1. Suppose an employee receives an increment in August, and his salary exceeds Rs. 21,000 per month. On what basis should we calculate the monthly contribution to ESIC? Should it be based on Rs. 21,000 or the actual salary he is receiving?
2. If the company provides overtime or incentives on a monthly basis, should these be included in ESIC calculations? What if, after accounting for the aforementioned components, the salary exceeds the threshold limit?
From India, Faridabad
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12. If the company provides overtime or incentives on a monthly basis, should these be included in ESIC calculations? What if, after accounting for the aforementioned components, the salary exceeds the threshold limit?
From India, Faridabad
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Clarification on Allowances and ESIC Contribution
The position was earlier clarified in detail by Shri O. Abdul Hameed, Formerly Addl. Commissioner, ESIC, which is reproduced below:
Dear Friends, I almost forgot about this useful site until I received an email from Mr. Banerjee from Calcutta, who could have obtained my email ID from here only. He had some doubts about four different kinds of allowances. I am pasting below my clarification to him, in case it is of some use to 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 10,000 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 taken into account for payment for contribution. For example, if an employee is getting 9,500 as a wage including various monthly/bi-monthly paid cash allowances and gets Rs 550 as OT in a month (total earning 10,050), he will continue to be covered as if he is drawing Rs 10,000 or below, but the contribution needs to be paid on the full 10,050 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 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 incentive when it is paid quarterly/half-yearly or annually (as in the case of an annual bonus). But it will be considered both for payment of contribution and deciding coverage when payment is made monthly. Normally, where incentive is available, people pay it monthly in the case of those whose other wage is close but below 10,000, to avoid ESIC, but pay quarterly for others whose wage will be well below 10,000 even after taking incentive monthly.
Conveyance Allowance
There were contradicting judgments from High Courts, and sometime in 2005 or so, a final clarification was given by ESI HQ. As per this, if 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 house to work and back, such allowance, though labeled as "Conveyance allowance" or Transport allowance, etc., is wage and contribution needs to be paid. But TA paid for duty-related journeys (different from the normal journey 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 a 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 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 bulk payment to such hotel against the bill, and supply free coupons or tokens, no contribution needs to be paid. Also, remember that whatever payment that is taken as wage for the payment of contribution, they are also taken into account for deciding coverage.
E.g. 1
Basic wage 4000
DA 3000
Heat allowances 1000
Sp. allowance 2000
Overtime allowance 500
ESI Covered
Contribution on 10,000
E.g. 2
Basic Wage 4000
DA 3000
Heat allow. 1000
Spl Allow 2000
ESI Cover.
Contribution Rs 10,500
E.g. 3
Basic Wage 4000
DA 3000
Heat allow. 1000
Spl allowance 2000
Tiffin allowance 200
Overtime 500
Fixed Conveyance 500
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 free. In case it is not available with 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 RTI Act.
This reply was given in 2008; please substitute the ceiling limit with Rs. 21,000/- but the principles remain the same and valid.
From India, Mumbai
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The position was earlier clarified in detail by Shri O. Abdul Hameed, Formerly Addl. Commissioner, ESIC, which is reproduced below:
Dear Friends, I almost forgot about this useful site until I received an email from Mr. Banerjee from Calcutta, who could have obtained my email ID from here only. He had some doubts about four different kinds of allowances. I am pasting below my clarification to him, in case it is of some use to 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 10,000 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 taken into account for payment for contribution. For example, if an employee is getting 9,500 as a wage including various monthly/bi-monthly paid cash allowances and gets Rs 550 as OT in a month (total earning 10,050), he will continue to be covered as if he is drawing Rs 10,000 or below, but the contribution needs to be paid on the full 10,050 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 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 incentive when it is paid quarterly/half-yearly or annually (as in the case of an annual bonus). But it will be considered both for payment of contribution and deciding coverage when payment is made monthly. Normally, where incentive is available, people pay it monthly in the case of those whose other wage is close but below 10,000, to avoid ESIC, but pay quarterly for others whose wage will be well below 10,000 even after taking incentive monthly.
Conveyance Allowance
There were contradicting judgments from High Courts, and sometime in 2005 or so, a final clarification was given by ESI HQ. As per this, if 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 house to work and back, such allowance, though labeled as "Conveyance allowance" or Transport allowance, etc., is wage and contribution needs to be paid. But TA paid for duty-related journeys (different from the normal journey 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 a 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 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 bulk payment to such hotel against the bill, and supply free coupons or tokens, no contribution needs to be paid. Also, remember that whatever payment that is taken as wage for the payment of contribution, they are also taken into account for deciding coverage.
E.g. 1
Basic wage 4000
DA 3000
Heat allowances 1000
Sp. allowance 2000
Overtime allowance 500
ESI Covered
Contribution on 10,000
E.g. 2
Basic Wage 4000
DA 3000
Heat allow. 1000
Spl Allow 2000
ESI Cover.
Contribution Rs 10,500
E.g. 3
Basic Wage 4000
DA 3000
Heat allow. 1000
Spl allowance 2000
Tiffin allowance 200
Overtime 500
Fixed Conveyance 500
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 free. In case it is not available with 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 RTI Act.
This reply was given in 2008; please substitute the ceiling limit with Rs. 21,000/- but the principles remain the same and valid.
From India, Mumbai
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