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

Lalitha Rao

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;
• National Pension Scheme;
• Gratuity; and,
• Unemployment insurance.

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 under old tax regime only. 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 12 percent.

Private sector and government employees with interest on 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.

National Pension Scheme (NPS)

The National Pension Scheme (NPS), established by the Government of India, serves as a long-term investment avenue aimed at providing retirement income to its subscribers. Instituted under the guidance of the Pension Fund Regulatory and Development Authority (PFRDA), which was set up on October 10, 2003, NPS officially commenced on January 1, 2004. Initially, it catered exclusively to new government recruits (excluding armed forces personnel), but from May 1, 2009, it was extended to all citizens, including workers in the unorganized sector, on a voluntary basis.

NPS offers two types of accounts to cater to different needs:

1. Tier I Account: This is a mandatory retirement account with restricted withdrawal options. Contributions made to this account are primarily intended for retirement savings, and withdrawals are permitted only under specific conditions. It provides significant tax benefits under various sections of the Income Tax Act.
2. Tier II Account: This is a voluntary savings account with greater flexibility. Subscribers can withdraw funds from this account at any time without restrictions. However, contributions to the Tier II account do not qualify for tax benefits.

Eligibility

NPS is open to all Indian citizens between the ages of 18 and 60. This includes individuals from the public, private, and unorganized sectors. Even Non-Resident Indians (NRIs) are eligible to join the scheme. Key eligibility criteria include:

• Must be an Indian citizen (resident or non-resident) or an NRI.
• Age should be between 18 and 60 years.
• Compliance with Know Your Customer (KYC) norms.
• Legal competence to execute a contract as per the Indian Contract Act.

Tax benefits

NPS offers multiple tax advantages to encourage participation:

• Employees can claim deductions up to 10 percent of their salary (Basic + DA) under Section 80CCD(1), subject to a ceiling of Rs. 1.5 lakh under Section 80CCE. An additional deduction of Rs. 50,000 is available under Section 80CCD(1B). It is allowable only in old tax regime/
• Employer contributions are deductible up to 10 percent of salary under Section 80CCD(2), and for Central Government employees, this limit is 14 percent. It is allowable in new tax regime as well.
• Self-Employed Individuals can claim deductions up to 20 percent of their gross income under Section 80CCD(1), within the overall limit of Rs. 1.5 lakh under Section 80CCE, and an additional Rs. 50,000 under Section 80CCD(1B).
• Partial withdrawals up to 25 percent of the subscriber’s own contributions are tax-exempt under specific conditions as per Section 10(12B).
• Purchases of annuities at retirement are tax-exempt, although the subsequent pension is taxable. Withdrawals up to 60 percent of the corpus at retirement are tax-free under Section 10.

Withdrawal options

NPS offers structured withdrawal options designed to balance the need for liquidity with retirement income security:

• Upon superannuation (Retirement at 60): Subscribers can withdraw up to 60 percent of the accumulated corpus as a lump sum, which is tax-free. The remaining 40 percent must be used to purchase an annuity to ensure a regular pension.
• Pre-mature exit: If a subscriber exits NPS before reaching the age of 60, at least 80 percent of the accumulated corpus must be used to buy an annuity, while the remaining 20 percent can be withdrawn. If the total corpus is Rs. 2.5 lakh or less, the entire amount can be withdrawn without purchasing an annuity.
• Upon death: In the event of the subscriber's death, the entire corpus is paid to the nominee or legal heir.

Point of Presence (POP) are the first points of interaction for NPS subscribers. POPs are authorized entities such as public and private sector banks that facilitate the opening of NPS accounts. The National Securities Depository Limited (NSDL) functions as the Central Recordkeeping Agency, handling recordkeeping, administration, and customer service. Annuity Service Providers (ASPs) are responsible for delivering monthly pensions post-retirement.

Health insurance and medical benefit Information-Benefits | Employee's State Insurance Corporation, Ministry of Labour & Employment, Government of India (esic.gov.in)

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).

Ayushman Bharat Yojana

The Ayushman Bharat Yojana, also known as the Pradhan Mantri Jan Arogya Yojana (PMJAY), was launched by the Indian government in 2018 as a transformative health insurance program aimed at providing comprehensive healthcare coverage to the economically vulnerable segments of the population. Ayushman Bharat Yojana is designed to provide extensive health insurance coverage to low-income families. The scheme offers:

• Each eligible family is entitled to a health insurance cover of up to ₹5 lakh annually. This coverage applies to both secondary and tertiary care hospitalization, encompassing a wide range of medical treatments and procedures.
• Beneficiaries can avail of cashless treatment at any empaneled public or private hospital across India. This feature ensures that patients do not have to pay out-of-pocket at the time of hospitalization.
• The benefits under Ayushman Bharat Yojana are portable across the country, allowing beneficiaries to receive treatment at any empaneled hospital, regardless of their state of residence.
• The scheme covers various medical expenses, including pre-hospitalization and post-hospitalization costs, surgeries, critical illnesses, and chronic conditions. It also includes treatments like knee replacements, heart bypass surgeries, cancer treatments, and more.
• A network of empaneled hospitals, both public and private, ensures that beneficiaries have access to quality healthcare services across the nation.

