India’s social security system is composed of a number of schemes and programs spread throughout a variety of laws and regulations. Generally, India’s social security schemes cover the following types of social insurances:
- Employee provident fund
- Health insurance and medical benefit
- Disability benefit
- Maternity benefit
The applicability of mandatory contributions to social insurances is varied. Some of the social insurances require employer contributions from all companies, some from companies with a minimum of ten or more employees, and some from companies with twenty or more employees.
Businesses should note that when The Code of Social Security, 2020 – one of the four new labor codes introduced by the Ministry of Labor and Employment – comes into force, it will subsume the following enactments:
- The Employees’ Compensation Act, 1923;
- The Employees’ State Insurance Act, 1948;
- The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952;
- The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959;
- The Maternity Benefit Act, 1961;
- The Payment of Gratuity Act, 1972;
- The Cine- Workers Welfare Fund Act, 1981;
- The Building and Other Construction Workers Welfare Cess Act, 1996; and
- The Unorganised Workers’ Social Security Act, 2008
Employee Provident Fund
Employee provident fund (EPF) is a retirement savings scheme that the government has mandated for all salaried employees in India. The funds deducted from your salary as provident fund (PF) goes to your PF account, which is maintained by the Employee Provident Fund Organization (EPFO). All organizations in India that have more than 20 employees are required to register with EPFO.
Contributions to the EPF are obligatory for both the employer and the employee when the employee is earning up to INR 15,000 (US$197) per month. If the pay of any employee exceeds this amount, the contribution payable by the employer will be limited to the amount payable on the first INR 15,000 (US$197) only.
The contribution paid by the employer is 12 percent of basic wages plus dearness allowance and retaining allowance. An equal contribution is payable by the employee also. For establishments that employ less than 20 employees or meet specific conditions as notified by the EPFO, the contribution rate for both the employee and employer is limited to 10 percent.
It should be noted that not all of the employer’s share moves into the EPF. Out of employer’s contribution, 8.33 percent will be diverted to employees’ pension scheme (EPS), but it is calculated on INR 15,000 (US$197). So, for every employee with basic pay equal to INR 15,000 (US$197) or more, the INR 1,250 (US$16.5) is deposited each month into EPS.
The EPFO allocates a Universal Account Number (UAN) for all employees covered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The UAN is linked to the employee’s EPF account and will remain portable throughout the lifetime of an employee. This means that there is no need to transfer an EPF account at the time of changing jobs.
Tax on EPF contributions announced
Starting from the 2021-22 fiscal year, the government intends to tax interest on contributions made in excess of INR 250,000 for private sector employees and INR 500,000 for government employees. Separate accounts will thus need to be maintained for the provident account fund for 2021-22 and subsequent years – for the respective taxable and non-taxable contributions made by the individual.
Rules to enforce these were notified by the Ministry of Finance on August 31, 2021. They were previously announced in the federal budget in February 2021.
The EPFO, however, is yet to formalize the separation of taxable and non-taxable contribution in their accounts.
The CBDT stated that the taxable contribution account will consist of contributions made by the individual during the previous year (2021-22) and subsequent years in excess of the threshold limit.
Tax amendment in effect from 2022
The Income-Tax Rules, 1962 has been amended with the insertion of Rule 9D – which will come into effect from April 1, 2022.
According to Rule 9D, income through interest accrued during the previous year that is not exempt shall be computed as the interest accrued during the previous year in the taxable contribution account. Separate accounts within the provident fund account shall be maintained during 2021-2022 and subsequent years for an individual’s taxable contribution and non-taxable contribution.
For individual taxpayers in the highest 30 percent tax bracket – the interest income on contribution above INR 250,000 will get taxed at the marginal tax rate.
Health insurance and medical benefit
The Employees’ State Insurance (ESI) Act creates a fund to provide medical care to employees and their families, as well as cash benefits during sickness and maternity, and monthly payments in case of death or disablement for those working in factories and establishments with 10 or more employees.
The ESI Act under the labor ministry covers employees with salary up to Rs 21,000 (US$276). Aiming to increase the country’s formal workforce, the government had raised the wage ceiling in December 2016 to Rs 21,000 (US$276) from Rs 15,000 (US$197).
