Jan 2017 update: The ESI wage ceiling has been enhanced to Rs 21,000 with effect from 01-Jan-2017, please take a look at our blog post here.
Payroll managers are aware that the existing wage limit (as of Nov 2013) for coverage under the ESI Act is Rs 15,000 (Rupees Fifteen Thousand) per month. Also, that once the ESI contribution begins, the contribution should continue until the end of the contribution period (Apr to Sep or Oct to Mar) even if the salary (for the purpose of ESI calculation) increases beyond Rs 15,000 per month during the contribution period.
One of our customers asked us the following question in this regard.
In case the salary goes above Rs 15,000, say to Rs 17,000, during the contribution period, should we calculate ESI on the actual salary (Rs 17,000) or should the salary be restricted to Rs 15,000 for ESI calculation?
Many payroll managers mistakenly believe that salary, when it goes above Rs 15,000 during the contribution period, should be restricted to Rs 15,000 for the purpose of ESI calculation. The logic is that since salary for ESI coverage limit is Rs 15,000 per month, there is no need to calculate ESI on any amount above Rs 15,000. We find many payroll managers being incorrectly informed on this.
The ESI department has adequately clarified that during the contribution period ESI should be calculated on total ESI salary and the salary should not be restricted to Rs 15,000 in case the salary goes above Rs 15,000. In other words, if the total ESI salary is Rs 17,000, ESI deduction and contribution should be calculated on Rs 17,000 and not on Rs 15,000. Payroll managers should note that employees get additional benefits on the ESI amount calculated on salary above Rs 15,000.
In one of its publications, the ESI department has cleared the air on this issue.
An employee whose wages crosses the prescribed ceiling limit in any month at anytime after commencement of the contribution period, continue to be an employee till the end of that contribution period. Though there is a wage ceiling limit for coverage of an employee, there is no ceiling limit in the definition of wages for payment of contribution. Hence contribution is payable on the total wages without any ceiling limit.
Payroll managers would do well to follow the ESI department’s directive in this regard.