On 1 July 2019, the Indian government lowered the rate of contribution required under the Employees’ State Insurance (ESI) Act 1948 to reduce employers’ financial burden and increase employees’ take-home salaries. The ESI contribution rate was reduced from a total 6.5% of wages to 4%.
The ESI scheme applies to companies with a minimum of 10 employees (at least 20 employees in the state of Maharashtra). The scheme is funded by the contributions made by employers and employees. The contribution rates by employers were reduced from 4.75% to 3.25% of wages and by employees from 1.75% to 0.75% of wages. With these contributions, the scheme provides medical, cash, maternity, disability and dependent benefits to Indian workers earning a maximum of INR 21,000 per month.
The amendment aims to attract an increase of workers into the formal sector and therefore expand social security coverage to a larger part of the workforce. The government has been working towards this goal since 2016 when it increased the wage ceiling for coverage from INR 15,000 to INR 21,000 and extended the coverage to all districts in India.
According to government statistics, the lower contribution rates will benefit 36,000,000 employees and 1,285,000 employers. The Indian government is expecting that this change would eventually lead to enhanced ease of doing business for multinational employers and an improved compliance of law.