Provident Fund and Employee State Insurance – A detailed note

All the tax professionals are very familiar with the terms, contributions to various funds (i.e., provident fund, Employee state insurance, superannuation funds, gratuity fund or any other fund etc.) by employees as well as employers as per defined percentage in accordance with the respective law. However, this seems as a mandatory requirement by Statue for the below mentioned cases concerning welfare of employees after retirement. But still there are so many people who are in dilemma as to the proper treatment that in which cases these contributions are allowable as business expenditure and in which cases these are not allowed as per Income tax Act. So, after reading this article you will be familiar with the following question:

1. Familiar about the terms (Provident Fund and Employee State Insurance)

2. In which scenario these are mandatory?

3. What will be the rate of deduction and deposit to the Government in a time bound manner?

4. List of documents for registration under the Provident Fund and Employee State Insurance

5. What is the Registration Process?

6. And last and most important, what is the Income Tax perspective for an entity in relation to business expenditure?

7. Now I will try to provide you a brief about all the above mentioned things.

First let us understand basic terms

• The Provident Fund (PF)​ is an investment fund that is jointly established by the employer and employee to serve as a long-term savings to support an employee upon retirement. It also represents job welfare benefits offered to the employee.

Sources of money invested in the provident fund:

One is “Employee’s Contribution” – An amount will be deducted from the employee’s monthly salary.

Another is “Employer’s Contribution” – Just like a deduction from employee’s salary employer also contributes a fixed percentage of amount besides the usual salary payment made to the employee.

• The Employees’ State Insurance (ESI) Scheme is an integrated measure of Social Insurance embodied in the Employees’ State Insurance Act and it is designed to accomplish the task of protecting ’employees’ as defined in the Employees’ State Insurance Act, 1948 against the impact of incidences of sickness, maternity, disablement and death due to employment injury and to provide medical care to insured persons and their families.

 Sources of money invested in the Employee State Insurance:

One is “Employee’s Contribution” – An amount will be deducted from the employee’s monthly salary.

Another is “Employer’s Contribution” – Just like a deduction from employee’s salary employer also contributes a fixed percentage of amount besides the usual salary payment made to the employee.

Mandatory requirement in the following scenario

• The Provident Scheme applies to every establishment where an establishment consists of different departments or has branches, whether situate in the same place or in different places, all such departments or branches shall be treated as parts of the same establishment, which comprises of employees 20 or more persons and every such employer shall be required to be registered under the EPF on the government website known as “Employee Provident Fund Organization”.
• The Employee State Insurance Scheme applies to all factories and other establishment’s viz. Road Transport, Hotels, Restaurants, Cinemas, Newspaper, Shops, and Educational/Medical Institutions wherein 10 or more persons are employed. However, in some States threshold limit for coverage of establishments is still 20. Employees of the aforesaid categories of factories and establishments, drawing wages not more than Rs. 21,000/- a month and every such employer shall be required to be registered under the EPF on the government website known as “Employees’ State Insurance Corporation”

Rate of Percentage to be deducted and deposited

• Provident Fund: Employee’s contribution to EPF is 12% of salary whereas Employer’s contribution to EPF is 12% of salary. The definition of salary in respect of calculation of PF is Basic pay plus Dearness Allowance, and any other allowance (like House Rent Allowance, City Compensatory Allowance, Meal Allowance etc.) shall not be included.
• Employee State Insurance: Employee’s contribution to ESI is 0.75% of salary whereas Employer’s contribution to ESI is 3.25% of salary. For ESI calculation, the salary comprises of all the monthly payable amounts such as Basic pay, Dearness Allowance, City Compensatory Allowance, House Rent Allowance, Incentives (including sales commission), Attendance and overtime payments, Meal Allowance, Uniform Allowance and Any Other Special Allowances.

 Disclaimer: Rate of deduction may be varied from time to time, so rely on the above rate please first read the respective act.

