ESI Contribution after implementing COSS
This query is : Resolved
24 December 2025
My client spends wages for one of his employees amounting to 25000.00, which includes INR 12500/- basic & INR 12500/- HRA. He also contributes INR 1500/- (12% of INR 12500/-) to the EPF Fund. So, after implementing COSS, total wages for ESI contribution is come to INR 12500/- or INR 13250/- , (total basic INR 12500/- plus the difference of 50% of CTC INR 26500/- i.e. INR 13250/- , HRA INR 12500/- + Employer EPF contribution INR 1500/- i.e. INR 14000/-)
25 December 2025
“Wages” under COSS are defined broadly:
• Includes basic pay, DA, retaining allowance.
• Excludes HRA, statutory bonus, employer PF contribution, gratuity, retrenchment compensation, conveyance allowance, overtime, commission, etc.
• 50% Rule (CTC floor):
• If the sum of excluded components exceeds 50% of total remuneration, the excess is added back to wages for compliance purposes.
• This ensures employers don’t artificially inflate allowances to reduce statutory contributions.
• Includes basic pay, DA, retaining allowance.
• Excludes HRA, statutory bonus, employer PF contribution, gratuity, retrenchment compensation, conveyance allowance, overtime, commission, etc.
• 50% Rule (CTC floor):
• If the sum of excluded components exceeds 50% of total remuneration, the excess is added back to wages for compliance purposes.
• This ensures employers don’t artificially inflate allowances to reduce statutory contributions.
25 December 2025
Application to Your Case
- CTC = Basic + HRA + Employer PF = ₹26,500
- Included in wages = Basic ₹12,500
- Excluded components = HRA + Employer PF = ₹14,000
- 50% of CTC = ₹13,250
Since excluded components (₹14,000) exceed 50% of CTC (₹13,250), the excess ₹750 must be added back to wages.
Final ESI Wages
- Base wages = ₹12,500
- Add-back (excess over 50% rule) = ₹750
- Total wages for ESI contribution = ₹13,250
For ESI purposes under COSS, your client should take ₹13,250 as the wage base.
- CTC = Basic + HRA + Employer PF = ₹26,500
- Included in wages = Basic ₹12,500
- Excluded components = HRA + Employer PF = ₹14,000
- 50% of CTC = ₹13,250
Since excluded components (₹14,000) exceed 50% of CTC (₹13,250), the excess ₹750 must be added back to wages.
Final ESI Wages
- Base wages = ₹12,500
- Add-back (excess over 50% rule) = ₹750
- Total wages for ESI contribution = ₹13,250
For ESI purposes under COSS, your client should take ₹13,250 as the wage base.
26 December 2025
Is this new rule for calculation of ESI applicable from DEC-25 ?
26 December 2025
Effective Date: ESIC notifications dated 10–11 December 2025 confirmed that the uniform wage definition under COSS is operational for ESI purposes from 21 November 2025.
• Definition of Wages: Basic pay, DA, retaining allowance included; allowances beyond 50% of CTC are added back to wages.
• Threshold: The ₹21,000 monthly wage ceiling for ESI coverage remains unchanged, but more employees may now fall under ESI because of the broadened wage definition.
• SPREE 2025 Drive: ESIC launched a compliance drive (SPREE 2025) with a registration window open until 31 December 2025, urging employers to reassess payroll and coverage.
• Definition of Wages: Basic pay, DA, retaining allowance included; allowances beyond 50% of CTC are added back to wages.
• Threshold: The ₹21,000 monthly wage ceiling for ESI coverage remains unchanged, but more employees may now fall under ESI because of the broadened wage definition.
• SPREE 2025 Drive: ESIC launched a compliance drive (SPREE 2025) with a registration window open until 31 December 2025, urging employers to reassess payroll and coverage.
26 December 2025
Practical Implications for Employers
• Payroll Structuring: Review salary splits — if allowances exceed 50% of gross, the excess must be treated as wages.
• Contribution Base: ESI contributions will likely increase for employees with allowance-heavy structures.
• Audit Risk: AO scrutiny will focus on wage bifurcation; explanatory notes and employee confirmations are critical.
• Coverage Expansion: Employees previously outside ESI (due to allowance-heavy pay) may now be covered, even without a change in the ₹21,000 threshold.
• Payroll Structuring: Review salary splits — if allowances exceed 50% of gross, the excess must be treated as wages.
• Contribution Base: ESI contributions will likely increase for employees with allowance-heavy structures.
• Audit Risk: AO scrutiny will focus on wage bifurcation; explanatory notes and employee confirmations are critical.
• Coverage Expansion: Employees previously outside ESI (due to allowance-heavy pay) may now be covered, even without a change in the ₹21,000 threshold.
26 December 2025
Compliance Strategy
• Immediate Action: Align payroll with the 50% rule effective 21 Nov 2025.
• Documentation: Maintain explanatory notes citing Section 2(88) of COSS and ESIC notifications.
• Employee Declarations: Secure confirmations on wage structure to pre‑empt disputes.
• Audit Preparation: Keep comparative payroll records (pre‑Nov 2025 vs post‑Nov 2025) to demonstrate compliance.
• Immediate Action: Align payroll with the 50% rule effective 21 Nov 2025.
• Documentation: Maintain explanatory notes citing Section 2(88) of COSS and ESIC notifications.
• Employee Declarations: Secure confirmations on wage structure to pre‑empt disputes.
• Audit Preparation: Keep comparative payroll records (pre‑Nov 2025 vs post‑Nov 2025) to demonstrate compliance.
27 December 2025
If COSS2020 and the Wages Act 2019 define "gross wages" as "CTC," which includes the employer PF contribution, then how do you calculate the employee or employer contribution to EPF? it considered 12% of INR 12500/- or 12% of INR 13250/-?
27 December 2025
Under the implemented COSS 2020 rules, the contribution for both EPF and ESI must be calculated on the adjusted wage of INR 13,250/-.
This ensures that "Wages" comprise at least 50% of the total CTC.
Therefore, the EPF contribution is 12% of INR 13,250/-.
This ensures that "Wages" comprise at least 50% of the total CTC.
Therefore, the EPF contribution is 12% of INR 13,250/-.
29 December 2025
But confusion arises. First, I consider EPF employer contribution as an allowance, and at that time, I compute EPF employer contribution at 12% of the basic, i.e., on INR 12500, and after adding up this amount as allowance, I again compute the EPF employer & employee contribution at 12% of the CTC, i.e., on i.e. INR 13250 ?
30 December 2025
So, as per new amendment you have to revise basic pay.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- ADT-3 AND ADT-1
- TDS on rent paid to NRI rate
- TDS Under Section 194IA Where More than one Buyer and More than one Seller
- Itr .….......
- FOREIGN GAIN AND LOSS
- E-way bill issue with two invoice
- Interest on Capital-Partnership Firm
- Mvat Reurn filling for Restaurant & Bar
- Inheritances Share Tax Implications
- STCG.........
- IRN was not generated for October-2025 Invoice but generated e waybill, now it is self identified,
- 80G deduction eligibility
- GST on Tobacco - as per new notification
- Cant amend a 26QB
- "Please ensure that the Total of the Deductions u/s 54F match the same in Table D in Sch CG"
- Composition Dealer GST Annual Return Filing process
- TDS under section 195.
- Filing GST Returns after death of proprietor
- Registered Required in GST Act
- Switch over to Composition Scheme
Trending Online Classes
-
Online GST Course - Master the Fundamentals of GST with Practical Insights
Ruhi Joshirao19 January 2026
CAclubindia
