ESI Contribution on Incentives: Is Deduction Mandatory or Optional? Seeking Advice!

Hi all,

Please help me. We are paying incentives to our employees. Should we deduct ESI contribution from incentives as well? Is it mandatory? I am expecting valuable advice.

Thanks and regards,
Jossy Justin

E.S.I. Scheme being contributory in nature, all the employees in the factories or establishments to which the Act applies shall be insured as provided by the Act. The contribution payable to the Corporation in respect of an employee shall comprise the employer's contribution and the employee's contribution at a specified rate. The rates are revised from time to time. Currently, the employee's contribution rate (w.e.f. 1.1.97) is 1.75% of the wages and that of the employer is 4.75% of the wages paid or payable in respect of the employees in every wage period. Employees in receipt of a daily average wage up to Rs. 50 are exempted from the payment of contribution. However, employers will contribute their own share in respect of these employees.

Collection of Contribution

An employer is liable to pay their contribution in respect of every employee and deduct employees' contribution from the wages bill. They shall pay these contributions at the specified rates to the Corporation within 21 days of the last day of the calendar month in which the contributions fall due. The Corporation has authorized designated branches of the State Bank of India and some other banks to receive the payments on its behalf.

Contribution Period and Benefit Period

There are two contribution periods, each of six months' duration, and two corresponding benefit periods, also of six months' duration as follows:

Contribution period Corresponding Cash Benefit period
1st April to 30th Sept. 1st January of the following year to 30th June.
1st Oct. to 31st March 1st July to 31st December of the year following

:)

Regards Madhu

Hi Jossy,

Thank you for your message. When it comes to payments to employees beyond their salary or wages, such as festival allowances, profit sharing, bonuses, etc., the question arises whether these should be included in ESI (Employee State Insurance) calculations.

Typically, ESI contributions are calculated based on the gross salary of employees. Therefore, any additional payments made to employees, such as festival allowances, profit sharing, or bonuses, would likely be considered part of the gross salary and should be included in ESI calculations.

If you have any further questions or need clarification on this matter, feel free to reach out.

Thanks and regards,
Madhu

ESI is applicable only to the payouts that appear on your monthly paystub and applicable up to and including Rs.10,000/- Gross per month. If you want to add up all the other x, y, z incentives received by other means, then the total salary would sometimes cross the ceiling, and applicability may not arise. So only your payslip figure is eligible for ESI.

Regards,
Chandru

Dear,

An incentive will attract contributions towards ESI if it is paid every month.

Thanks,
J. S. Malik

Dear All,

Please find the enclosed attachment for your perusal.

Best of luck,

Incentives paid at intervals of 3 months will not attract ESI contribution. However, if paid monthly, then ESI contribution is to be paid on the incentives, subject to the total not crossing Rs. 10,000 per month.

Anastasio J Colaco

Dear Jossy Justin,

Since you have not mentioned the interval of payment of the incentive, I am providing the rule that allowances, incentives, profit sharing, etc., if paid on a regular monthly basis and gross up to Rs. 10,000, will be covered under the Act, and the contribution has to be deducted and deposited. Any allowance, incentive, etc., paid more than once in two months is exempt from considering wages for E.S.I. contribution.

I would suggest you check if, when adding the said incentive to the monthly salary, the total exceeds Rs. 10,000. If it does, show it on the wage register on a monthly basis, and your employees will automatically be exempted from E.S.I. Otherwise, pay it on a quarterly basis so that the amount of the incentive will be exempt from E.S.I. contribution.

Thanks,
Mohd. Arif Khan

Dear Friend,

Generally, ESI is deducted from the monthly gross salary. If you are paying incentives monthly, you have to deduct ESI; otherwise, you can pay incentives quarterly or half-yearly to get exemption from deducting ESI.

With regards,
Nitin

Hi,

ESI is payable on all sorts of remuneration, provided they are paid at intervals not exceeding 2 months. In case the remuneration is paid at intervals exceeding 2 months (e.g., once in a quarter), then contributions need not be paid since it does not fall within the definition of wages as envisaged in the ESI Act under Sec. 2(22).

Therefore, you may consider the periodicity of the payment and decide accordingly. If it is paid within a 2-month interval (e.g., monthly), then, as advised by seniors, you should add the monthly incentive to the payroll wages and check whether it exceeds the ceiling limit of Rs. 10,000/- (i.e., Rs. 10,001/- and above per month). If it exceeds, contributions need not be paid. However, a rule of the ESI Act states that if an employee who was continuously covered under ESI goes out of the coverage due to crossing the ceiling limit due to a salary hike or similar reasons, then contributions are required until the closure of the contribution period. There are 2 contribution periods in a financial year (April to March). The first one starts from 1st April and ends on 30th Sept; the second one follows from 1st Oct and ends on 31st March.

Therefore, an employee drawing a monthly salary of Rs. 9000/- for April and May, if due to earning a higher incentive, their earnings rise to Rs. 12000/- in June and thereafter, contributions are payable for the entire gross earned until the end of that contribution period (i.e., 30th Sept).

I hope this clears your doubts.

Regards,

Ramesh Kumar

Dear Friends,

Will anybody help me with the Provident Fund matter? Is PF mandatory for the Companies under STPI registered 100% EOU Software companies? If applicable, what are the rules and other details? Please attach a brief note or any relevant information.

Thanks in advance.

KVS Reddy

Dear Mr. Banerjee,

Out of the four kinds of allowances, each needs to be understood differently when it comes to deciding coverage limit of 10000 and calculating contribution 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 payment for contribution. For example, if an employee is receiving 9500 as wages including various monthly/bi-monthly paid cash allowances, and receives Rs 550 as overtime in a month (total earnings 10050), he will continue to be covered as if he is drawing Rs 10000 or below, but contributions need to be paid on the full 10050 during the contribution period.

Incentive Allowance

If it is paid or is payable quarterly, half-yearly, or annually, or in a periodicity of over two months, it need not be taken into account for payment of contribution 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 contribution on incentives when they are paid quarterly/half-yearly or annually (as in the case of annual bonuses). However, it will be considered both for payment of contribution and deciding coverage when payment is made monthly. Normally, where incentives are available, people pay them monthly in the case of those whose other wages are close but below 10000, to avoid ESIC but pay quarterly for others whose wages will be well below 10000 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. However, TA paid for duty-related journeys (different from normal journeys from home to work and back) and reimbursement of actual conveyance charges subject to 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 payment of contribution. 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 payment of ESI Contribution.

Tiffin Allowance

If the amount is paid in cash to an 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 contribution, they are also taken into account for deciding coverage.

For example:

Eg. 1

Basic wage: 4000
DA: 3000
Heat allowance: 1000
Special allowance: 2000
Overtime allowance: 500

ESI Covered
Contribution on 10000
Total contribution Rs 10500

Eg. 2

Basic wage: 4000
DA: 3000
Heat allowance: 1000
Special allowance: 2000
Overtime allowance: 500
Fixed conveyance: 1000

ESI Covered
Contribution Rs 10500

Eg. 3

Basic wage: 4000
DA: 3000
Heat allowance: 1000
Special allowance: 2000
Tiffin allowance: 200

Not covered
No Contribution

Abdul O Hamid

Sir, contributions paid under the ESI Act of 1948 are for the benefits to be paid to the insured persons during the course of their employment in certain contingencies like sickness, accident, death due to employment injury, maternity, etc. Such contributions are not refundable.