Understanding Incentives: Should They Appear on Pay Slips and Affect ESI Deductions?

Dear All,

As we all know, an incentive is a variable allowance, so I have two questions:

1) Can we mention the incentive on pay slips? (If we include it on the pay slip, the employee will receive a different amount every month.)

2) Will ESI be deducted from the gross wage, including the incentive?

Please reply.

Thanks & Regards,
Nitin Sharma

Since an incentive is an amount purely dependent on performance, it is advisable not to show the same on the payslip. If included and paid every month, it will be considered as part of the salary for the purpose of ESI contribution.

Madhu.T.K

Dear Sir,

I agree with you, but if we do not show the incentive in the payslip, how do we pay the incentive? Suppose an employee earns below or equal to 15000 (including the incentive) in January, and in the second month, he/she earns more than 15000 (including the incentive), but in the following month, he/she earns below 15000 again. In that case, what should we do regarding ESIC? Should we deduct ESIC or not? Please advise, sir.

Thanks & Regards,
Nitin Sharma

ESI Contribution and Salary Changes

ESI contribution shifts only once at the time of change of the contribution period and with a change in salary. For example, an increase in salary over Rs. 15,000 in one month will not cause the employee to be out of coverage. The employee becomes out of ESI only if their salary exceeds Rs. 15,000 in April or October.

Suppose someone earns more than Rs. 15,000 in April and is consequently removed from ESI. If their salary then drops to less than Rs. 15,000 in May, they should be brought back under ESI coverage. This issue can be resolved by paying incentives every quarter and not including them in the payslip.

Regards, Madhu.T.K

Hi,

You are bound to show the incentive on the payslip, but label it as an advance. The anticipated annual incentive can be split equally on a quarterly basis. This way, it won't be included in ESI calculations but will be considered as annual income for IT purposes.

Incentive is variable and should not be construed as part of the salary. Hence, it should not be reflected as a salary. There is no ESI on incentives.

If ESI is payable in case incentive is paid through payslip, then it appears to me that one is only trying to avoid or evade ESI by using a particular modus operandi. Will it not be against the law? Someone may please clarify.

From the Income tax (IT) point of view, incentive is taxable. Therefore, it is advisable for convenience to include it in the payslip. If you pay it separately, you might miss it when calculating the gross salary for the month of monthly Tax Deduction at Source.

If the salary is more than $15,000 (including all allowances), the incentive can be paid through the payslip. Otherwise, separate remittances for incentives may be made to his salary account.

Incentives as Part of Wages Under the ESI Act, 1948

The amount of "incentive" is considered part of wages under the ESI Act, 1948, and contributions on such amounts are payable. Even if you pay quarterly but calculate on a monthly basis, it is still considered wages, and a contribution is payable. The mere fact that you accumulate the incentive for the first two months and pay the total after the expiry of the third month is irrelevant; the contribution is "payable." Please refer to the definition of "wages" in section 2(22), which states "paid or payable."

If wages are not disbursed by any unit/employer continuously for three months (say a defaulting unit), it does not mean that they were not "payable" for the first two months. Any unit or employer may book these amounts in any form, such as an advance, pay by voucher, or not reflect them in the pay slip, as per their own option or procedure. If this comes to the attention of inspecting authorities and they take note of it, then it could be considered a discrepancy during inspection or verification of records.

Regards,
[Username]

Fixed incentives paid to employees are liable for continuous coverage under the ESI Act. This means that if an employee regularly receives treatment under the ESI wage, the incentive payments are subject to ESI deductions. However, if an employee receives incentives once every three months or once every fourth month, no ESI deductions are applicable.

What will be the problem if you show the incentive earnings every month in the payslip? Incentives are a part of earnings and should definitely be shown in the payslip for the information of the employee. If you are avoiding the contribution of ESI, which is not proper, you are giving room for manipulation and depriving the rights of the employee.

Adoni Suguresh
Labour Laws Consultant

Including Incentives in Payslips

You can include incentives in the payslips if you want to ensure transparency. However, when you include them, the earnings will fluctuate every month. Consequently, you may have to rework the list of employees who fall out of ESI coverage accordingly. For example, if due to a higher incentive payout in April, an employee goes out of ESI coverage, but in the following month, due to a lesser incentive, their salary would drop below 15,000, and they may come back under ESI coverage. This situation can be avoided if incentives are paid at intervals of more than two months and as a separate payment.

Handling Productivity Bonuses and Reimbursements

If you pay a productivity bonus, will you show it on the payslip? No. When it comes to reimbursements like medical or travel expenses, which are based solely on the production of bills, they are not processed through payroll but as separate payments under the employee benefits account. Similarly, there is nothing wrong with paying incentives separately. There is no manipulation involved. This approach is not meant to deprive any rights or to gain an advantage in terms of ESI contributions. After all, ESI is applicable to those whose wages are less than 15,000, and when counting the number of employees under ESI, it is decreasing because in the organized sector, it's rare to find a salary below 15,000.

Advice on Payslip Components

My advice is to only include the fixed part of the salary in the payslip and separate the variable parts, which are based on specific conditions, from it.

Regards, Madhu.T.K

Incentive Bonus

As per the decision of the Supreme Court delivered on 8.3.2000 in the case of M/s. Whirlpool India Ltd. Vs. ESIC in civil appeal No. 1903 of 2000, additional remuneration to become wages has to be paid at intervals not exceeding two months, as distinguished from being payable. Thus, there has to be actual payment, and the payment of production incentive does not fall under either the first part or the last part of the definition of the term wages as defined in Sec. 2(22) of the Act; hence no contribution is payable on the incentive bonus, provided the periodicity of payment is more than two months. In line with this verdict, you may devise a scheme that allows quarterly calculation for payment, and it can reflect in the salary slip as well.

Production Bonus

Production Bonus, like incentive bonus, is paid to the workers as additional remuneration. Hence, like incentive bonus, such additional remuneration, in order to become wages, has to be paid at intervals not exceeding two months, as distinguished from being payable. Thus, there has to be actual payment, and hence no contribution is payable, provided the periodicity of the payment is more than two months.

Inam/Ex-Gratia Payment

Inam represents a payment made by the employer to any employee as a reward for the services rendered by him for which he is/was not under obligation to render the same under the contract of service, which is expressed or implied but does not include the payment that has been made to an employee in fulfillment of the contract of service. This may include ex gratia payment.

Where Inam is being paid for special skill or higher responsibilities/additional duties, it may be taken as remuneration, and contribution is payable.

Where the employer has introduced the scheme of Inam but according to terms and conditions, the employer has no right to withdraw it or revise it, the same may be treated as wages, and contribution is payable.

Where the employer has introduced the scheme of Inam and he has the right to revise or withdraw it at his discretion, the payment of Inam under such a scheme may not be treated as wages, and contribution is not payable, provided the payment is made at an interval exceeding two months.

Where there is no scheme of Inam in writing but still the employer might be making payment under the head Inam based on some understanding between the parties, in such cases, the nature of payment and its periodicity may be ascertained, and whether payment of Inam is an ex gratia payment not covered by the contract of service. In case the periodicity is more than two months, no contribution may be charged.

Regards, RDS Yadav Labour Law Adviser

If you are paying the incentive regularly or monthly, mention it on the salary slip and deduct ESI contribution on the incentive along with the salary/wages earned during the month, i.e., on the gross salary earned by the employee.