How Should Incentives Be Reflected in Payslips and Affect ESI Calculations?

Dear Seniors,

Introduction of KRA System

My company is going to apply the KRA (Key Responsibility Area) system from April 2017, in which employees will receive increments in the form of incentives. For example, if an employee, A, is earning 10,000, then he will receive 10% of his salary as an incentive if he fulfills all targets. However, the incentive will be provided on a quarterly basis. This means that the incentives for April, May, and June will be credited in the June month's salary.

Questions on Salary Reflection and ESI Calculation

My question pertains to how I should reflect this in the monthly salary and how to calculate ESI. Additionally, I am curious if ESI is applicable to incentives. What is the best way to display incentives on the payslip? It's possible that an employee may receive an incentive in one month, while in the next month, it could be zero.

Thank you.

If incentives are paid monthly, then ESI will be attracted to the incentives as well. If it is paid quarterly, half-yearly, or annually, then it will not have an effect. However, it is better to pay incentives separately and declare them as incentives.

Dear Monika,

If the incentives are paid as a part of the salary, then it will surely attract ESIC contribution. Thus, it is advisable not to pay them along with the salary to avoid ESIC. However, it will be considered a part of their annual income, so it will come under their taxable income.

Increment and incentive are two different things altogether. Incentive is not a salary component and hence not required to be shown in a payslip or salary sheet, as stated by the above members. On the other hand, an increment is a salary hike and has to be paid monthly, which is deductible for all statutory applicable.

Hi,

We are giving employees incentives every month in cash, but this month we have decided to add incentives to their salary. Is ESI applicable for incentives added to the salary every month?

Kindly advise on this matter.

Regards,
Arun

Mr. Arun,

Yes, ESI will be applicable if you release the incentive with the monthly salary.

Regards,
Monika