The Employees’ State Insurance Corporation (ESIC) has issued a major circular on 10 December 2025, reshaping how ESIC applicability will be determined under the New Labour Codes. With the Code on Social Security, 2020 now operational across India, ESIC coverage will no longer depend on gross wages but on the new wage definition (Basic + DA). This shift is expected to bring lakhs of additional employees under ESIC coverage and force companies to restructure salary components to remain compliant. This article breaks down the new ESIC rule in simple terms, backed by statutory references and practical HR implications.
1. What the New ESIC Circular Says (2025 Update)
ESIC has clarified that:
ESIC applicability will now be calculated on “Wages” as defined under Section 2(88) of the Code on Social Security, 2020.
This means:
- ESIC coverage is not based on Gross Salary anymore
- It is now based on Basic + Dearness Allowance (DA)
- The wage ceiling of ₹21,000 continues, but the method of calculation changes
This is a structural shift because earlier employers could reduce ESIC liability by adjusting allowances.
Under the new rule, that is no longer possible.
2. Understanding the New Wage Definition (Section 2(88))
The New Labour Code defines “Wages” as:
- Basic Pay
- Dearness Allowance
- Retaining Allowance (if any)
All other allowances (HRA, Conveyance, Special Allowance, etc.) are excluded, but only up to a limit.
The 50% Rule
If allowances exceed 50% of total CTC, the excess amount must be added back to Basic for compliance.
This rule directly impacts ESIC calculations.
3. How the 50% Rule Impacts ESIC Applicability
Earlier:
ESIC was calculated on Gross Salary, which included all allowances.
Now:
ESIC is calculated on Basic + DA, but Basic cannot be artificially kept low.
Example:
If CTC = ₹25,000
Basic = ₹8,000
Allowances = ₹17,000
Allowances exceed 50% of CTC → excess = ₹4,500
So, revised Basic = ₹8,000 + ₹4,500 = ₹12,500
Since ₹12,500 < ₹21,000 → Employee becomes ESIC-eligible.
Due to that more employees will now fall under ESIC coverage.
4. Who Will Now Come Under ESIC?
Based on the new wage definition and circular:
Employees with Basic + DA ≤ ₹21,000
Even if their gross salary is ₹30,000–₹40,000, they may still fall under ESIC.
Employees with inflated allowances
Companies that kept Basic low to avoid ESIC will no longer be able to do so.
Contract workers, gig workers, and platform workers
The Code on Social Security expands coverage to new categories.
5. What HR & Employers Must Change Immediately
1. Recalculate ESIC eligibility using Basic + DA
Not gross salary.
2. Restructure salary to comply with the 50% rule
Basic must be at least 50% of total wages.
3. Update payroll software
Most payroll systems still calculate ESIC on gross.
4. Re-issue appointment letters if salary structure changes
To avoid disputes under the Industrial Relations Code.
5. Ensure compliance to avoid penalties
The new codes impose higher penalties for non-compliance.
6. Impact on Employees
More employees will get ESIC benefits, including:
- Medical care
- Sickness benefit
- Maternity benefit
- Disablement benefit
- Dependent benefit
Take-home salary may reduce
Because ESIC employee contribution (0.75%) will now apply to more employees.
7. Impact on Employers
Employer ESIC contribution (3.25%) will increase
Because more employees fall under ESIC.
Compliance burden reduces
The new labour codes consolidate 29 laws into 4 codes.
But payroll cost may rise
Due to higher ESIC liability.
8. Final Summary — What This ESIC Rule Means for 2025
The new ESIC circular marks a major shift in India’s social security landscape.
By linking ESIC applicability to the new wage definition, the government aims to:
- Expand social security coverage
- Prevent salary manipulation
- Ensure fair wages
- Improve employee welfare
For HR teams, payroll managers, and employers, salary restructuring is now mandatory, not optional.
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Disclaimer – This blog post is a general guide. It should not be considered legal advice. Consult a legal professional for more details.