Understanding Wage Ceilings: How Does the New Social Security Code Affect EPF and ESI Contributions?

Query on Wage Ceilings Under the New Social Security Code

As per the new Social Security Code, would the wage ceilings for EPF contributions and ESI continue to attract ESI contribution on the 50% allowance, which is not part of the wage as per the latest wage definition? Kindly explain.

ESI and EPF Contributions

ESI is payable on gross monthly wages, even on overtime paid. EPF is payable on Basic + DA + SDA.

Thank you.

Question about Wage Definition in the Social Security Code

Yes, sir. I completely agree with you. My question pertains to the wage definition in the Social Security Code. According to ESIC, wage allowances also attract ESIC contribution. However, the Social Security Code defines that up to 50% of allowances in wages are excluded. So, does the ESIC contribution exclude this clause or not?

Exclusion of Components in Wage Definition

As per the new Social Security Code, in the definition of wages, components such as HRA, OT, Commission, and Travel allowance are excluded. Therefore, the liability of contributions of employees and employers under the EPF Act and ESI Act shall be reduced.

No, it has not been excluded. If we read the third paragraph of section 2 (clause 88), it is mentioned that if any payments made under sub-clauses a to i (exclusion list) exceed 50%, the amount which exceeds will be part of wages.

ESIC Applicability on Gross Salary

ESIC is applicable on the total gross salary, which includes allowances, regardless of their nature. The main crux of the wage code is that if allowances exceed 50%, the percentage exceeding 50% should be merged into basic and DA.

So far, no notification has been issued by EPF or ESIC regarding changes to the contribution limits, and they remain the same.

I am a little bit confused about whether the deduction of PF and ESIC is from the basic salary or the net salary. Thank you.

PF and ESI Calculation Clarification

PF percentage is calculated on BASIC and DA, whereas ESI deduction is calculated on gross salary. Hope this clarifies your doubt.

Regards, Priya

I think that the question relates to the calculation of subscriptions to ESI and EPF schemes under the newly enacted Code on Social Security, 2020. One of the salient features of all the four Labor Codes is that they provide for uniformity of interpretation of certain terms like 'wages' commonly occurring in all the Codes.

Definition of 'Wages'

The important aspect of the definition of the term 'wages' is that, in general, only those components of basic pay, dearness allowance, and retaining allowance, if any, should be considered as wages for the purposes of each Code. This is subject to the condition of their sum total remaining always at an equal proportion to the sum total of the remaining components in the wage/salary structure. If the equality in the proportion is disturbed by lesser fixation of the inclusive components, it has to be restored by adjusting from certain excluded components specified in the definition.

Awaiting Enforcement and Notifications

Since the enforcement of the Codes and their Rules is awaited, let us wait and see how the treatment of subscriptions to the schemes of ESI and EPF is prescribed under the notifications to be issued by the Central Government in this regard.

Practical Examples of EPF, ESI, and Gratuity

Learned and knowledgeable members can provide practical examples using tables for EPF, ESI, and Gratuity, considering inclusions and exclusions. This is a current and trending topic that many may benefit from, especially those involved in payroll and taxation.

Thanks,
RN

Determination of wages and contributions

Determination of wages as per the wage code is one thing, and contributions to PF & ESI are different matters. Once wages have been determined by combining Basic, DA, and Allowances, the contributions to PF & ESI will remain the same as at present, i.e., PF will be on wages only, and ESI on monthly gross. According to the Social Security Code, PF contribution will be 10% instead of the current 12%.

Regards, S K Bandyopadhyay (WB, Howrah) CEO - USD HR Solutions [Email Removed For Privacy Reasons]

As per the definition of wages under the Wage Code, it has not been mentioned that wages should be 50% of CTC. It should be 50% of all the remuneration calculated under this clause, which is not CTC.

Definition of Wages

In the first part of the wages definition, the inclusion items are all remunerations, whether by way of salaries, allowances, or otherwise, expressed in terms of money to be payable to a person, and include Basic, DA, & RA.

CTC Considerations

Usually, in CTC, all the items spent for any employee are considered, such as employer contribution to ESIC, gratuity, insurance premium, etc., which randomly vary from organization to organization. These should not be considered for all the remuneration calculated under the wage clause as those items are not payable to the person.

It will be required to determine carefully the items to be considered for calculation.

Regards, S K Bandyopadhyay (WB, HOWRAH) CEO-USD HR Solutions [Phone Number Removed For Privacy-Reasons] [Email Removed For Privacy Reasons]