In 2026, Indian payroll compliance looks very different.
For decades, HR teams and business owners determined ESIC eligibility by checking an employee’s gross salary. That approach is now outdated. Since the Code on Social Security, 2020 became fully operational in late 2025, the statutory yardstick is no longer “gross”, it’s the legal definition of wages under Section 2(88).
As a Senior Labour Law Consultant, I’ve seen that the most common compliance error today isn’t missing a payment, it’s using the wrong definition of wages.
Gross vs. Basic Pay: The New ESIC Test
If you are still calculating ESIC eligibility based on the old ₹21,000 gross pay threshold, you may be:
- Over-contributing for some employees, or
- Excluding others who should be mandatorily covered.
The real question is no longer “How much are they paid?” but “Which parts of their pay legally count as wages?“
1. The End of Allowance-Heavy Structures
Earlier practice: Employers often kept Basic Pay low (30–40%) and loaded the rest into allowances like HRA, Special Allowance, or Conveyance. This helped keep “ESI gross” below ₹21,000.
New reality: Under Section 2(88), wages are strictly defined as:
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance
The 50% Rule: If excluded allowances (HRA, commission, travel, etc.) exceed 50% of total remuneration, the excess is automatically added back into wages.
2. Why Gross Salary No Longer Decides ESIC
Old law: An employee earning ₹24,000 gross was simply “out of ESI.”
2026 law:
- If Basic + DA = ₹10,000 (less than 50% of CTC), the law reclassifies the structure.
- The recalculated “wages” may fall below ₹21,000 once exclusions are capped.
- Result: This employee could now be mandatorily covered under ESIC, despite a higher gross.
3. Compliance Checklist: The Key4Comply Strategy
To stay audit-ready:
- Audit the 50% Split
Ensure Basic + DA + Retaining Allowance = at least 50% of total remuneration. - Identify Exclusions Clearly
List HRA, overtime, and statutory bonuses separately. Remember: exclusions are valid only up to 50%. - Recalculate Eligibility
Test each employee’s wages (as per Section 2(88)) against the ₹21,000 ceiling. Apply this especially for employees earning between ₹20,000–₹30,000.
Why This Matters
- Audit Exposure: Misclassification can trigger penalties and back payments.
- Payroll Structuring: “Allowance-heavy” designs no longer shield employers.
- Future Updates: ESIC may issue clarifications on borderline cases (e.g., performance-linked incentives).
Disclaimer: This article is for educational purposes only and provides general information on the New Labour Codes in India. It does not constitute legal advice. Laws and government notifications are subject to change. Employers should consult a legal professional or compliance expert at Key4Comply for tailored guidance.