Confused About ESI/PF in Notice Pay? Seeking Clarity on Accounting Practices

Dear Seniors, kindly find the link attached regarding ESI/PF inclusion or exclusion in notice pay. The discussion here seems to be in equilibrium. My request is also floated specifying the reasoning behind PF inclusion and exclusion (where I am confused). But at the same time, this seems to resolve to a certain extent. The query is where will we place in the account books the amount if it is not considered as salary.

Looking forward to your noble and quick response, please.

Regards

https://www.citehr.com/61096-pf-dedu...-urgent-3.html

Please note that the amount of notice pay as per the standing order or terms of appointment, which is paid to an employee in lieu of termination of employment, does not attract any deduction of Provident Fund or ESI. This is because it is not actually earned by the employee during the period of his employment. It is a well-settled law as pronounced by various high courts. If you wish, you can refer to the court judgments reported in 1959 (2) LLJ 733 (Bom). The law laid down by the court is still continuing, and you need not have any confusion in this regard.

In the books of accounts, it will, of course, be shown under the head of salary and wages. It is not compulsory that every amount under the head of wages and salary should attract PF/ESI contribution.

Regards,
Pkjain

When notice pay does not count for P.F. deduction, it is evident that it is not considered as wage or salary. In my view, if it is not classified as wage or salary, it cannot be categorized under the salary or wages header.

Furthermore, the purpose of notice pay is to assist the employee in overcoming potential financial difficulties resulting from sudden unemployment. Therefore, it can be viewed as a subsistence allowance that the employer is required to provide to the employee to support them until they secure another job, with a maximum duration of one month.

The determination of "one month wages" is primarily to establish a formula agreed upon by both the employer and employee to quantify this subsistence allowance, rather than categorizing it as wages. Hence, it might be necessary to list it under a different income category and not as part of the salary. Consulting a Chartered Accountant on this matter would be advisable.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Dear Seniors,

Thank you from the bottom of my heart for the noble advice.

Dear PK Jain Sir, I am not able to access court judgments reported in 1959 (2) LLJ 733 (Bom). I would request if any link or attachment could be forwarded in support of the same for me to go through and study.

Notice Pay Compensation Query

Dear Seniors, I am still contemplating "in which category should I then ask accounts to post" such compensation referred to in the notice pay, in support of my explanation since ultimately it will end in posting and reimbursement.

Regards

Notice Pay Accounting

Notice pay should be shown under Salary Administration in the book of accounts. It will not attract EPF or ESIC deductions, but income tax is applicable.

Regards,
Kamal

Notice pay is an amount of compensation, as already advised, which is paid in lieu of termination of services but does not attract PF/ESI deduction in view of the definition of wages described in the PF/ESI Act. As such, it can be posted in the account head of salary and wages without any ifs and buts. Some companies maintain a separate head as "Notice Pay a/c"; you can choose whichever suits your management. In my company, which employs more than thousands of employees, we post the same in the wages and salary head. For your request of sending a copy of the citation to you, I will send it to you shortly after finding it out from old books. Yes, it will attract income tax as applicable under the Income Tax Act.

Regards,
Pkjain

Thank you very much. This is really something very knowledgeable. I think ESI, in such a case, will also be deemed to be treated the same as PF in notice pay.

Regards

Yes, although the definition of wages is different in both Acts, in the case of Notice Pay, it will work.

Regards,
pkjain