Social Security System in India

Social insurance overview

India’s social security system is composed of a number of schemes and programs spread throughout a variety of laws and regulations. The government-controlled social security system applies to only a small portion of the population.

Contributing Advisor

Nidhi Mittal

Assistant Manager, Corporate Accounting Services

The social security system in India includes not just an insurance payment of premiums into government funds (like in China) but also lump sum employer obligations.

India’s social security schemes cover the following types of social insurance:

• Employee provident fund (EPF);
• Health insurance and medical benefits;
• Disability benefit;
• Maternity benefit; and
• Gratuity.

The applicability of mandatory contributions to social insurance is varied. Some social insurance requires 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.

Employee Provident Fund (EPF)

The employer contributes 12 percent of the basic salary against EPF. It is a statutory obligation on the part of the employer. The employee gets the benefit of a PF deduction (12% of basic) on their part. The employer also keeps PF administration (0.85% of basic salary) as part of CTC, which the employer needs to pay to RPFC in addition to 12 percent of basic salary.

Contributions to the EPF scheme are obligatory for both the employer and the employee when the employee is earning up to INR 15,000 per month and voluntary when the employee earns more than this amount.

Contribution options:

• Contribute INR 1,800 per month: A fixed contribution irrespective of the basic salary.
• Contribute 12 percent of basic salary: Ideal for higher salary earners aiming to maximize contributions.

Tax benefits: Contributions are eligible for tax deductions under Section 80C of the Income-tax Act, 1961. Further, a company can voluntarily apply for the PF scheme at any juncture, eliminating the need for a mandatory 20-employee threshold.

Registration process: To initiate PF registration, a company needs to secure the following documentation:

1. Consent in Form 11 from every employee must include the employee’s signature.
2. The EPF specimen sign card has three signatures from the director in the employer's name.
3. Specific documents, which include company letterhead, copy of PAN Card and Aadhaar Card of employer and company, rental agreement or ownership proof of the company premises, list of employees with father’s name, designation, and salary, copy of GST certificate, list of machinery if it is a manufacturing enterprise, employees’ respective Aadhaar Card, bank account details, and mobile number, etc.

The registration process typically spans 10-15 days, after which login credentials are issued for streamlined compliance.

Upon PF implementation, the company is advised to ensure the salary structure of the employees incorporates provident fund components, which is a cost-to-company (CTC), and communicate any changes to employees.

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 only. For establishments that employ less than 20 employees or meet specific conditions as notified by the Employees’ Provident Fund Organization (EPFO) under the Ministry of Labor and Employment, the contribution rate for both the employee and employer is limited to 10 percent.

Private sector and government employees with contributions of more than INR 250,000 and INR 500,000, respectively, would be liable to pay tax.

For individual taxpayers in the highest 30 percent tax bracket – the interest income on contributions above INR 250,000 will get taxed at the marginal tax rate.

Health insurance and medical benefit

India has a national health service, but this does not include free medical care for the whole population. 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.

Coverage under the ESI scheme has been extended to:

• Hotels;
• Shops;
• Cinemas and preview theaters;
• Restaurants;
• Newspaper establishments; and
• Road-motor transport undertakings.

The scheme has also been extended to private educational and medical institutions that have employed 10 or more employees. This is applicable in certain states and union territories only.

The ESI scheme offers benefits to both the workers and their dependents in case of any unfortunate eventualities at work. Employees or workers employed in the above-mentioned categories earning wages up to INR 21,000 per month (up to INR 25,000 per month in case of a person with a disability) are entitled to this social security scheme.

Eligible workers contribute 0.75 percent of their salary towards the ESI, while the employer pays 3.25 percent – making a total contribution of 4.5 percent. The company or establishment can apply for an ESI registration within 15 days from the time the ESI Act becomes applicable to that entity.

Further, daily wage earners earning an average wage of up to INR 137 are exempted from payment of contribution. Employers, however, are mandated to contribute their own share in respect of these employees.

Sickness benefit under ESI coverage is 70 percent of the average daily wage and is payable for 91 days during two consecutive benefit periods. To qualify for sickness benefits, the insured worker must contribute for 78 days in a contribution period of six months. There are provisions for extended sickness benefits and corresponding eligibility criteria.

