Dear Friends,
I almost forgot about this useful site until I received an email from a Mr. Banerjee from Calcutta, who may have obtained my email address from here. He had some doubts about four different kinds of allowances. Below, I am providing my clarification to him in case it is useful for others visiting this site.
Dear Mr. Banerjee,
Out of the four kinds of allowances, each needs to be understood differently when it comes to (a) deciding the coverage limit of 10000 and calculating the contribution in case the employee is covered. Let us not mix up the issues. I will explain each case separately.
Overtime Allowance
This will not be taken into account for deciding coverage, but it has to be considered for the payment of contribution. For example, if an employee is receiving 9500 as wage, including various monthly/bi-monthly paid cash allowances, and gets Rs. 550 as overtime in a month (total earning 10050), he will continue to be covered as if he is earning Rs. 10000 or below. However, the contribution needs to be paid on the full 10050 during the contribution period.
Incentive Allowance
If it is paid or is payable quarterly, half-yearly, or annually, or in a periodicity of over two months, it need not be taken into account for the payment of contribution and also for deciding coverage. Assuming that there is no contractual obligation, but if there is a contractual obligation, it will be taken into consideration for both coverage and payment. This is my interpretation, but in fact, ESIC normally does not claim contribution on incentives when paid quarterly/half-yearly or annually (as in the case of an annual bonus). However, it will be considered for both the payment of contribution and deciding coverage when the payment is made monthly. Normally, where incentives are available, people pay them monthly in the case of those whose other wages are close but below 10000 to avoid ESIC, but pay quarterly for others whose wages will be well below 1000 even after taking the incentive monthly.
Conveyance Allowance
There were contradictory judgments from High Courts, and sometime around 2005, a final clarification was given by ESI HQ. As per this, if the payment is a fixed amount or a percentage of Basic pay, or fixed for different cadres, irrespective of the actual amount incurred by the employee for conveyance from home to work and back, such allowance, though labeled as "Conveyance allowance" or Transport allowance, etc., is wage, and contribution needs to be paid. However, TA paid for duty-related journeys (different from normal journeys from home to work and back) and reimbursement of actual conveyance charges subject to production proof of actual incurring for the journey from home to work and back, is not wage, since such payment is excluded from the definition of wage. Similarly, if employees are paid transport/conveyance allowance based on the type of vehicle they are maintaining, subject to proof of owning the vehicle, and not a flat or fixed rate, such payment will be reimbursement or transportation allowance, and not considered as wage for the payment of contribution. In fact, this is the correct interpretation as per the definition under Sec 2 (22). But in most cases, what is paid is a fixed amount depending on the cadre of employees, without bothering about the type of vehicle, distance, or proof, etc., and hence such payment has to be considered for the payment of ESI Contribution.
Tiffin Allowance
If the amount is paid in cash to the employee, ESI contribution is to be paid on it, since it is nothing but an element of wage. But in case you provide food, or purchase food coupons or tokens for a hotel or canteen, and make a bulk payment to such a hotel against a bill, and supply free coupons or tokens, no contribution needs to be paid.
Also, remember that whatever payment is taken as wage for the payment of contribution, they are also taken into account for deciding coverage.
E.g. 1 E.g. 2
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allow. 1000 Sp. allowance 2000 Sp. Allow 2000 Overtime allowance 500 ESI Covered ESI Cover. Contribution on 10000 Contribution Rs. 10500
E.g. 3
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allow. 1000 Sp. allowance 2000 Sp. allowance 2000 Tiffin allowance 200 Overtime 500 Fixed Conveyance 500
Not covered Not Covered. No Contribution
Hope you are clear now.
ESIC has issued many circulars to their field offices and Regional offices. They do not supply them to Employers. However, they supply a small book called "Employers Handbook" You can get it for free. In case it is not available at the ESI Regional Office, you can write to Director (PR), ESI HQ New Delhi. You can also ask for all circulars on Wage and clarification on various allowances issued up to date using the RTI Act.
O. Abdul Hameed Formerly Additional Commissioner ESIC New Delhi
From India, Coimbatore
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56I almost forgot about this useful site until I received an email from a Mr. Banerjee from Calcutta, who may have obtained my email address from here. He had some doubts about four different kinds of allowances. Below, I am providing my clarification to him in case it is useful for others visiting this site.
Dear Mr. Banerjee,
Out of the four kinds of allowances, each needs to be understood differently when it comes to (a) deciding the coverage limit of 10000 and calculating the contribution in case the employee is covered. Let us not mix up the issues. I will explain each case separately.
Overtime Allowance
This will not be taken into account for deciding coverage, but it has to be considered for the payment of contribution. For example, if an employee is receiving 9500 as wage, including various monthly/bi-monthly paid cash allowances, and gets Rs. 550 as overtime in a month (total earning 10050), he will continue to be covered as if he is earning Rs. 10000 or below. However, the contribution needs to be paid on the full 10050 during the contribution period.
Incentive Allowance
If it is paid or is payable quarterly, half-yearly, or annually, or in a periodicity of over two months, it need not be taken into account for the payment of contribution and also for deciding coverage. Assuming that there is no contractual obligation, but if there is a contractual obligation, it will be taken into consideration for both coverage and payment. This is my interpretation, but in fact, ESIC normally does not claim contribution on incentives when paid quarterly/half-yearly or annually (as in the case of an annual bonus). However, it will be considered for both the payment of contribution and deciding coverage when the payment is made monthly. Normally, where incentives are available, people pay them monthly in the case of those whose other wages are close but below 10000 to avoid ESIC, but pay quarterly for others whose wages will be well below 1000 even after taking the incentive monthly.
Conveyance Allowance
There were contradictory judgments from High Courts, and sometime around 2005, a final clarification was given by ESI HQ. As per this, if the payment is a fixed amount or a percentage of Basic pay, or fixed for different cadres, irrespective of the actual amount incurred by the employee for conveyance from home to work and back, such allowance, though labeled as "Conveyance allowance" or Transport allowance, etc., is wage, and contribution needs to be paid. However, TA paid for duty-related journeys (different from normal journeys from home to work and back) and reimbursement of actual conveyance charges subject to production proof of actual incurring for the journey from home to work and back, is not wage, since such payment is excluded from the definition of wage. Similarly, if employees are paid transport/conveyance allowance based on the type of vehicle they are maintaining, subject to proof of owning the vehicle, and not a flat or fixed rate, such payment will be reimbursement or transportation allowance, and not considered as wage for the payment of contribution. In fact, this is the correct interpretation as per the definition under Sec 2 (22). But in most cases, what is paid is a fixed amount depending on the cadre of employees, without bothering about the type of vehicle, distance, or proof, etc., and hence such payment has to be considered for the payment of ESI Contribution.
Tiffin Allowance
If the amount is paid in cash to the employee, ESI contribution is to be paid on it, since it is nothing but an element of wage. But in case you provide food, or purchase food coupons or tokens for a hotel or canteen, and make a bulk payment to such a hotel against a bill, and supply free coupons or tokens, no contribution needs to be paid.
Also, remember that whatever payment is taken as wage for the payment of contribution, they are also taken into account for deciding coverage.
E.g. 1 E.g. 2
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allow. 1000 Sp. allowance 2000 Sp. Allow 2000 Overtime allowance 500 ESI Covered ESI Cover. Contribution on 10000 Contribution Rs. 10500
E.g. 3
Basic wage 4000 Basic Wage 4000 DA 3000 DA 3000 Heat allowances 1000 Heat allow. 1000 Sp. allowance 2000 Sp. allowance 2000 Tiffin allowance 200 Overtime 500 Fixed Conveyance 500
Not covered Not Covered. No Contribution
Hope you are clear now.
ESIC has issued many circulars to their field offices and Regional offices. They do not supply them to Employers. However, they supply a small book called "Employers Handbook" You can get it for free. In case it is not available at the ESI Regional Office, you can write to Director (PR), ESI HQ New Delhi. You can also ask for all circulars on Wage and clarification on various allowances issued up to date using the RTI Act.
O. Abdul Hameed Formerly Additional Commissioner ESIC New Delhi
From India, Coimbatore
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Draft Notification dt 6-10-2016 reg enhancement of wage ceiling under ESI Act.pdf