Sickness benefit under ESI coverage is 70 percent of the average daily wage and is payable for 91 days during two consecutive benefit periods.
ESI also provides disablement benefit, which is applicable from day one of entering insurable employment for temporary disablement benefit. In case of permanent disablement benefit, it is paid at the rate of 90 percent of wage in the form of monthly payment, depending upon the extent of loss of earning capacity as certified by a Medical Board.
Besides sickness and disability pay outs, the ESI provides for dependents’ benefits (DB). The DB paid is at the rate of 90 percent of the wage in the form of monthly payment to the dependents of a deceased insured person – in cases where the death has occurred due to employment injury or occupational hazards.
Other benefits that are offered with ESI are:
- Medical benefits
- Maternity benefits
- Unemployment allowance
- Confinement expenses
- Funeral expenses
- Physical rehabilitation
- Vocational training
- Skill upgradation training under Rajiv Gandhi Shramik Kalyan Yojana (RGSKY)
The Employee’s Compensation Act, 1923, requires the employer to pay compensation to employees or their families in cases of employment related injuries that result in death or disability.
In addition, workers employed in certain types of occupations are exposed to the risk of contracting certain diseases, which are peculiar and inherent to those occupations. A worker contracting an occupational disease is deemed to have suffered an accident out of and in the course of employment, and the employer is liable to pay compensation for the same.
Injuries resulting in permanent total and partial disablement are listed in parts I and II of Schedule I of the Employee’s Compensation Act, while occupational diseases have been defined in parts A, B, and C of Schedule III of the Act.
The amendment introduced in 2017, makes it mandatory for employers to inform its employees of their rights to compensation under the Act, either in writing or electronically, in a language understood by the employee. Failing to do this, the employer is liable to a penalty of INR 50,000 (US$657), which may be extended to INR 100,000 (US$1,314).
Compensation calculation depends on the situation of occupational disability:
- Permanent total disability – Permanent total disability is relevant when a worker can no longer perform any of their previous duties due to an on-the-job injury. This injury must be assessed to permanently affect the employee’s ability to perform their In this case, the worker is entitled to a minimum compensation of INR 140,000 (US$1,840) or 60 percent of their monthly wage multiplied by a factor based on the employee’s potential future earnings. The total payment can be significantly larger based on the age of the injured employee.
- Permanent partial disability – When an employee has sustained an injury that renders them unable to perform their role at the same capacity for the rest of their career, the employee is entitled to permanent partial disablement compensation. In this case, compensation is dependent upon the nature of the injury and the employee’s loss of earning capacity. The Act includes a schedule of possible permanent disability injuries and lists the loss of earning
- Temporary disability – Employees that sustain injuries that render them disabled, permanently or partially, for a temporary period are compensated through temporary disability. In this case, an injured worker will be paid 25 percent of their salary every two weeks, making monthly compensation fifty percent of total earned
- Death – In the case of a death, the worker’s immediate dependents are entitled to compensation. The compensation payable on death is INR 120,000 (US$1,578), or half the worker’s monthly wage multiplied by a factor based on the employee’s potential future earnings.
The Maternity Benefit (Amendment) Act, 2017 came into force on April 1, 2017, and increases some of the key benefits mandated under the previous Maternity Benefit Act of 1961. The amended law provides women in the organized sector with paid maternity leave of 26 weeks, up from 12 weeks, for the first two children. For the third child, the maternity leave entitled will be 12 weeks. India now has the third most maternity leave in the world, following Canada (50 weeks) and Norway (44 weeks).
The Act also secures 12 weeks of maternity leave for mothers adopting a child below the age of three months as well as to commissioning mothers (biological mothers) who opt for surrogacy.
The 12-week period in these cases will be calculated from the date the child is handed over to the adoptive or commissioning mother.
In other provisions, the law mandates that every establishment with over 50 employees must provide crèche facilities within easy distance, which the mother can visit up to four times a day. For compliance purposes, companies should note that this particular provision will come into effect from July 1, 2017.
