Is It Right to Include HRA in ESI Deductions? Seeking Clarity on Employee Coverage Rules

ESI Deduction Clarification

I want to know about ESI deduction. We are deducting ESI from the gross salary (basic + D.A + HRA + other allowances). However, a senior HR professional with the rank of DGM HR in a large organization told me that we are wrong. He said that for ESI deduction, we can't include HRA. Is he right?

ESI Coverage Requirements

Secondly, for ESI coverage, is a minimum employee strength of 20 still required with power?

Thanks,

Manoj

Hi Manoj,

ESI is deducted from the monthly gross salary. There is a defined purpose for determining which salary components constitute wages for ESI. Allowances such as Washing, Food, and Uniform are not considered as wages.

Regards,
Gopal

Hello, Mr. Manoj.

ESI is deducted from Gross Salary. Only the washing allowance paid to employees is exempt from ESI deduction.

Yes, only the washing allowance is exempted from the gross salary when calculating ESI deductions.

Regards,
Girish

Sub-section 22 of Section 2 of the ESI Act clearly defines "wages," a reading of which will help clarify any doubts. Nonetheless, traveling allowance and OT wages are to be exempted while calculating the "wages."

Thanks, Sanu Soman

Understanding Wage Components for ESI Contribution

If money is paid directly to employees under the label "HRA," this will be treated as a wage, and a contribution has to be paid. However, if you provide a free house or hired house and the company pays the rent directly to the landlord, no contribution is required for this. Though for income tax purposes, this will have to be considered. Simply stated, what is provided in kind is not a wage, and what is provided in cash is a wage.

Washing Allowance Considerations

Regarding the washing allowance, if wearing a uniform is compulsory for an employee, then a reasonable amount as a washing allowance is not required to be taken for payment of contribution. But if you provide a disproportionate amount under the head washing allowance or where a washing allowance is paid with no uniform to be worn, it will be treated as a wage, and a contribution should be paid.

Traveling and Conveyance Allowance

About traveling allowance/conveyance allowance, etc., I have posted exhaustively in the past; please search those posts. Reimbursement of duty-related travel expenses is not a wage. A fixed amount payment without any production of travel documents, tickets, etc., is a wage.

Food Allowance Clarification

Any cash payment regularly under the head food allowance is a wage, but free food, or occasional reimbursement of actual food expenses for additional or overtime work or while on tour, etc., is not a wage.

Regards,
O. Abdul Hameed
Formerly Additional Commissioner ESIC
CEO Santhi Hospital
[Email Removed For Privacy Reasons]

Dear All,

We are a manufacturing company, and the CTC break-up provided by the company is as follows:

1. Basic
2. HRA
3. Conveyance
4. Telephone Allowance
5. Special Allowance
6. P.F. - Employer Share
7. LTA or
8. Medical or ESI
9. Bonus

Could you please confirm which part of the above break-up determines whether the employee is applicable for ESI deduction? Your response would help in clearing my concept.

Thank you and regards.

I want to know about ESI deduction. We are deducting ESI from gross salary (basic + D.A + HRA + other allowances), but some senior HR professionals, with the rank of DGM HR in a large organization, have told me that we are wrong. They say that for ESI deduction, we cannot include HRA. Is he right?

Secondly, for ESI coverage, a minimum employee strength of 20 is still required with power.

Dear Manoj ji, this old post of yours came to my attention today. I wholeheartedly endorse the response provided by Shri. Abdul Hameed ji. Shri. Abdul Hameed ji is an authority in the subject. We should anticipate more active participation from members like him to enhance our knowledge.

In response to your second question, as of now, in three states, the required employee strength for coverage is 20 eligible employees. These states are Maharashtra, Himachal Pradesh, and Assam.