Navigating Conveyance Allowance: ESI, PF Deductions, and Tax Limits Explained

I am working in a garment export company located in a SEZ park. Here, all other companies provide cab facilities to their employees, so I have decided to offer a conveyance allowance to our employees. However, I need to know if conveyance allowance requires deduction for ESI and PF. I also want to understand the tax-deductible limits, any criteria, or the maximum and minimum amount levels.

Please guide me on these matters. Thank you.

Regards.

Conveyance and Travel allowances are covered under ESI benefits. The tax-deductible limits will be above Rs. 800/- per month and above Rs. 9600/- per year. Handicapped persons have non-taxable limits up to Rs. 1600 per month. Please note that the employer may pay any sum depending on the bills produced in relation to the travel made. This is a benefit that is offered by most companies. Sometimes, it also depends on whose car you are using, i.e., Employer's Car (with or without chauffeur)/ Employee's car for conveyance. This amount is not actually an "Allowance" but should be called a reimbursement of Conveyance.

I do not know the maximum limit for conveyance allowance, but it shall not be deemed as wages, and hence it will not attract ESI (Please refer to the attachment).

The same is the case for EPF too, where the Act states, "In respect of establishments employing 20 or more persons and engaged in an industry notified under Section 6 of the Act (other than the Establishments declared as sick), 12% of the basic pay DA, Cash value of food concession, and retaining allowance, if any, subject to a maximum of Rs. 6500/- per month. Voluntary higher contributions are also acceptable at the joint request of the member and the employer."

Here is the Supreme Court order on EPF contribution on allowances. Both the acts are applicable on the conveyance allowance.

SUPREME COURT ON EPF CONTRIBUTIONS ON ALLOWANCES

It may be recollected that in a Review Petition by Surya Roshni Limited vs. Employees' Provident Fund and Another, 2012 LLR 42, the Division Bench of Madhya Pradesh High Court held that Section 2(b) and 6 of the Employees' Provident Funds & Miscellaneous Provisions Act define basic wages. HRA, overtime allowance, bonus, commission, or any other similar allowance are not covered in the definition of basic wages, but when special allowance, dearness allowance, conveyance allowance, and other allowances are paid universally to all the employees, they would be treated as part and parcel of basic wages.

A special leave petition to appeal was filed and came up for hearing on 13.7.2012, in which the following order was passed:

ITEM NO.MM-128 COURT NO.12 SECTION XV

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

I.A. NOS.4-5 in

Petition(s) for Special Leave to Appeal (Civil) No(s).8781-8782/2012

(From the judgment and order dated 24-3-2011 in WPC No.1891/2011 and dated 22-11-2011 in RP No.117/2011 of the High Court of M.P. at Gwalior)

SURYA ROSHNI LTD. Petitioner(s)

versus

EMP. PROVIDENT FUND & ANR. Respondent(s)

Travel Allowance and ESI Contribution

Travel allowance is not definitely part of the wages. Thus, ESI contribution is not to be deducted from it. As far as the conveyance allowance is concerned, going by the Madras High Court judgment in the Cosmopolitan Club case, conveyance allowance is also not part of wages for the purpose of deduction of ESI contribution. It appears that the views of the High Courts are divided on this issue. In my view, if the conveyance allowance is paid at intervals not exceeding two months, it may qualify for ESI contribution.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

So far as the conveyance allowance for EPF contribution is concerned, it is subject to the order of the Honorable Supreme Court in Surya Roshini's case.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

ESI and EPF Deductions on Allowances

If the company is paying a fixed allowance every month, whether they name it conveyance allowance or travel allowance, it would attract ESI deductions.

Conveyance/travel reimbursement, where the employee travels and submits the bills as per the company policy or at actual, and the same is reimbursed, would not attract ESI deductions.

As far as EPF is concerned, the deduction is not applicable.

Conveyance Allowance and ESIC Implications

Conveyance allowance, when paid through payroll, would attract ESIC. It is deemed necessary to pay ESIC on conveyance allowance, but it must be a part of gross wages.

Regards,

Mr. Kamal Prasoon Sinha's note is highly valid. If the conveyance allowance and travel allowance are fixed and paid on a regular basis, it would attract ESIC deductions.

Query on Flexi Benefits

Now I have a little hitch, i.e., if the conveyance allowance and travel allowance are paid through flexi benefits, which are under CTC?

Looking forward to your expert opinion.

Thanks & Regards,
Subroto Mukherjee

Please go through the following instruction/circular issued by the ESIC headquarters on travel/conveyance allowance to be/not be considered as wages under the ESIC Act. I hope this circular will clear all your doubts on the topic.

No. T-11/13/53/08/2001-Ins.IV Dated: 21/11/2001

Instruction No. 10/2001

To
The Regional Director/Joint Director I/c,
ESI Corporation,
Regional Office/Sub-Regional Office,

Sub: Treating Conveyance Allowance as Wages for the Purpose of Section 2(9) & Section 2(22) of the ESI Act, 1948

Sir,
I am to invite your attention to this office Instruction No. 2/97 issued vide letter No.P-11/13/97-Ins.IV dated 27.1.1997 and Item No. 12 of Memorandum No.P-11/13/97-Ins.IV dated 6th Nov., 2000, wherein it was instructed that the traveling allowance or the value of any traveling concession, if paid to the employees in the nature of conveyance allowance, is neither wages for the purpose of coverage of employees under Section 2(9) nor is it to be treated as wages under Section 2(22) of the ESI Act for the purpose of payment of contribution.

