How Will the New ESIC Changes Affect Your Income Tax and What Should Be Done?

New Changes in ESIC Announced

As most members of this forum are aware, the Labour Ministry announced new changes in ESIC on 1st January 2017. These changes are as follows:

1. The ESIC wage limit is revised from Rs. 15,000/- to Rs. 21,000/-.
2. Employees now have the option to continue in ESIC even after their wages exceed Rs. 21,000/-.

This revision will bring 50 lakh more employees under the ESIC scheme. Simultaneously, the ESIC board is also expanding its geographical coverage. As the saying goes, "You touch new territories as you spread (conquer)."

I request members of this group not to review the change in isolation and restrict it to ESIC only.

Impact on Income Tax

Earlier, the ESIC wage limit was Rs. 15,000/-, with annual ESIC wages at Rs. 1,80,000/-. With revised ESIC wages of Rs. 21,000/-, annual ESIC wages would be Rs. 2,52,000/-. This is marginally above the existing minimum slab of Income Tax (Rs. 2,50,000/-). I want to highlight that this is occurring for the first time. In the past, the ESIC wage limit was too low to cross the Income Tax slab.

Will this revision in ESIC now impact the Income Tax of employees? Is this a hypothetical case? If this year's budget changes the Income Tax slabs, will it be applicable? As per the second option in the revision, this cannot be a hypothetical case.

Currently, as per income tax rules applicable to salaried employees, there is no provision to consider ESIC deduction in tax computation. Statutory deductions like Professional Tax and Provident Fund are deducted from the annual income of employees. ESIC is also a mandatory statutory component, deemed to be deducted from the annual income of the employee. This will bring ESIC at par with Professional Tax and Provident Fund.

Due to the increased wage limit, more white-collar employees are covered under ESIC. Also, once an employee is a member of ESIC, he/she can continue the membership even though wages are above the threshold set by ESIC.

Illustrative Example

For illustrative purposes, consider an employee having:

a. Gross Earnings – Rs. 20,000/- (Rs. 12,000/- as Basic and Rs. 8,000/- as other earning components)

The employee will have:

b. Provident Fund – Rs. 1,440/- (12% of Rs. 12,000/-)
c. Professional Tax – Rs. 200/- (in states where PT is applicable; here PT is considered for Maharashtra State)
d. ESIC – Rs. 150/- (1.75% of Rs. 20,000/-)

For this employee, in tax computation, taxable earnings are reduced to the extent of deductions of Provident Fund and Professional Tax. Monthly taxable earnings will be Rs. 18,360/- (Rs. 20,000 - Rs. 1,440 - Rs. 200). Current rules do not allow considering ESIC deduction in this computation.

Case 2: Higher Earnings

In the case of employees with gross earnings of Rs. 21,000/-, ESIC will be Rs. 368/- monthly. The maximum amount of deduction annually due to ESIC will be Rs. 4,416/- (Rs. 368 x 12 months). This amount is more than the maximum deduction allowed under Professional Tax, which is Rs. 2,500/-. It can also be noticed that in cases where employees are paid overtime, incentives, etc., gross earnings will be higher, and ESIC deduction can be more than Rs. 4,416/-.

Resolution

ESIC is a scheme for the health benefits of employees and their family members. The deduction of ESIC from employees' salaries should be considered under Section 80D of Chapter VI-A (Deduction for Medical Benefits). As per the existing rules, this section has an upper limit of Rs. 25,000/-, which can sufficiently adjust the ESIC deduction. Once this rule is formed, any further changes either in the ESIC wage threshold or Section 80-D limit will be effective for all employees.

I request the esteemed members of this forum to take up this issue with the proper authority for the benefit of the employees.

Regards

I think the information you provided, such as "The option is provided to employees to continue in ESIC even after his/her wages cross Rs.21,000/-," appears to be incorrect. I hope you will upload some gazette notification or other relevant documents that explain the option allowed to employees to continue ESI coverage even after their wages exceed the statutory limit for the information of members and seniors in this forum.

I am also doubtful whether an employee receiving wages of Rs. 21,000/- per month throughout a financial year and having savings in the form of deductions related to EPF Contributions, ESI Contributions, and other expenses like Transport Allowance or HRA, will be required to pay any income tax. I hope you will share the basis of your calculations and suggestions with the seniors and experts in this forum.

Furthermore, I believe you could have submitted your suggestions to the appropriate government body, i.e., the Ministry of Labour & Employment (Central Govt.), in response to their draft intention notification dated 6/10/2016, before the final notification regarding the enhancement of the wage ceiling was issued by the government. This could have been done when the government sought views and objections from the general public.

Thank you.

There was a plan to include employees over and above the threshold wage ceiling of 21K, but to my knowledge, no gazette notification has been issued.

M.V. Kannan

Thank you for your reply. I admit, I could not locate the Gazette notification on the continuation of membership after crossing the threshold limit.

Income Tax and ESIC Wages

Though an employee's ESIC wages are Rs. 21,000/-, his/her gross earnings can be more than Rs. 21,000/- due to sales incentives or overtime. For these employees, ESIC will be more than Rs. 368/-. I have confirmed with payroll experts that this is not a hypothetical or academic case; the employee is covered under ESIC and is paying income tax.

Increasing ESIC Limits

Secondly, the ESIC limit is increasing periodically. One cannot keep hoping that the rules applicable to other components will keep employees out of taxable limits. Also, ESIC is a mandatory statutory deduction that should have the same treatment in income tax as Provident Fund and Professional Tax.

I did submit my suggestion during the period of suggestions to the concerned authority. Also, I am writing to the employees' representative on the ESIC board.

Regards

A very simple logic: 21000 x 12 = 252000.

A simple consideration of HRA: 20% of gross or 25% of basic = 21000 x 20% = 4200 x 12 = 50400.

Say the member pays EPF on 15000, so 15000 x 12% = 1800 x 12 = 21600.

252000 - (50400 + 21600) = 180000.

If sales incentive is fixed in nature per month, then simply, he will get excluded from ESIC scheme, as it would come as part of the salary.

Thank you for your reply. I may submit that many times the proposals regarding amendments, etc., are published by various departments/government organizations in newspapers. However, they only acquire the force of law after gazette notifications, and that too after being passed/approved by competent governments/parliament/Hon'ble President (as per legal requirement). I suggest that you do not treat such proposals as final until the final gazette notifications of amendments, etc., are published. Often, Hon'ble ministers give interviews in various newspapers, and these interviews are published in a way that suggests the contents are final, when in reality, the position remains unchanged. For example, the amendment in the Maternity Benefit Act, 1961, has not yet been passed by Parliament, despite the Hon'ble Minister giving interviews on the subject multiple times.

Further, I believe that Income Tax provisions are entirely different from the ESI Act, 1948, and have no relation to each other. Income Tax provisions are extensive, spread out by various rules, and serve a different purpose. If an employee receives amounts for incentives and overtime, and their total taxable income falls within the taxable slab, I think the government is justified in charging income tax.

Thank you.