Medical Allowance vs. ESIC Contributions: Do Employers Need to Pay Both?

Dear Experts,

If the employer is paying "Medical allowance" to its employees (to whom the ESIC benefits are applicable) every month under the salary/wage, then is it necessary to also contribute under ESIC?

Thanks!

Medical Allowance is a part of the salary, and ESI contribution is statutory. God forbid if any employee meets with an accident during the course of employment or if any employee's dependent family member is under some ailment, will the Medical Allowance suffice the medical treatment expenses.

ESI Contribution Requirement

Yes, if the employees are eligible for ESI, you must contribute to the ESI on their wages/salary, regardless of paying medical allowance/reimbursement, as it is a statutory regulation. Hence, it cannot be avoided. In contrast, medical allowance/reimbursement is subject to the terms of the contract and the discretion of the employer. It is not a statutory allowance; therefore, you have to contribute to the ESI irrespective of medical allowance.

Thanks & Regards,

V SHAKYA
HR & Labour, Corporate Laws Advisor

Dear Experts,

Thank you for clarifying the query. My second question would be: if an Employer still needs to contribute to ESIC, then will they be required to consider "Medical Allowance" as wage for the purpose of the definition of "Wage," or should they exclude such an allowance in order to arrive at the wage for calculating the contribution.

Whatever components are shown in the monthly salary will attract ESIC. Thus, if you are paying Medical Allowance as a part of the salary, then it will automatically attract ESIC contribution on it.

The salary/wage is the agreed amount between the employer and employee for their services. Now, ESIC is a statutory contribution that needs to be made mandatorily if your company is covered under ESIC. The decision to exclude medical allowance, merge it with another component, or keep it as a separate component is the management's call.

When excluding the medical allowance, one should ensure that the employees' rights to POW are met and also adhere to MW.

If you pay Medical Allowance through the salary to the employees who are under the coverage limit of ESIC, i.e., drawing a salary up to Rs. 21,000 per month, it will attract ESI contribution. However, if you pay the same as medical reimbursement against the medical bills, ESI contribution is not deductible.

Suresh

Medical Allowance and Reimbursement

You can pay a component under medical allowance even on a monthly basis, but at the end of the year, the employee needs to submit bills to that extent (subject to the limits specified under Income Tax rules) so that it comes under medical reimbursement, which doesn't attract ESI and even Income Tax.

In case the employee is unable to submit the bills to that extent, then the total amount paid to him shall attract a deduction under Income Tax rules. The component should be named as medical reimbursement; failing which, it comes under regular wages and attracts both ESI and IT.

The employee even covered under ESI may not be able to go to the dispensary for petty illness and needs treatment, and to meet such expenses, this medical allowance will be used. Hence, this allowance is generally on a reimbursement basis.

To avoid all related issues, it is better to reimburse on submission of bills either quarterly, half-yearly, or annually so all the related issues can be avoided and it is helpful to the employee.

Medical allowance and ESIC deduction

Medical allowance is compulsory if we deduct ESIC.