ESI also provides disablement benefit, which is applicable from day one of entering insurable employment for temporary disablement benefit. In the case of permanent disablement benefit, it is paid at the rate of 90 percent of the 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 payouts, 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; and
• Skill upgrade training under Rajiv Gandhi Shramik Kalyan Yojana (RGSKY).

Disability benefit

The Employer has to pay compensation to employees or their families in cases of employment-related injuries that result in death or disability.

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.

The wage amount for the calculation of compensation to workers is INR 15,000 (US$205).

It’s mandatory for employers to inform their employees of their rights to compensation, 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:

• Death: 50 percent of the monthly wage multiplied by the relevant factor or an amount of INR 120,000 (US$1,640), whichever is more.
• Total permanent disablement: 60 percent of the monthly wage multiplied by the relevant factor or an amount of INR 120,000 (US$1,640), whichever is more.

Maternity Benefit

Women in the organized sector get 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 12-week period in these cases will be calculated from the date the child is handed over to the adoptive or commissioning mother.

An establishment with over 50 employees must provide crèche facilities within easy distance, which the mother can visit up to four times a day.

Women have the option to negotiate work-from-home if they reach an understanding with their employers after the maternity leave ends.

Every woman is entitled to, and her employer is liable for, the payment of maternity benefits 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). In the event of a 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).

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 obligations under the law;
• Develop systems, processes, and policies to allow working mothers to work from home;
• Develop the infrastructure for mandatory crèche facilities for working mothers; and
• Devise a non-discriminatory performance appraisal system taking acknowledges the absence of female employees.

Employers must 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 of up to one year, a fine of INR 5,000 (US$66), or both.

Gratuity

Establishments with 10 or more employees must 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.

Gratuity is provided as a lump sum payout by a company. In the event of the death or disablement of the employee, the gratuity must still be paid to the nominee or the heir of the employee. 

The employer can, however, reject the payment of gratuity to an employee if the individual has been terminated from the job due to any misconduct. In such a case of forfeiture, there must be a termination order containing the charges and the misconduct of the employee.

Gratuity calculation formula

Gratuity = Last Drawn Salary × 15/26 × Tenure of Service, where:

• The ratio 15/26 represents 15 days out of 26 working days in a month.
• Last Drawn Salary = Basic Salary + Dearness Allowance.
• Tenure of Service is rounded up or down to the nearest full year. For example, if the employee has a total service of 10 years, 10 months, and 25 days, 11 years will be factored into the calculation.

Gratuity is exempt from taxation provided that the amount does not exceed 15 days’ salary for every completed year of service calculated on the last drawn salary (subject to a maximum of INR 2 million). 

An employer can choose to pay more gratuity to an employee, which is known as ex-gratia and is a voluntary contribution. Ex-gratia is subject to tax.

Social security agreements (SSAs)

India has concluded various Social Security Agreements (SSAs) to ease the social security obligations on cross-border/international workers. Under these SSAs, incentives such as detachment, exportability of pension, totalization of benefits, and withdrawal of social security benefits are available.

India has entered into SSAs with the following countries/territories:

Social security for international workers India’s social security system provides pension and retirement benefits to workers in factories and ‘covered establishments’ – defined as establishments employing 20 or more employees.

IIWs (other than excluded employees) have to contribute 12 percent of their salary. Employers have to contribute 12 percent of their employees’ specified salary to this scheme. The contribution must be deposited monthly by the 15th of the subsequent month.

Conditions where IWs are excluded from contributing towards PF in India:

• If they contribute to the social security system in their country/jurisdiction of origin and have obtained a Certificate of Coverage (COC) under the relevant SSA; or
• If they are deputed from a country/jurisdiction with which India has entered into a bilateral comprehensive economic agreement before October 1, 2008; or
• If they are a Nepalese national on account of the Treaty of Peace and Friendship of 1950 OR a Bhutanese national on account of the India-Bhutan Friendship Treaty of 2007 – upon either case being deemed as equivalent to Indian workers.

Withdrawal of contributions to social security schemes

IWs can claim their social security savings upon termination of employment or reaching retirement age in India. To determine eligibility, employees from countries/jurisdictions with whom India has an SSA need to examine the agreement’s conditions; similarly, employees from countries/jurisdictions with whom there is no SSA with India need to assess their entitlement to social security contributions.