Due date for payment of contribution amount

Provident Fund/Employee State Insurance contribution amount is to be deposited before 15^th of the month following the month in which deductions are made. That is, ESI contribution for the month of January, is to be deposited on or before the 15^th of February. However, Government can extend the due date according to situation if it is necessary to the public interest, as last year due to covid pandemic, government had to extend the due date for two months.

Due date for return filing

The entity that has PF registration have to file return monthly. Hence, the PF return filings are to be completed by the 25^th of each month.

The entity that has ESI registration have to file return half yearly. The ESI return filings for the period of April to September are to completed by 12^th November and for the period October to March are to be completed by the 12^th May.

List of documents required for registration under these fund

• Provident Fund/ Employee State Insurance:

For registration under both funds, almost same documents are required. So, following is an illustrative list of documents for your reference:

1. Shop and establishment Certificate/ GST Certificate/ License issued by the Government for factory/Articles of Association or Memorandum of Association

2. Company incorporation certificate/LLP registration certificate/ Partnership Deed

3. PAN Card of Proprietor/Partner/Director

4. Digital Signature Certificate of Proprietor/Partner/Director etc.

5. Aadhar Card of Proprietor/Partner/Director etc.

6. Cancelled Cheque/Bank Statements of the entity

7. PAN Card of the entity

8. Lease or rent agreement (if applicable)

9. Electricity Bill of the Registered Office (not older than 2 months)

10. Contact number and e-mail address of the entity.

Besides the above requirements, any other specific documents can also be demanded by the authority as per the status of the organization or the situation of the case.

Registration process

The process of PF/ESIC registration has become an easy task since it has shifted from manual registration to online registration. By following a few steps and verifying the testimonials, one can easily get registered in almost negligible time.

• Provident Fund:

Now try to understand the process of PF registration

Step 1: The first step is registering an entity on EPFO portal.

Visit the EPFO web portal for registering your entity. Select the option stating ‘Establishment Registration’ present on the home page of this unified portal.

Step 2: On clicking the ‘Establishment Registration’ option, the page will be redirected to the link https://registration.shramsuvidha.gov.in/user/register. Here on this link, there is a user manual available which you must download. This manual should be read thoroughly before registration if you are new to this process.

Step 3: After thoroughly reviewing this user manual, sign up on Unified Shram Suvidha Portal (USSP) of EPFO. The sign-up page of USSP will open when you click on the ‘Establishment Registration’ tab present on the home page. Then, click on the tab ‘Sign Up.’

On clicking the ‘Sign up button, you will be asked for your name, mobile number verification code, and email. Input all required details to create an account.

Step 4: Login to USSP and locate a tab stating ‘Registration For EPFO-ESIC v1.1’ situated on the screen’s left side. After this, choose an option displayed as ‘Apply for New Registration’ on the screen’s right side.

You will find two options on clicking, namely, ‘Employees’ Provident Fund and Miscellaneous Provision Act 1952’ and ‘Employees’ State Insurance Act 1948.’ As an employer, you will have to select the option stating ‘Employees’ Provident Fund and Miscellaneous Provision Act 1952’ and then click the ‘Submit.’

On clicking the button stating ‘Submit,’ the page featuring ‘Registration Form for EPFO’ will be displayed. Here you need to input employment details, branch or division, contact persons, establishment details, activities and identifiers.

Step 5: Now the Last Step is attaching DSC: After filling out the above registration form and attaching all required documents, the employer’s Digital Signature Certificate needs to be uploaded and affixed on this form. The Unified Shram Suvidha Platform will email you to confirm that EPF registration has been successfully completed on uploading the DSC.

• Employee State Insurance:

Now try to understand the process of ESIC registration

Step-1– The first step to get registered is to sign up in the ESIC portal. Signing up is easy as it is the first thing that pops up when any new employee opens the portal. Once you sign up with the required details, the first step is completed.

