Labor Regulations, Welfare & Social Security

Social Security17

The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) provides for the retirement/old-age benefits in the form of a provident fund, superannuation pension, invalidation pension, family pension and deposit-linked insurance for employees in factories and other establishments. Furthermore, the Act provides for the payment of terminal benefits in various contingencies such as retrenchment, closure, retirement on reaching the age of superannuation, voluntary retirement, and retirement due to incapacity to work.

The minimum contribution as a percentage of the wage is shown below18

Scheme Employer’s contribution (ER) Employee’s contribution (EE)
Contribution accounts Administration accounts Contribution accounts Administration accounts
Provident fund Difference of EE share and Pension Contribution 0.50% [w.e.f. 1 June 2018] 12%/10% 0
Pension fund 8.33% NA Nil NA
Deposit-linked insurance fund 0.50% 0 [w.e.f. 1 April 2017] Nil 0

It applies to every factory and other establishments engaged in any industry employing 20 or more persons. This Act applies to all employees, including contract labor and part-time labor, drawing salaries up to INR 15,000 per month.

However, an employee who draws salary beyond INR 15,000 can also become a member of the fund voluntarily upon fulfillment of certain formalities by the employer.

For any establishment to be eligible for benefits,

  • The establishment or factory should already be covered and registered under the EPF Act
  • The total number of employees employed in the establishment should be up to 100 (one hundred), where 90% or more of such employees should be drawing monthly wages less than INR 15,00019.

Applicability for Expatriates and International Social

The Indian Government, vide Notifications GSR 705(E) and GSR 706(E) dated 1 October 2008, extended the Employees’ Provident Fund (EPF) and Pension Scheme to all ‘international workers.’ Besides Indian employees working overseas, an ‘international worker’ also includes an employee other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the EPF Act applies.

The EPF contribution is to be calculated on the total salary earned by the employee, whether received in or outside India. The expatriate will be required to contribute 12% of their basic salary + Dearness Allowance (DA), and the employer needs to contribute a similar amount. There is no upper cap on the contribution payable for an international worker.

Currently, India had signed social security agreements with 18 countries: Belgium, Germany, Switzerland, Denmark, Luxembourg, France, South Korea, Netherlands, Hungary, Finland, Sweden, Czech Republic, Norway, Canada, Japan, Austria, Portugal, and Australia. Six proposals are in the pipeline (with Spain, Thailand, Sri Lanka, Russia, Cyprus, and the USA).20 These agreements help workers by exempting them from social security contributions in case they are working on short-term contracts and allows for easy remittance of pension in case of relocation. Such agreements also prove beneficial for companies as exemption from social security contribution for their employees substantially reduces costs.

In the case of winding up of a company to which the EPF Act applies, the amount due from such company, whether in respect of the employee’s or employer’s contribution, is included among the debts to be paid on priority to all other debts. This payment will be preferential, provided the liability has accrued before the order of winding up is made.

The Payment of Gratuity Act, 1972 (Gratuity Act), provides for the payment of gratuity to employees. Gratuity is a lump sum payment to an employee on superannuation/ retirement, termination of service, resignation or on death or disablement due to accident or disease of the employee. Every employee, irrespective of his wage, is entitled to receive gratuity if he has rendered continuous service for five or more years.

However, in the case of death or disablement of an employee, the gratuity is payable even if the employee has not completed five years of service. This Act applies to every establishment employing 10 or more persons at any time during the year

The rate of gratuity payable to employees is 15 days’ salary for every completed year of service or a part thereof exceeding six months. , The maximum amount of tax-free gratuity is currently INR 2 million. Any amount more than this prescribed limit is taxable at the hands of the recipient21. However, the employer has the liberty to provide better terms of gratuity to the employee under the contract for employment.

Wages/salary under this Act means the last drawn wages and includes all payments earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment, excluding bonus, commission, house rent allowance, overtime wages, and any other allowance. The formula to calculate gratuity is as follows:

Gratuity = Monthly wage/26 x 15 days x Number of years of service

The Employees’ Compensation Act, 1923 (Employee Compensation Act), earlier known as the Workmen’s Compensation Act, provides for the payment of compensation to workmen for injury by accident arising out of and in the course of of his/her employment.

The Employee Compensation Act is applicable to factories and other risk-based industries as stated in the schedule of the Act.

However, in some states, this Act is also applicable to all other establishments. The amount of compensation varies depending on the age of the employee, whether the injury results in death or permanent disablement, nature of disablement, etc.

This Act requires the employer to send reports to the commissioner of any accident occurring on his premises that result in death or serious bodily injury except in cases where the factory is covered under the ESI Act.

The Employees’ State Insurance Act, 1948 (ESI Act), provides for benefits to employees in case of sickness, maternity, disablement, and death due to an employment injury or occupational hazard and provides for medical care to the insured employees and their families. It covers all employees including casual, temporary, and contract employees. This Act applies to factories using power and employing 10 or more people, and other establishments as notified by the appropriate government.

Presently, shops, hotels, restaurants, cinemas (including preview theaters), road-motor transport undertakings, newspaper establishments, and private medical and educational institutions are covered under the Act. The existing wage limit for coverage under the Act is INR 21,000 per month (with effect from 1 January 2017).22

The contribution payable to the Employees’ State Insurance Corporation with respect to an employee comprises the employer’s contribution and the employee’s contribution at a specified rate, which is revised from time to time. Currently, the employer is required to contribute 3.25% of the employee’s wages, and the employee’s contribution is 0.75% of his/her wages23. Wages mean all remuneration paid to the employee excluding the contribution paid by the employer to any pension or provident fund, traveling allowance, any amount paid to defray special expenses, and gratuity payable on discharge.

Get in Touch
Manik Abbott
Strategic Initiatives Management
(Greenfield, Market Research and Special Projects)

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