The Maternity Benefit (Amendment) Act introduces the option for women to negotiate work- from-home, if they reach an understanding with their employers, after the maternity leave ends.
Under the pre-existing Maternity Benefit Act of 1961, every woman is entitled to, and her employer is liable for, the payment of maternity benefit at the rate of the average daily wage for the period of the employee’s actual absence from work. Apart from 12 weeks of salary, a female worker is entitled to a medical bonus of INR 3,500 (US$47.85).
The 1961 Act states that in the event of miscarriage or medical termination of pregnancy, the employee is entitled to six weeks of paid maternity leave. Employees are also entitled to an additional month of paid leave in case of complications arising due to pregnancy, delivery, premature birth, miscarriage, medical termination, or a tubectomy operation (two weeks in this case).
In addition to the above, the 1961 Act states that no company shall compel its female employees to do tasks of a laborious nature or tasks that involve long hours of standing or which in any way are likely to interfere with her pregnancy or the normal development of the fetus or are likely to cause her miscarriage or otherwise adversely affect her health.
Changes expected under the code on social security, 2020
- Inspector cum facilitators will be hired for the purpose of ensuring the rules of the Act are being They will be able to get information from employers about their female employees, regarding the kind of work they do and the wages they are paid, as well as enquire about any complaints they may have.
- Inspector cum facilitators will allow offending employers a period of time to begin complying with the rules of the Act by way of a written If they do so, no action will be taken against them.
- It will be ensured that female employees who work in the unorganized sector are able to establish their identities via their Aadhaar
- Employers who withhold maternity rights from their female employees will be fined INR 50,000 (approx. US$683) or be imprisoned for at least six months or
- If a female employee is denied maternity rights and she is part of a trade union under the Trade Unions Act of 1926, she is eligible to file a complaint with them that will be heard in any court of competent However, only the denied employee and the inspector cum facilitator can approach the court for help.
Compliance requirements for employers
- Review and amend employee maternity leave policies to reflect the expanded benefits under the Act.
- Update and include appropriate references with respect to maternity benefits in employment contracts – reflecting the new maternity benefit entitlements and obligation under the
- Develop systems, processes, and policies to allow working mothers to work from
- Develop the infrastructure for mandatory crèche facilities for working
- Devise a non-discriminatory performance appraisal system taking acknowledging the absence of female employees.
Taking into account the health and safety measures of new mothers, the Act also mandates employers to ensure that no woman works during the six weeks immediately following the day of her delivery or her miscarriage. It is also illegal for an employer to discharge or dismiss a woman employee on account of such absence.
Non-compliance can lead to imprisonment up to one year, or a fine of INR 5,000 (US$66), or both.
Alternative laws that provide maternity benefits in India.
Besides the Maternity Benefit Act, there are several other laws in India that provide for maternity benefits in India.
ESI provides maternity benefits to women in lower-income jobs. It is applicable to employees earning INR 21,000 (US$276) or less per month, with the employer contributing 4.75 percent and the employee contributing 1.75 percent. Those who qualify may receive maternity benefits under the ESI scheme instead of the Maternity Benefits Act.
Other laws offering maternity benefits include the Working Journalists (Conditions of Service) and Miscellaneous Provisions Act, 1955 that grants 12 weeks of maternity benefits and the Factories Act, 1948 that grants 12 weeks of maternity leave with full wages.
The Payment of Gratuity Act, 1972 directs establishments to provide the payment of 15 days of additional wages for each year of service to employees who have worked at a company for five years or more. To be eligible for gratuity, an employee needs to have at least five full years of service with the current employer, except in the event that an employee passes away or is rendered disabled due to accident or illness, in which case gratuity must be paid to the employee or their nominee.
It is applicable to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops, or other establishments with ten or more employees.
Gratuity calculation formula
Gratuity in India is calculated using the formula:
Gratuity = Last Drawn Salary × 15/26 × No. of Years of Service
- The ratio 15/26 represents 15 days out of 26 working days in a
- Last drawn salary = Basic Salary + Dearness Allowance.
- Years of Service are rounded down to the nearest full For example, if the employee has a total service of 20 years, 10 months and 25 days, 21 years will be factored into the calculation.