Editor’s Note: The article was first published in March 2013 and has been updated on January 4, 2017 as per the latest regulations.
By Dezan Shira & Associates
India’s social security system is composed of a number of schemes and programs spread throughout a variety of laws and regulations. Keep in mind, however, that the government-controlled social security system in India applies to only a small portion of the population.
Furthermore, the generally accepted concept of the social security system includes not just an insurance payment of premiums into government funds (like in China), but also lump sum employer obligations.
Generally, India’s social security schemes cover the following types of social insurances:
- Health Insurance and Medical
While a great deal of the Indian population is in the unorganized sector and does not have an opportunity to participate in each of these schemes, Indian citizens in the organized sector (which include those employed by foreign investors) and their employers are entitled to coverage under the above schemes.
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 ten or more employees, and some from companies with twenty or more employees.
In this article, we’ll discuss each of these social insurances, along with their coverage, contribution rates, and the laws and regulations behind them.
The Employees’ Provident Fund Organization, under the Ministry of Labor and Employment, ensures superannuation pension and family pension in case of death during service. Presently only about 35 million out of a labor force of 400 million have access to formal social security in the form of old-age income protection. Out of these 35 million, 26 million workers are members of the Employees’ Provident Fund Organization, which comprises private sector workers, civil servants, military personnel, and employees of State Public Sector Undertakings.
The schemes under the Employees’ Provident Fund Organization apply to businesses with at least 20 employees. Contributions to the Employees’ Provident Fund Scheme are obligatory for both the employer and the employee when the employee is earning up to INR 15,000 (US$220) per month, and voluntary when the employee earns more than this amount. 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$220) only. Contributions should be made to the Employees’ Provident Fund Organization on an annual basis.
The Employees’ Provident Fund Organization includes three schemes:
- The Employees’ Provident Fund Scheme, 1952
- The Employees’ Pension Scheme, 1995
- The Employees’ Deposit Linked Insurance Scheme, 1976
The Employees’ Provident Fund Scheme is contributed to by the employer (1.67-3.67 percent) and the employee (10-12 percent).
The Employee Pension Scheme is contributed to by the employer (8.33 percent) and the government (1.16 percent), but not the employee.
Finally, the Employees’ Deposit Linked Insurance Scheme is contributed to by the employer (0.5 percent) only.
Four main types of pension (all monthly) are offered:
- Pension upon superannuation or disability;
- Widows’ pension for death while in service;
- Children’s pension; and
- Orphan’s pension.
In addition, there are separate pension funds for civil servants, workers employed in coal mines and tea plantations in the State of Assam, and for seamen.
Health Insurance and Medical
India has a national health service, but this does not include free medical care for the whole population. The Employees’ State Insurance 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.
In case of sick leave, the employer will pay half salary to the employees covered under the Employee’s State Insurance Act.
The Workmen’s Compensation Act requires the employer to pay compensation to employees or their families in cases of employment related injuries resulting 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. Occupational diseases have been defined in the Workmen Compensation Act in parts A, B, and C of Schedule III.
Compensation calculation depends on the situation of occupational disability:
50 percent of the monthly wage multiplied by the relevant factor (age) or an amount of INR 80,000 (US$1,163), whichever is more.
(b) Total permanent disablement
60 percent of the monthly wage multiplied by the relevant factor (age) or an amount of INR 90,000 (US$1,320), whichever is more.
The Compensation Act also includes stipulations for partial permanent disablement and temporary disablement (total or partial).
The Maternity Benefit Act requires an employer to offer 12 weeks wages during maternity as well as paid leave in certain other connected contingencies.
Every woman shall be entitled to, and her employer shall be liable for, the payment of maternity benefit at the rate of the average daily wage (the average of the woman’s wages payable to her for the days on which she has worked during the period of three calendar months immediately preceding the date from which she is absent on account of maternity), including the day of her delivery and for the six weeks immediately following that day.
The maximum period for which any woman shall be entitled to maternity benefit shall be 12 weeks, six weeks up to and including the day of her delivery, and six weeks immediately following that day.
During the one month proceeding the period of six weeks before her expected delivery or any period during that six week period for which she does not take a leave of absence, no pregnant woman shall be required by her employer to do any work that is arduous, involves long hours of standing or is in any way likely to interfere with her pregnancy or the normal development of the fetus, or is likely to cause her miscarriage or otherwise adversely affect her health.
Any woman working in an organization and allowed to maternity benefit may give written notice to her employer stating that her maternity benefit and any other benefits to which she may be entitled may be paid to her or to anyone she nominates in the notice, and that she will not work in any establishment during the period for which she receives maternity benefit.
On receipt of the notice, the company shall authorize the employee to absent herself from the company until the end of six week period following the day of her delivery.
The maternity benefit for the period preceding the date of her expected delivery shall be paid in advance by the company to the employee after having confirmed that she is pregnant. The amount due for the subsequent period shall be paid by the employer to the employee within 48 hours of the child’s birth.
In addition to the above, the act states that no company shall deliberately employ a woman in any organization during the six weeks immediately following the day of her delivery or her miscarriage. 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.
For establishments with ten or more employees, the Payment of Gratuity Act requires 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.
This article was originally published in the India Briefing Magazine, titled “Payroll Processing in India.” In this issue, we aim to help expatriate managers and business owners grasp the overall picture of how payroll works in India. We also discuss how outsourcing payroll can benefit all types of companies, particularly those of small and medium-size.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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