Statutory payments
This query is : Resolved
Prithwiraj Hait
(Querist)
13 June 2010
What should be the rate of ESI deduction from contractor's payment if material component is not segregated from labour (service is rendered in client's premises)?
In general rate of ESI deduction is 6.5% but on what ratio should it be apportioned?
In general rate of ESI deduction is 6.5% but on what ratio should it be apportioned?
CA. B.SRINIVASULU
(Expert)
13 June 2010
You have to estimate the labour value. Say 60% / 40% or 1/3 or 1/2 depending on the industry and practiability and on that amount you have to deduct 6.5% totally from the contractor.
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Prithwiraj Hait
(Querist)
13 June 2010
Yes sir.They are estimating labour and material on 60:40 ratio as most of the contracts were labour intensive.
But we found a bill where it was clearly mentioned "labour only" in this case can they apply 60:40 ratio and then deduct ESI @6.5% on labour component. I mean were they correct in doing so??
I think they should have deducted ESI on the entire Bill amount.
But we found a bill where it was clearly mentioned "labour only" in this case can they apply 60:40 ratio and then deduct ESI @6.5% on labour component. I mean were they correct in doing so??
I think they should have deducted ESI on the entire Bill amount.
25 July 2025
Great question about ESI deduction on contractor payments when the bill mentions **“labour only.”**
### What’s the correct approach?
* **If the bill clearly says “labour only,”** then the **entire bill amount** is considered as labour cost.
* Since ESI applies only on wages (labour component), the **full bill amount** should be subject to ESI deduction at **6.5%**.
* **No need to apply a labour-material ratio** in this case, because the material component is zero or nil.
---
### Summary:
| Bill Description | Labour-Material Split | ESI Deduction |
| ----------------------------------------- | ---------------------------- | --------------------------- |
| Labour + Material (mixed, no segregation) | Estimate ratio (e.g., 60:40) | 6.5% on labour portion only |
| Labour Only (as per bill) | 100% labour, 0% material | 6.5% on full bill amount |
---
### So, in your case:
* Deducting ESI @6.5% on only 60% labour part when bill says “labour only” is **incorrect**.
* Correct approach is to deduct ESI on **entire bill amount**.
---
### What’s the correct approach?
* **If the bill clearly says “labour only,”** then the **entire bill amount** is considered as labour cost.
* Since ESI applies only on wages (labour component), the **full bill amount** should be subject to ESI deduction at **6.5%**.
* **No need to apply a labour-material ratio** in this case, because the material component is zero or nil.
---
### Summary:
| Bill Description | Labour-Material Split | ESI Deduction |
| ----------------------------------------- | ---------------------------- | --------------------------- |
| Labour + Material (mixed, no segregation) | Estimate ratio (e.g., 60:40) | 6.5% on labour portion only |
| Labour Only (as per bill) | 100% labour, 0% material | 6.5% on full bill amount |
---
### So, in your case:
* Deducting ESI @6.5% on only 60% labour part when bill says “labour only” is **incorrect**.
* Correct approach is to deduct ESI on **entire bill amount**.
---
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