ESI: On which compontens contribution is payable

Pls update me about ESI is not applicable on what components.

E.S.I. Scheme is social security legislation and it is contributory in nature. The contribution is paid by both employer and employee at a specified rate. The rates are revised from time to time. Currently, the employee’s contribution rate is 1.75% of the wages and that of employer’s is 4.75% of the wages.

As per Section 2 (22) wages means “all remuneration paid or payable, in cash to an employee, if the terms of the contract of employment, express or implied, were fulfilled and includes any payment to an employee in respect of any period of authorised leave, lock out, strike which is not illegal or lay-off and other additional remuneration, if any, paid at intervals not exceeding two months, but does not include - (a) any contribution paid by the employer to any pension fund or provident fund, or under this Act.”

Definition of wages consist of two parts, first part is including components and second part exclude some things from wages such as contribution to pf fund etc.

II. The following items will form part of the wage both under Section 2(9) i.e for considering the employee for the purpose of coverage and Section 2(22) of the ESI Act for the purpose of charging of contribution:-
· Suspension allowance/subsistence allowance
· Overtime allowance
· Inam/ex-gratia payment:
· Wages paid during layoff:
· House rent allowance
· Night shift/heat/gas & dust allowance:
· Medical allowance
· Newspaper allowance
· Education allowance:
· Drivers’ allowance
· Food/milk/tiffin/lunch allowance
· Gazetted allowance
· Wages and dearness allowance for unsubstituted holidays:
· interim relief
· Attendance bonus
· Matinee allowance which is being paid to employees in Cinema Houses
· Compensatory allowance.
· Cash handling allowance paid to Cashier.
· Supervisory Allowance.
· Additional pay paid to training staff.
· Charge allowance
· Steno/Typist allowance
· Plant allowance
· Honorarium for looking after the hospital/dispensary
· Computer allowance
· Gestetner/Photocopier/Printer allowance
· Personnel/Special allowance
· Machine allowance
· Convassing allowance
· First-aid allowance
· Personnel allowance
· Area allowance
· Exgratia payment if payment is made within an interval of two months.

II. The following items will not form part of the wage either under Section 2(9) or under Section 2(22) of the ESI Act:
· Washing allowance:
· Annual bonus:
· Incentive bonus:
· Production bonus:
· Annual commission
· Conveyance allowance
· Service charges
· Exgratia payment during strike for travelling expenses
· Saving scheme
· Payment made on account of un-availed leave at the time of discharge.
· Commission on advertisement secured for newspapers, if not paid to the regular employee.
· Fuel allowance/petrol allowance
· entertainment allowance
· shoes allowance
· payment made on account of gratuity on discharge/retirement.
· Payment made on encashment of leave.

Can Salary be deposited & then withdrawn by company?

Amount once credit in the account of employee cannot be withdrawn without permission of said employee. If by mistake or due to error of employer such thing happen then also law do not permit employer to take arbitrary action. In contract Act there is specific provision to deal with this sort of situation. Section 72 of Indian contract Act states that payments or delivery made under mistake or coercion must be made good or be returned. In Sri Shiba Prasad Singh v. Maharaja Srish Chandra Nandi it was made clear that money paid under mistake is recoverable whether the mistake is of fact or of law but by lawful way.


Some of my friends will ask why we should not recover amount directly from the account of employee. When we can? Yes, you can recover amount from account of employee if you have good term with bank but it can create legal issues for employer and bank. To have bird eye view of issue we have to understand few points:

1. There are three parties in this case. i.e Employer, Employee and Bank.
2. What was the mistake due to which wrong amount credit to employee account and by whom this mistake was done?
3. Is there any clause in agreement which stipulate that employer or bank can recover amount back from the account of employee. If amount credit by mistake.

Employer and employee are having master and servant relationship. Same time Bank and employee are having customer (consumer) relationship. So we have to take into consideration not only employment law but customer, contract and banking law also.

If mistake was on the part of banker than he can recover amount back from the customer (employee) because in standard contract there is always clause, which give right to banker to recover back amount which is credit by mistake. But I am not sure whether there is any clause in contract (salary account agreement) which gives right to employer to recover back amount from employee. If there is no such clause then employer legally cannot recover back amount from account of employee whether it credit by mistake or not.


If we assume there is some sort of agreement like this then also how can bank recover back amount on recommendation of employer because mistake was on the part employer not on part of bank. So on this ground bank cannot recover amount from customer account.

Now coming to nature of mistake first, If mistake is like in place of crediting Rs 1000 to employee account employer had credit Rs 1200 then employer can adjust excess amount with next month salary (if possible). Second, if employee left the organisation after taking salary and his notice pay is due then amount which employee had taken is salary and notice pay is compensation. They are legally two different things so employer should recover notice pay in full and final settlement as per rules.

In a regular course employer can deposit amount into employee account but cannot withdraw the same. It can be withdrawn only when it mistakenly credited by bank. So insist of recovering amount from account of employee with help of bank. Employer should recover money directly from employee by proper and legal way to avoid any legal hassle.

Provident fund and Overtime Allowances

Whether Provident fund can be deducted on Overtime Allowances?

In PF Laws there are recurrent changes which involve more biting than a reasonable person can eschew. The practical difficulties of executing PF law can only be perceived and felt at the point of implementation.

There are some issues in minds of young HR guys whether overtime would form part of basic wages under the EPF laws. Basic wages are ordinarily susceptible to PF deduction. As per Section 6 of EPF Act and related law, PF is deducted on basic pay; DA; Retaining allowance; and cash value of food concession. Overtime allowances do not come under preview of above mentioned terms and Section 2 (b) (ii) of PF Act specifically stated that overtime is excluded from the definition of Basic wage.

The Supreme Court in Bridge and Roof Company (India) Ltd. v. Union of India, 1962 and Jay Engineering Works Ltd. v. Union of India, 1963 “very aptly unfolded the inter woven components of basic wages vis-à-vis their susceptibility to the Provident Fund Contribution. The theory that has been propounded is very obvious and simple and is good for universal application. It has been ruled that whatever is payable to all concerns and earned by all permanent employees, is included for the purpose of contribution under section 6 but whatever is not payable by all concerns or may not be earned by all employees of the concern is excluded for the purpose of contribution, irrespective of anything.” By way of example it was held that overtime allowance, though it is generally in force in all concerns is not earned by all employees of a concern. It is also earned in accordance with the terms of the contract of employment but because it may not be earned by all employees.

This is an Acid test which has been laid down by the Apex Court, and if we were to apply it to the overtime payment, then some discrepancies would surface. So PF cannot be deducted on overtime allowances.

Vulgar salary-What the hell it is?

Recently when I was scanning through leading newspaper I came through a word “vulgar salary”. As a HR profession I heard various names of salary such as fair salary, minimum salary, executive compensation, wages blah ..blah but this is fast time I heard term vulgar salary. How can salary be vulgar? I don’t know and don’t want to know because whatever you call it I love my salary. Which I get in my account on first day of every month.

For my readers term vulgar salary is coined by one of the cabinet minister of India. He was referring to high pay packages of CEO’s. High pay packages are burning issue all over the world. The gap between the salary of entry level employee and top hats are growing day by day. It is not good for developing country in long run.

To curb and to regulate high compensation packages new company law is in the pipe line. Hope it will give some direction but government has to see pros and cons of it before coming to any point. Till then top hats please enjoy your vulgar salary.