Eligibility criteria

Eligibility for Ayushman Bharat Yojana is determined based on socio-economic factors and specific occupational categories. The criteria are:

• The scheme targets families identified through the SECC data. It focuses on families living below the poverty line (BPL) and those classified as deprived based on specific socio-economic indicators.
• In urban areas, the scheme covers workers in the informal sector such as street vendors, construction workers, domestic workers, and sanitation workers. These categories ensure that vulnerable workers in urban settings also benefit from the scheme.
• While the central eligibility criteria apply nationwide, some states may have additional criteria based on local socio-economic conditions.

Benefits offered

The Ayushman Bharat Yojana offers an array of benefits aimed at alleviating the financial burden of medical expenses for low-income families. By covering up to ₹5 lakh per family annually, the scheme provides a significant financial shield against high medical costs, reducing out-of-pocket expenditures for beneficiaries.

Beneficiaries have access to quality healthcare services across a network of empaneled hospitals, ensuring timely and appropriate medical attention. The scheme's implementation has led to job creation in the healthcare sector, contributing to economic growth and stability. By covering pre and post-hospitalization expenses, the scheme ensures a holistic healthcare experience for beneficiaries, addressing various aspects of medical care.

Social Security Code 2020

The Social Security Code 2020 aimed to consolidate and amend the laws relating to social security with a special focus on the unorganized sector. The Social Security Code, 2020, encompasses several important provisions designed to streamline and enhance the existing social security framework in India, namely:

• The Code applies across the entire country, ensuring uniformity in the implementation of social security measures.
• The Code specifies the applicability of various chapters to different establishments and sectors, as outlined in the First Schedule.
• Employers and employees can mutually agree to apply specific provisions of the Code to their establishment. This agreement, once notified by the Central Provident Fund Commissioner, brings the provisions into effect for that establishment.
• Establishments can opt-out of specific provisions if there is mutual agreement between the employer and the majority of employees, subject to approval from the Central Provident Fund Commissioner.
• The Central Government can extend the provisions of the Code to establishments employing a specified minimum number of employees, ensuring wider coverage.
• Once the Code's provisions are applied to an establishment, they continue to be in effect even if the number of employees falls below the specified threshold later.

Benefits for unorganized sector workers

The unorganized sector, which constitutes a significant portion of India's workforce, often lacks access to formal social security benefits. The Social Security Code 2020 aims to address this gap through several measures.

The Code extends social security benefits to unorganized sector workers, ensuring they are covered under schemes for provident funds, insurance, and maternity benefits. The Code also facilitates the portability of social security benefits, allowing workers to retain their entitlements even when they change jobs or move across regions.

The consolidation of multiple social security laws into a single Code simplifies compliance for employers, thereby encouraging them to extend benefits to unorganized sector workers.

Unemployment insurance in India

Unemployment insurance, or mostly known as The Rajiv Gandhi Shramik Kalyan Yojana, launched by the Employees' State Insurance Corporation (ESIC), is a social security measure designed to provide financial assistance to workers who have lost their jobs involuntarily. Named in honor of former Prime Minister Rajiv Gandhi, the scheme aims to mitigate the financial hardships faced by unemployed workers and their families.

Eligibility

To qualify for benefits under the RGSKY, workers must meet specific eligibility criteria:

• The worker should have been employed in an organization covered under the Employees' State Insurance (ESI) scheme for a minimum of two years prior to losing their job.
• The worker must have contributed to the ESI scheme for at least 78 days during each of the four consecutive contribution periods immediately preceding the date of unemployment.
• The job loss must be involuntary, meaning the worker should have been laid off or terminated due to reasons beyond their control. Voluntary resignation or dismissal due to misconduct does not qualify.
• In case of unemployment due to a health condition, the worker must provide medical certification validating the illness or injury that led to job loss.
• The worker should be continuously unemployed for at least one month to be eligible for the benefits.

Benefits

The RGSKY offers a range of benefits aimed at providing financial support and facilitating re-employment:

• Eligible workers receive a monthly unemployment allowance for a maximum period of 24 months. This allowance is calculated as a percentage of the average daily wages drawn by the worker during their last four contribution periods. Typically, the allowance is set at 50 percent of the average daily wages for the first 12 months and 25 percent for the remaining 12 months.
• During the period of unemployment, workers and their dependents continue to receive medical benefits under the ESI scheme. This includes access to outpatient and inpatient medical care, ensuring that health issues do not exacerbate the financial strain of unemployment.
• The scheme also provides opportunities for vocational training to help unemployed workers acquire new skills or upgrade existing ones. This training aims to enhance their employability and facilitate re-entry into the job market. The cost of such training is borne by the ESIC.
• Dependents of the unemployed worker continue to receive family welfare benefits, including maternity benefits, as applicable under the ESI scheme.
• The RGSKY includes provisions for job placement services, helping workers find new employment opportunities. These services include job fairs, placement drives, and career counseling sessions.

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). 

When gratuity is received upon a change of employment, it is fully taxable. The tax exemption applies only when gratuity is received at the time of retirement or upon leaving the employer due to resignation, termination, or death. If gratuity is received while switching jobs, the entire amount is considered taxable income.  

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.