ESI Calculation Confusion: Is It Based on Basic or Gross Salary, and What About Allowances?

Can anyone help me with the calculation of ESI? Is it calculated on the basic or gross salary? If it is calculated on the gross salary, should the washing allowance be added to it? Please kindly clarify for me.

It is to be calculated on gross salary, i.e., Basic + DA + HRA + any allowance which is paid as part of the salary.

Regards

If the washing allowance is paid as part of the salary every month, in my view, it shall rank for contribution. If it is paid as a reimbursement of the expenses incurred by an employee, it will not form part of the wage and will not count for contribution.

Regards,
B. Saikumar
Mumbai

If the wage limit is not changed, i.e., $6500, then I want to know whether that $6500 is from gross or after adding all other allowances with basic. Even after your fruitful answer, my understanding is not clear about the new PF deduction. Therefore, please kindly clarify for me.

Sai, you mentioned that other allowances, except for HRA, O.T, and Bonus, will form part of the basic wages and thus count for contribution. I want to know whether these expenses will be included with the basic wage and the entire amount will be treated as basic, or if there is another treatment. Additionally, could you kindly clarify the 6500 limit for me?

ESI contributions are to be paid on the gross amount (ceiling is Rs. 15,000/-) excluding washing allowance and conveyance reimbursement.

Regards,
G.K. Manjunath Sr. Manager-HR

ESI Calculation

ESI is applicable to employees whose gross salary is less than or equal to Rs. 15,000.

- **Employee Contribution:** 1.75% on gross salary
- **Employer Contribution:** 4.75% on gross salary

Kindly help me to clarify:

1. Is the Overtime Amount included in Gross Pay for ESIC calculations?
2. Overtime is a variable amount that may exceed the ESIC wage limit of ₹15,000. How do we calculate ESIC in case an employee's Gross pay is more than ₹15,000 for a particular month?

Clarification on ESI Calculation

Overtime should not be considered for calculating the ESI ceiling of Rs. 15,000, but contributions should be made on overtime as well. Washing allowance should be excluded from the contribution calculation.

Therefore, overtime should not be included in the gross salary calculation; it should be excluded. When the gross salary is Rs. 15,000 and the overtime is Rs. 3,500, the contribution should be paid on the total amount of Rs. 18,500. I hope this clarifies both questions and doubts.

Regards,
G.K. Manjunath, Sr. Manager-HR

Thank you for your reply. Our PF consultant has put certain employees out of coverage for ESI as their gross wages were more than 15k, including their OT amount. Kindly advise a solution in such a case. Thank you in advance.

According to the ESI Act Section 2, Ss 22, overtime is considered part of wages because employees work for the employer due to the emergence of work. Therefore, contributions are payable on the overtime allowance. However, overtime allowances will only be considered as wages for the purpose of charging the contribution and will not be taken into account for determining the coverage of the employee under the scheme.

Thank you.

Please provide me with detailed information about ESI monthly and quarterly returns. I work in the mining industry where ESI is not applicable, so I am quite unfamiliar with the process.

Regards,

I have gone through the ESIC circular. What the ESIC guidelines say is that washing allowance, if paid to defray special expenses on account of employment, will stand excluded. What I said in my post is that if washing allowance is paid by way of reimbursing expenses incurred by an employee, it will not rank for ESI contribution. If it is paid every month as part of salary universally to that particular class of employees as per terms of employment/settlement (irrespective of any procedure to claim it as reimbursement), it partakes the character of remuneration within the first part of the definition of wages and will, in my view, rank for contribution. In some establishments, it is the practice. This line of interpretation is in tune with ESIC's interpretation about conveyance allowance despite the fact that the definition clearly excludes traveling allowance and the synonymous conveyance allowance. This is also in tune with the settled position in law on the scope of wages.

As regards P.F, I have given the details to Anjana (who started the discussion) for her knowledge with a rider that she should verify whether the physical submission of the returns is necessary due to the online process as I am not dealing with procedural aspects of P.F or ESI. Mr. Manjunath, in the meantime, thankfully clarified that the physical submissions of certain forms have been dispensed with due to the online process. Now, you have also confirmed.

Similarly, as regards ESI returns, I have given the details to Anjana for her academic interest and information as she is not dealing with ESI matters since she is working in a mine. Now, it is nice that you have also clarified that physical submission of ESI returns is dispensed with.

All the same, I am thankful to you for bringing this information to my notice.

Regards,
B. Saikumar
Mumbai

I appreciate your reply to my postings. According to my view, even if the washing allowance is paid as a part of the salary every month universally to all employees, it does not rank for ESI contribution. However, the amount should be justifiable as to defray the expense of washing the working clothes. This logic can also be applied to office staff. I have convinced the authorities of this view. One can differ with me.

I am with you as long as the washing allowance is paid to defray the expenses. In my view, it partakes the character of remuneration within the first part of the definition when it is paid as part of the salary every month to every employee concerned under the terms of employment. Otherwise, the conveyance allowance shall also be excluded invariably. However, by the ESIC's own interpretation, the conveyance allowance, if not paid to reimburse the expenses, shall rank for contribution. It is also laid down by the courts that it is not the name that is given to any payment that shall include or exclude it from wages, but the manner in which they are paid that will be determinative. Anyhow, we are entitled to our opinions, and we may respectfully disagree also. Two views are always possible in law, and in such circumstances, I prefer to err on the side of the law.

Thanks for your response.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai