Is ESI Deduction Applicable to Attendance Bonuses? Seeking Your Advice on ESIC Calculation

I have some doubts about the calculation of ESIC, so I am requesting your suggestions.

Employee Salary Details

In my company, there is one employee whose salary is as follows:
- Basic = 9800
- Conveyance = 800
- Special Allowance = 3400
- Total Gross = 14000

Every month, I am deducting 245 Rs (1.75% of 14000) as ESI. However, in June, he received an extra attendance bonus of 1400, making his gross salary 15400.

ESI Applicability on Attendance Bonus

My doubt is, according to ESIC, is ESI applicable to the attendance bonus as well? Please try to provide me with a solution on this.

Thanks,
Suneetha

If it's applicable, do we need to deduct the ESIC amount on 15,400 for that month, or do we not need to pay ESIC for that month? What's the solution?

Understanding Attendance Bonus and ESIC Applicability

It is a special allowance paid by certain employers to their employees to discourage workers from absconding from the job. Any amount paid by the employer to its employees as an Attendance Bonus will constitute wages under Sec. 2(22) of the ESI Act. The same opinion was held by the Bombay High Court in the case of ESIC Vs. Indian Dyestuff Industries Ltd. However, the periodicity aspect has to be kept in mind. In case the periodicity is more than 2 months, it will not constitute wages, and no contribution will be payable, as in the case of an incentive bonus.

Thanks & Regards,
Atul Saklani

In addition to Atul's comment given above, any monthly components paid along with the salary are considered for calculating ESI as it constitutes the gross salary of the month. Some things like Bonus and Leave encashment, which are paid annually, are exempted.

Attendance Bonus

It is a special allowance paid by certain employers to their employees to discourage absenteeism. Any amount paid by the employer to its employees as an Attendance Bonus will constitute wages under Sec. 2(22) of the ESI Act. This opinion was upheld by the Bombay High Court in the case of ESIC vs. Indian Dyestuff Industries Ltd.

However, the periodicity aspect must be considered. If the periodicity is more than 2 months, it will not constitute wages, and no contribution will be payable, as in the case of an incentive bonus.

Regards,

ESI Act Coverage Clarification

The issue raised by Ms. Suneetha is the coverage of an employee under the ESI Act if their wages exceed Rs 15,000 per month during the contribution period. With my practical experience of over 32 years in the industry at a managerial level, I can contribute to this issue.

According to the Act's proviso, the eligibility and coverage of every employee should be determined at the start of the contribution period, i.e., in the months of April and October. If an employee earns wages less than Rs 15,000, they fall within the definition of an employee and are required to pay contributions for six months, regardless of whether they earn wages exceeding Rs 15,000. All components of gross wages or salary must be taken into consideration for the purpose of contribution.

For further clarification, the member may send queries to me via email at [Email Removed For Privacy Reasons].

Regards,
Avinash Kanoray

I think I fully subscribe to Mr. Avinash's thinking. The coverage or otherwise is determined only at the entry months of April/October, and any fluctuation in between will not affect it. Likewise, even if there is a dip, ESI will have to be deducted until the half-year.

Dear Mr. Avinash, with due respect to your comment, in the above example, on which amount should ESI be deducted? $14,000 or $15,400?

Whatever the employee earned as his gross salary should be applicable for ESI deduction, excluding the conveyance allowance. The concerned employee's salary structure for ESI deduction should be as follows:

- Basic: 9800.00
- Special Allowance: 3400.00
- Total: 13200.00
- ESI deduction: 231/- only instead of 245/-.

You may clarify this with your local ESI office. Also, if an employee's wages exceed 15,000/- (actual salary rate below 15,000/-), he should continue the ESI contribution at his earnings. Hope it's clear.

Regards,
Krishna
HR & Admin

Mr. Avinash is correct. If an employee's salary is Rs. 15,400, you deduct only Rs. 15,000. If you deduct in the month of April or October, you must deduct for the whole 6-month contribution period.

Thank you.

Yes, Mr. Avinash is right. ESI deduction will continue until the next return is due. For example, if a person is out of coverage in May, in that case, the deduction will continue until September. From October, he will discontinue ESI deduction. To discontinue any person from ESI will only be affected in April and October.

So, thanks, Mr. Avinash, for providing the right information.

I respect Mr. Avinash Kanoray's comments on ESI coverage of the contribution period & benefit period, but this issue was raised by Ms. Suneetha. She asked whether the attendance bonus will be taken into account for ESI calculation, irrespective of wages crossing 15,000 or not. According to me, the attendance bonus should not be taken into account for ESI calculation, as I mentioned above in my comments and provided a brief note on the same.

Now, I'm attaching a Word document listing almost 50 Wage Heads and will highlight which Wage Heads should be taken into account for ESI calculation and which should not. I hope Suneetha's doubts will be cleared this time, and I appreciate the members contributing their views/comments.

For any clarifications, please contact me.

Life is short; live every moment.

In your case, ESI contribution will be calculated on the gross earnings of the employee as all the components of salary are within the meaning of the definition of the word 'wages' under the act.

Thanks,
Avinash Kanoray

Please let us know your view on the following.

Attendance Bonus and ESI Act

It is a special allowance being paid by certain employers to their employees to discourage the workers from being absent from the job. Any amount paid by the employer to its employees as an Attendance Bonus will constitute wages under Sec. 2(22) of the ESI Act. The same opinion was held by the Bombay High Court in the case of ESIC Vs. Indian Dyestuff Industries Ltd. However, the periodicity aspect has to be kept in mind. In case the periodicity is more than 2 months, the same will not constitute wages, and no contribution will be payable, as in the case of an incentive bonus.

Regards

What if the deductions are done in April, and wages are revised in July effective from April, which results in a salary of more than ₹15,000? Kindly advise!