Understanding ESIC Deductions: Does Including LTA and Medical in Gross Salary Affect Eligibility?

ESIC Deduction Query

Dear Seniors, I have a small doubt regarding the ESIC deduction that I would like to share with you all for your views.

We have two categories of workers: those in the Executive cadre and those in the Staff Cadre. Recently, about 3-4 months ago, we shifted to a new compensation structure designed by the renowned Mercer consultancy, where employees can enjoy maximum benefits.

In the past, in the Executive cadre, we had basic, HRA, conveyance, special allowance, and additional special allowance. In the Staff cadre, we had BASIC+DA+VDA+CONV+HRA+LIFESTYLE ALLOWANCE. Despite these, we paid them LTA (grade-based policy) in one go yearly through salary and medical on a cash voucher.

Now, after the new compensation, we have to make LTA and medical part of the monthly salary, which makes the salary gross.

My query is: if someone's BASIC+HRA+CONVEYANCE+SPECIAL+Additional is below 15,000, will ESIC be deducted? However, if in his gross salary we include MEDICAL+LTA, the amount will exceed 15,000.

If someone's gross salary, including BASIC+HRA+CONV+SPECIAL+MEDICAL+LTA, is greater than 15,000, will ESIC be deducted?

In case any other details are required, please let me know. I would appreciate your prompt views on it.

Regards,
Ranjeet

As I am not a senior, I still want to share my views with you. The salary structure has almost 32 different heads, into which the 'net salary' can be bifurcated. However, the ESI is applicable on the gross salary if it is Rs. 15,000 or below. It doesn't matter how many heads you have bifurcated the salary into; if your gross salary is Rs. 15,000 or below, then you have to pay the ESI contribution.

As per your information, in your company, the Monthly Medical & L.T.A amounts are being paid as a salary component. Generally, the payment of L.T.A is done on a yearly basis. Since your company is paying it monthly, it will be a loss to employees as these amounts will come under taxable income.

Talking about the ESI Act, “wages” means all remuneration paid or payable in cash to an employee.

MEDICAL ALLOWANCE

Employees working in factories/establishments are provided medical services in kind by the employer. However, in certain factories/establishments, instead of providing medical services in kind, the amount spent by employees on medical care is reimbursed. In some other organizations, employees are paid a monthly cash allowance in lieu of medical aid/reimbursement of medical expenses. Where such payments are made by the employer in lieu of the medical benefit, they are to be treated as wages under Sec.2(22) of the ESI Act, and the contribution is chargeable.

(Earlier instructions were issued vide letter No.Ins.5(5)/68-Ins.III dated 21.8.71 & Ins.III/2(2)2/68 dated 24.6.71)

Since your company is showing Medical+LTA as a monthly salary component, if someone's gross salary, having heads BASIC+HRA+CONV+SPECIAL+MEDICAL+LTA, exceeds 15k, ESIC will not be deducted.

Regards,
Ratikanta Rath

Dear Bhuwan/Ratikanta, Thanks for your valuable updates.

Section 22 Overview

Section 2(22) in The Employees' State Insurance Act, 1948 defines "wages" as all remuneration paid or payable in cash to an employee if the terms of the contract of employment, express or implied, are fulfilled. This includes any payment to an employee for any period of authorized leave, lock-out, strike that is not illegal, or lay-off, and other additional remuneration paid at intervals not exceeding two months. However, it does not include:

(a) any contribution paid by the employer to any pension fund or provident fund, or under this Act;
(b) any traveling allowance or the value of any traveling concession;
(c) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or
(d) any gratuity payable on discharge.

Will LTA come under the definition of travel allowance?

Regards, Ranjeet

Dear Ranjeet,

Generally, LTA does not come under the ESI Act because most companies provide this benefit to employees after 1 or 2 years of service, not on a regular monthly basis like leave travel allowance. However, in your case, as you mentioned earlier, your company is paying it as a monthly fixed component in the salary. In the case of the ESI Act, if any amount is payable to an employee monthly in a fixed manner, then it will also be considered as part of the ESI Wages component.

So, I believe it will be applicable. For more information, you can speak with the local ESI Enforcement Officer; they will guide you in a better way. Please inform us of any updates you receive.

Regards,
Ratikanta Rrath

I would like to have clarification from seniors on this subject. In general, Medical and LTA are all part of CTC, and such things are reimbursable in most companies upon the production of bills because they do not become part of wages.

Going by that general package formula, if the pay exceeds 15k with the bifurcation of Basic, DA, VDA, Conveyance, and Special Allowance = 15k+, then only ESIC is not applicable. I would like to get clarification from seniors on this subject to see whether my assumption is in line.

Advance thanks.

Understanding LTA and ESIC Deductions

If LTA is paid on a monthly basis, it will become an allowance but will not be considered as LTA on a reimbursement basis, subject to Section 22 of ESIC. The wage definition and categorization of allowances should be considered under ESIC gross.

Regards,

Thanks a ton, everyone. From what I understand, these reimbursements can be considered as an allowance, and ESIC will not be deducted if the gross salary is more than 15k.

According to ESIC sec 2(22), it refers to the definition of wages, which means any cash paid towards salary shall be deducted for ESIC. It may be LTA, Medical, or other components included in the gross salary. Remember, as a rule of thumb, an employee drawing a gross salary of Rs. 15,000/- shall be covered under ESIC, and above that shall be excluded.

Regards,
Rammi24

If any payment is made on a monthly basis under any category, it will attract ESI coverage if the gross amount is less than ₹15,000. However, if the payment is made or reimbursed once every three months, it will not be covered under ESI.

Regards,
Dhanuskodi

Understanding ESIC Deductions and Salary Components

As per the ESIC Act, any bi-monthly payments made to the employee can be considered as wage/salary. LTA can be paid on a monthly basis, and for tax benefits, we can fix one month's basic salary or any other value as per the IT Act. This will help you resolve your problem.

Regards,
Girish G