Step- 2– After signing up with the required details, the employee will receive a mail on his registered mail id, confirming the username and password provided. This username and password is very important, and it will help you open the portal as long as you are working under the organization.

Step-3– After the completion of signing up on the portal, the employee can log in with the username and password provided in the mail. Once you log in, a new page will open where the ‘registration form’ will appear for a ‘new employee’. This is the registration form that confirms your registration with ESIC. While filling up a form for ‘new registration’, the employee has to state the details of the organization along with the details of the employer. Once all the required information is provided, the employee has to click on the ‘submit button to complete the registration form’s filling.

Step-4– An employee is registered under the ESIC scheme only after the advance amount paid for the next six months. By clicking on the ‘payment ‘option and successfully following the payment procedure, the registration process will be completed.

Step-5– At this last step, the employee will receive the c-11 letter, which is the registered letter containing his unique registration number of 17 digits. This registration is generated by the ESIC system portal, which ensures that the employee is successfully registered for the ESIC scheme.

Hence let us understand about these terms as per Income tax perspective in relation to business expenditure

As per Income tax perspective we should know that the amount that has been deducted from employee’s fixed monthly salary and the employer’s own contribution, which is deposited to the government as per norms as defined in the Act, when it will be allowed as a business expenditure and when it will not be allowed as a business expenditure. Hence, to know about these in details we have to discuss about the following sections:

1. Section 43B(b) of Income Tax Act, 1961: As per this section, there are Certain deductions to be allowed only on actual payment, and one of them is, any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employee shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return

2. Section 36(1)(Va) of Income Tax Act, 1961: As per section 36 of, in which there is a list of other deductions, and one of them is, any sum received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date.

Explanation 1 of the above section: For the purposes of this clause, “due date” means the date by which the assessee is required as an employer to credit an employee’s contribution to the employee’s account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.

Explanation 2 of the above section: For the removal of doubts, it is hereby clarified that the provisions of section 43B shall not apply and shall be deemed never to have been applied for the purposes of determining the “due date” under this clause.

After reading the above both sections, we discuss about the relevance of these sections, so we discuss above that there are two way of contribution first is contribution by employee and the second is contribution by employer. And to check the allowability of the both way of contribution in respect of business expenditure, we have to check the due date and actual date of payment of such contributions.

So, first section (i.e. Section 43B) is applicable if the contribution is made by employer, that means the contribution paid by employer to various funds is allowable as deduction if it is paid before the due date of return as mentioned in sub-section (1) of section 139 of the Income tax Act, 1961.

Let us understand with an example, suppose employer have to pay as own contribution for the month of January, 2022 and the due date of return filing is 30^th September 2022. Now, to claim this expenditure as deduction, entity have to pay own contribution before the due date i.e. 30^th September, 2022.

However, this scenario is not same in the case of claim deduction in respect of employee’s contribution to various funds. The above second section tells us that if an entity have to claim the deduction of such employee’s share, then such entity have to pay before the due date of the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise.

Let us understand with the help of example, suppose entity have to pay employee’s contribution after collection from employees for the month of January, 2022 and the due date of such contribution as per relevant statue or act is 15^th February, 2022. Now, to claim this expenditure as deduction, entity have to pay employee’s contribution before the due date as defined in statue or act i.e., 15^th February, 2022.

However, I have seen so many cases that the same provision of section 43B is applied in case of Employee’s contribution, which is prima facie wrong.

Conclusion

In the whole article I tried to explain the most important point is that when Employee’s Contribution is allowed as business expenditure and when the Employer’s contribution is allowed as business expenditure in respect of Income Tax Act, 1961.

After reading the full article we have conclude that the employer’s contribution to be allowed as deduction if it is paid by entity before the due date of return filing under Income Tax Act, 1961 and the provision of section 43B will be applicable. And the same provision will not be applicable in case of employee’s contribution, so employee’s contribution is to be allowed as deduction if it is paid by entity before the due date as mentioned in respective act and not the due date of return filing under Income Tax Act.