ESI contribution needs to be paid on "Wage" paid or payable to an employee during a wage period. Wage has been defined as all payments made in cash as per the contract of employment and any additional cash payment made within a periodicity of two months or less. Hence, the nomenclature of different components of the wage is not important, but the actual payment or liability to make payment for work done in cash is important. Anything paid in kind (like free food, housing, transport, etc.) is not wage, though it will attract income tax. I am attaching below an email reply given to Mr. Banerjee a few days back, in response to a specific question regarding certain kinds of allowances. Maybe it will provide you with some clarity.
"Dear Mr. Banerjee,
Out of the four kinds of allowances, each needs to be understood differently when it comes to (a) deciding the coverage limit of 10,000 and calculating contributions in case the employee is covered. Let us not mix up the issues. I will explain each case separately.
Overtime Allowance
This will not be taken into account for deciding coverage but has to be considered for the payment of contributions. For example, if an employee is receiving 9,500 as wage, including various monthly/bi-monthly paid cash allowances, and receives Rs. 550 as overtime in a month (total earnings 10,050), he will continue to be covered as if he is drawing Rs. 10,000 or below, but contributions need to be paid on the full 10,050 during the contribution period.
Incentive Allowance
If it is paid or payable quarterly, half-yearly, or annually, or in a periodicity of over two months, it need not be taken into account for the payment of contributions and also for deciding coverage, assuming that there is no contractual obligation. But if there is a contractual obligation, it will be taken into consideration for both coverage and payment. This is my interpretation, but in fact, ESIC normally does not claim contributions on incentives when paid quarterly/half-yearly or annually (as in the case of an annual bonus). But it will be considered both for the payment of contributions and deciding coverage when payment is made monthly. Normally, where incentives are available, people pay it monthly in the case of those whose other wage is close but below 10,000, to avoid ESIC but pay quarterly for others whose wage will be well below 10,000 even after taking incentives monthly.
Conveyance Allowance
There were contradictory judgments from High Courts, and sometimes in 2005 or so, a final clarification was given by ESI HQ. As per this, if the payment is a fixed amount or a percentage of Basic pay, or fixed for different cadres, irrespective of the actual amount incurred by the employee for conveyance from home to work and back, such an allowance, though labeled as "Conveyance allowance" or Transport allowance, etc., is wage and contribution needs to be paid. But TA paid for duty-related journeys (different from normal journeys from home to work and back) and reimbursement of actual conveyance charges subject to production proof of actual incurring for journeys from home to work and back, is not wage since such payment is excluded from the definition of wage. Similarly, if employees are paid transport/conveyance allowances based on the type of vehicle they are maintaining, subject to proof of owning a vehicle, and not a flat or fixed rate, such payment will be reimbursement or transportation allowance and not considered as wage for the payment of contributions. In fact, this is the correct interpretation as per the definition under Sec 2 (22). But in most cases, what is paid is a fixed amount depending on the cadre of employees, without bothering about the type of vehicle, distance, or proof, etc., and hence such payment has to be considered for the payment of ESI Contribution.
Tiffin Allowance
If the amount is paid in cash to the employee, ESI contribution is to be paid on it since it is nothing but an element of wage. But in case you provide food, or purchase food coupons or tokens for a hotel or canteen, and make a bulk payment to such a hotel against a bill, and supply free coupons or tokens, no contribution needs to be paid.
Also, remember that whatever payment is taken as wage for the payment of contributions, they are also taken into account for deciding coverage.
Eg. 1 Eg. 2
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allowance 1000 Special allowance 2000 Spl Allow 2000 Overtime allowance 500 ESI Covered ESI Cover. Contribution on 10,000 Contribution Rs. 10,500
Eg. 3
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allowance 1000 Special allowance 2000 Spl allowance 2000 Tiffin allowance 200 Overtime 500 Fixed Conveyance 500
Not covered Not Covered. No Contribution
Hope you are clear now.
ESIC has issued many circulars to their field offices and Regional offices. They do not supply them to Employers. However, they supply a small book called "Employers Hand Book." You can get it for free. In case it is not available with ESI Regional Office, you can write to Director (PR), ESI HQ, New Delhi. You can also ask for all circulars on Wages and clarification on various allowances issued up to date using the RTI Act.
Abdul O. Hamid"