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 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.

Generally, India’s social security schemes cover the following types of social insurances:

• Pension
• Health Insurance and Medical Benefit
• Disability Benefit
• Maternity Benefit
• Gratuity

While a great deal of the Indian population is in the unorganized sector and may 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 a minimum of 10 or more employees, and some from companies with 20 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.

Pension or Employees’ Provident Fund

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 in India. 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 (PSUs).

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 15,000 rupees (Rs) 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 Rs 15,000 (US$232) only. 

The Employees’ Provident Fund Organization includes three schemes:

1. The Employees’ Provident Fund Scheme (EPF), 1952—contributed to by the employer (1.67%-3.67%) and the employee (10%-12%)
2. The Employees’ Pension Scheme (EPS), 1995—contributed to by the employer (8.33%) and the government (1.16%) but not the employee
3. The Employees’ Deposit Linked Insurance Scheme (EDLI), 1976—contributed to by the employer (0.5%) only

These four main types of pension (all monthly) are offered:

1. Pension upon superannuation or disability;
2. Widow’s pension for death while in service;
3. Children’s pension; and,
4. 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 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.

The ESI (Central) Amendment Rules, 2016–notified on December 22, 2016–expanded coverage to include employees earning Rs 21,000 (US$313.53) or less in a month from January 1, 2017; previously, the wage limit for ESI subscribers was Rs 15,000 per month. Subsequently, the Employees’ State Insurance (Central) Amendment Rules, 2017, was notified on January 20, detailing new maternity benefits for women who have insurance.

Sickness benefit under ESI coverage is 70% of the average daily wage and is payable for 91 days during two consecutive benefit periods. 

Disability Benefit

The Employee’s Compensation Act, 1923, formerly known as the ‘Workmen’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 Employee’s Compensation Act. 

Compensation calculation depends on the situation of occupational disability:

(a) Death—50% of the monthly wage multiplied by the relevant factor (age) or an amount of Rs 80,000 (US$1,246.20), whichever is more.

(b) Total permanent disablement—60% of the monthly wage multiplied by the relevant factor (age) or an amount of Rs 90,000 (US$1,401.98), whichever is more.

Maternity Benefit

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 is 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 who opt to use a surrogate. 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 more than 50 employees must provide crèche or day care 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 came into effect from July 1, 2017.

The Maternity Benefit (Amendment) Act introduces the option for women to negotiate work from home arrangements, 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 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 Rs 3,500 (US$54.45).

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.

Gratuity

The Payment of Gratuity Act, 1972 directs establishments with 10 or more employees 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.

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 is calculated through the formula mentioned below:

Gratuity = Last Drawn Salary × 15/26 × Years 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.
• Years of Service are 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 Rs 10 lakh or US$15,467.62). It is important to note that 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.

This article was first published on India Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at [email protected]. Further information about our firm can be found at: www.dezshira.com.