In the meanwhile, conflicting judgments by some High Courts have been received, necessitating the review of the Instruction No. 2/97 dated 27.1.1997, and Memo dated 6th Nov. 2000. The Madras High Court in its judgment dated 14.11.2000 in LPA No.50/98 (2001 LLR 489) has held that the conveyance allowance paid by the employer to the employees for commuting between residence and place of work should not be taken as wages as the same is nothing but traveling allowance for the purpose of Section 2(22)(b) of the ESI Act.

In another case where transport allowance was paid to the employees by the employer as per a settlement signed by the Employees' Union and the Management, the High Court of Karnataka has held in its Judgment dated 16th March, 2001 (MFA No. 2827/1999) that the transport allowance should be treated as wages as it flows out of a wage settlement, thereby it has come within the first part of the definition of wages under Section 2(22) of the ESI Act. There is a small difference in perspective. Whereas the Madras High Court has taken conveyance allowance per se, the High Court of Karnataka has specifically dealt with a case of transport allowance/conveyance allowance payable under a wage settlement. However, two different interpretations cannot be made by us for the same nature of payment allowed under identical circumstances. Therefore, it has been decided to accept the rationale behind the decision of the Karnataka High Court, and accordingly, it is advised that fixed conveyance allowance flowing out of a wage settlement should be treated as wages for all purposes.

However, the following should not be treated as wages under Section 2(22) of the ESI Act and also for the purpose of deciding coverage of an employee under Section 2(9) of the ESI Act:

• Amount towards conveyance paid or reimbursed to any employee for incurring expenses for specific duty-related journey.
• Reimbursement of the actual cost of conveyance for coming to work and going from work on production of a ticket or season ticket and subject to proof of actual expenditure.
• Payment of a certain amount for the maintenance of a vehicle depending upon the Cadre of the official and category of the vehicle and subject to the production of records for actually maintaining the vehicles.
• Fixed conveyance allowance paid at an interval exceeding 2 months, unless such payment is made as per a contract or agreement.

The Instruction No. 2/97 dated 27.1.1997 and item No. 12 of the Memorandum dated 6th Nov. 2000 stand modified accordingly.

This issues with the approval of the Insurance Commissioner. Please acknowledge the receipt.

Yours faithfully,
(O. ABDUL HAMEED)
ADDL. COMMISSIONER(REV.)

Copy to:
1. Joint Director(Fin.)/Dy. Director(Fin.), R.O./SRO
2. Joint Director (Vigilance) Zone
3. All Officers at Hqrs. Office
4. All Branches, Hqrs. Office
5. Guard File

JOINT DIRECTOR (REVENUE)

Regards,
Kamal

[QUOTE=naveen.r;1951711]Dear seniors, I am working in a garment export company located in an SEZ park. Here, all other companies provide cab facilities to their employees. I have decided to provide a conveyance allowance to our employees. However, I need to know if conveyance allowance needs to have ESI and PF deductions. Also, I would like to understand the tax-deductible limits. Are there any criteria for the maximum and minimum allowable amounts? Please guide me.

Conveyance Allowance vs. Reimbursement

Dear Naveen, please do not refer to it as a Conveyance Allowance. Instead, label it as Reimbursement of Conveyance Charges for all employees. Request an undertaking from the employees and obtain their signatures on the document to confirm their conveyance expenses. Pay them based on vouchers to ensure that PF, ESI, and tax exemptions are applied.

It is still not comprehensible how "travelling allowance" can be part of wages even if paid as part of salary every month since the definition of "wages" under Sec. 2(22) itself expressly excludes it without qualifying it. However, since ESI itself laid down certain guidelines in its circular, it is better to follow its circular to compute ESI contributions concerning travelling or conveyance allowance.

So far as P.F. contribution on conveyance allowance is concerned, it is better to follow the Apex Court's decision in the appeal in Surya Roshni's case, as Trilok Dhir pointed out.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai.

Conveyance Allowance and ESIC Contributions

The current view taken by ESIC is that if the conveyance allowance is paid in fulfillment of a contract of employment or wage agreement, whether express or implied, it would attract the scope of 'wages'. Consequently, contributions are payable on such an amount. This is notwithstanding an explicit proviso to the contrary under section 2(22) of the ESI Act.

Incidentally, as a few others have referred to earlier, the Honorable High Court of Madras has held that the conveyance allowance is not considered wages under section 2(22) of the Act, and no contributions are payable on such an amount.

As I understand it, notwithstanding the High Court decision, most employers in Tamil Nadu state are paying contributions on conveyance allowances for various obvious reasons. Well, if an employer really wants to avoid paying contributions and yet be legal about it, there are ways.

Deductions for PF, ESI, and Taxes

PF - 12% and ESI - 1.75% should be deducted from the employee's salary as per the Act and rules. However, conveyance allowance does not need to be deducted. If it exceeds the specified limit, then it should be deducted.

Income tax and professional tax must also be deducted as per the Act.

Legal Developments on Wage Splitting for Compliance

During the recent past, different views and decisions have been emerging from various sources regarding the splitting of wages for compliance under various Acts and Schemes. The Hon'ble Madras High Court, in the case of ESI v. Cosmopolitan Club, Chennai, has ruled that conveyance allowance does not constitute wages for the purpose of attracting ESI contributions.

The Hon'ble MP High Court, the Hon'ble Punjab & Haryana High Court, and other courts have issued their judgments on the splitting of wages for EPF deductions. The EPFO has filed an SLP in the Hon'ble Supreme Court of India against the decision of the Hon'ble MP High Court, which is pending. Additionally, the EPFO has suspended its circular dated 23-05-2011, in light of the SLP filed against the decision of the Punjab & Haryana High Court.

In this scenario, we must await the final verdict of the Hon'ble Apex Court.

Regards,
A.K. Chandok
RPFC (Retd.)
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