). The employees whose gross salary is less than or equal to Rs. 10,000/- (per month) will be covered under ESI.

E.g. Basic - 5000/-, HRA - 1500/-, Conveyance - 1000/-
Total = 7500/-
Therefore, ESI deduction from the employee's share will be 7500*1.75% and the employer's share will be 7500*4.75%. I hope this will help you out.

Regards, Nitu

Hi Madhu,

The salary structure of our organization includes Basic, HRA, Special Allowance, and Conveyance Allowance, and we are deducting ESI contribution from the gross salary. Since we are paying conveyance allowance to every employee as a part of the salary, can we exempt this allowance from the qualifying amount for the contribution of ESI?

Regards,
Sivadasan

Can anyone tell me what is the format of paying ESI? Like for PF, we have a challan system.

Regards,
Anand

Dear Sivadas,

You have to deduct and contribute ESI on the salary excluding Travelling/Conveyance allowance. At the same time, Special Pay/Allowance will be treated as part of salary unless it is proved that the same is paid only to a particular employee or class of employees as part of conditions of employment.

Regards,
Madhu T.K

In case the gross salary (Basic+DA+HRA+Special pay) of an employee is more than ₹10,000 per month, is he automatically exempted from the scheme?

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Dear Siva,

You can exempt the Conveyance part from the ESI Contribution.

CONVEYANCE ALLOWANCE

Conveyance allowance is paid to the employee to compensate for the expenses incurred by the employees on traveling, etc. The traveling allowance or value of any traveling concession is also being paid to the employees in the nature of conveyance allowance, which is neither wages for the purpose of coverage of employees under Sec. 2(9) nor is it treated as wages for the payment of contribution under Section 2(22) of the ESI Act.

In the case of M/s. Hyderabad Asbestos Cement Products Vs. ESIC, Punjab & Haryana High Court, Chandigarh, as well as in the case of M/s. Harihar Polyfibres, the Supreme Court has held that conveyance allowance is not a wage under Section 2(22) of the ESI Act. (Earlier instructions were issued by this office vide No. P.11/13/97-Ins.IV dated 27.1.97.)

As per Sec. 90 (Exemption of factories or establishments belonging to the government or any local authority), the appropriate government may, after consultation with the Corporation, by notification in the Official Gazette and subject to such conditions as may be specified in the notification, exempt any factory or establishment belonging to any local authority from the operation of the Act if the employees in any such factory or establishment are otherwise in receipt of benefits substantially similar or superior to the benefits provided under this Act.

Can anybody tell what is the procedure for seeking exemption under Section 90 as quoted above.

Mr. Rajiv Verma has clarified the matter by quoting the relevant section of the ESI Act and the ruling by the apex court in this regard. Therefore, there seems to be no room for much controversy.

Exemption: An employee who is in receipt of a salary not less than Rs 10,000 is exempted from ESI. However, the composition of his salary is also to be considered for deciding whether he is out of coverage or not. For instance, an employee with a salary of Rs 9,900 (Basic + DA + HRA + Special Pay, etc.) and receiving Rs 101 as Traveling Allowance as part of the salary will have a total of Rs 10,001 as salary but will not be exempted from ESI. Such an employee is subject to deduction and contribution towards ESI at the prescribed rates (1.75% and 4.75%) on Rs 9,900.

If the salary of a covered employee increases and becomes more than Rs 10,000, they will be out of the cover of ESI, but only after the current contribution period is over. Therefore, if the salary crosses Rs 10,000 in May, the employee has to contribute until September. Under EPF, an employee once covered will continue to be covered irrespective of any salary increase.

An establishment may be declared as exempted from the operation of the Act when the ESI Corporation is satisfied that the employees of the company are receiving better facilities than those provided by the ESIC. The duty to demonstrate this lies with the company.

Similar to Provident Fund remittance, separate challans are available for the remittance of ESI contributions.

Regards,

Madhu.T.K

Madhu, can you tell me the procedure for seeking an exemption if we have better facilities than those provided in ESI?

I do not find any specific procedure either in Employees' State Insurance (General) Regulations, 1950 or ESI (Central) Rules for claiming exemption under Section 90 or 91 of the ESI Act, 1948. Therefore, it is to be construed that a formal submission to the Regional Director, ESIC of the medical and other benefits being given to the employees with relevant documents in support of the same has to be made to start with. The Corporation will then make a detailed inquiry into the matter and if they satisfy themselves that your company is providing better facilities, then naturally, they will grant exemption.

For more details and clarity, please contact the ESI Inspector of the local office in your area. Also, please ensure that your company is providing or will be able to provide facilities better than those offered by ESI because under ESI, there are a lot of benefits available to the employees, many of which are extended to the family members of the insured employees. Besides, ESIC takes the responsibility of workmen's compensation as well, which would otherwise be a heavy burden for the employer.

Regards,
Madhu.T.K

Hi Madhu,

The salary structure of our organization includes Basic, HRA, Special Allowance, and Conveyance Allowance, and we are deducting ESI contributions from the gross salary. Since we are paying a conveyance allowance to every employee as a part of the salary, can we exempt this allowance from the qualifying amount for the contribution of ESI?

Regards,
Sivadasan

Hi Sivadasan,

As per the ESI Act, it is necessary to deduct ESI contributions on Gross salary excluding the following items not to be deemed as wages:
- Contribution paid by the employer to any pension/provident fund or under the ESI Act.
- Sum paid to defray special expenses entailed by the nature of employment - Daily allowance paid for the period spent on tour.
- Gratuity payable on discharge.
- Pay in lieu of notice of retrenchment compensation.
- Benefits paid under the ESI Scheme.
- Encashment of Leave.
- Payment of Inam which does not form part of the terms of employment.
- Washing allowance.
- Amount towards reimbursement for duty-related journey.

If the salary structure of our organization includes Basic, HRA, Special Allowance, and Conveyance Allowance, then it is necessary to deduct ESI contributions on gross excluding the above wages/allowances.

Deepak Raj
New Delhi
9868941534