Understanding ESI Deductions: Which Salary Components Are Included or Excluded?

Dear all,

Our company is providing salary as follows:

- Basic salary
- Overtime
- Medical allowance
- Leave encashment paid on a monthly basis
- Incentive for sales officers

Please inform me about which components will be included or excluded for ESI deduction.

Please revert.

Wage Components for ESI Coverage

The following items will form part of the wage under Section 2(9) for considering the employee for coverage and Section 2(22) of the ESI Act for charging of contributions:

- Matinee allowance paid to employees in cinema houses.
- Shift allowance paid to employees working on odd shifts.
- Location allowance, in addition to dearness allowance, to cover high house rent.
- Compensatory allowance.
- Cash handling allowance for cashiers.
- Supervisory allowance.
- Additional pay for training staff.
- Charge allowance.
- Steno/Typist allowance.
- Plant allowance.
- Honorarium for hospital/dispensary duty.
- Computer allowance.
- Gestetner/Photocopier/Printer allowance.
- Personnel/Special allowance.
- Machine allowance.
- Canvassing allowance.
- First-aid allowance.
- Personnel allowance - Extra pay for skill, efficiency, or good records.
- Area allowance - For employees in high-cost living areas.
- Ex gratia payment within two months.

Non-Wage Components for ESI Coverage

The following items will not form part of the wage under Section 2(9) or Section 2(22) of the ESI Act:

- Payment for unavailed leave at discharge.
- Advertisement commission not paid to regular employees.
- Fuel/Petrol allowance.
- Entertainment allowance.
- Shoes allowance.
- Gratuity payment at discharge/retirement.
- Payment for encashed leave.

Regards,
R. Sudhakar

ESI Deduction on Salary Components

In your salary structure, all the components will attract ESI. Overtime is not a regular component of wages; therefore, it will not be counted for deciding whether the employee is covered under the ESI. However, for a covered employee, contributions will have to be paid for wages, including overtime wages.

Similarly, if the incentives to sales officers are paid every month, then the same will be considered as wages qualifying for ESI. On the other hand, if the incentives are paid quarterly (any period in intervals of more than two months), then the same will also be considered outside ESI.

Regards, Madhu.T.K

Hello Madhu T.K.,

Suppose the incentive for April and May, if paid at any time in June, shall be exempt from ESI or not.

If an incentive is not paid monthly, it will not attract ESI. If medical allowance is merely an allowance, it will attract ESI. The rest of the components will attract ESI. By the way, I hope you know about contribution periods. If you don't, please visit the ESI website; it is critical information.