The Tamil Nadu Spinning Mills Association (TASMA) on August 06, 2026, issued circular on ESI/EPF Administration in view of the coming in to force of Code on Wages 2019 and also Code on Social Security 2020.
The Code on Social Security, 2020 brings a major change to the definition of "Wages" under Section 2(88), creating a uniform standard for EPF/ESI contribution calculations. The rule is simple: all remuneration counts as "wages" unless specifically excluded, and only Basic Pay, Dearness Allowance, and any specifically named Retaining Allowance form the core wage. Exclusions include Bonus outside standard employment terms, House-Accommodation/light/water/medical amenities, employer PF/Pension contributions, Conveyance Allowance, HRA, and Overtime/Commission.
The critical safeguard is the 50% Rule: if excluded allowances (HRA, Conveyance, etc.) exceed 50% of total remuneration, the excess is automatically added back into "wages" for EPF/ESI purposes. This prevents companies from artificially inflating allowances to shrink their statutory contribution base — a common practice until now. Members are advised to review the enclosed ESIC Gujarat communication, which contains worked calculation examples, to correctly structure Wages vs. Allowances going forward.
An important side-effect: since Bonus and Gratuity are legally calculated only on Basic + DA (not allowances), any restructuring that raises Basic + DA to satisfy the 50% rule will also raise the Bonus/Gratuity liability — a real financial impact management should factor in.
Members should also reassess employees previously excluded from EPF (ceiling ₹15,000) or ESI (ceiling ₹21,000) based on the old low-Basic structure, as the new wage computation may now bring them within these schemes. Since coverage decisions will vary case-to-case, members are advised to plan salary splits carefully — ideally in a way that keeps additional Bonus/Gratuity costs manageable while making enrolment into EPF/ESI a smoother, more acceptable option.
[Circular No. 30/2026-27]
