India’s labour law framework has undergone its most significant transformation in decades. With the Code on Social Security, 2020 formally notified on 21 November 2025, the legacy Employees’ State Insurance (ESI) Act, 1948 has been repealed. For HR professionals and business owners, 2026 marks the first full compliance year under the new regime.
1. The Core Shift: Redefining “Wages”
The biggest change is not the contribution percentage but what you pay it on.
Under the old regime, ESIC was calculated on Gross Salary. Now, it follows the uniform Section 2(88) definition of Wages:
Wages = Basic Pay + Dearness Allowance + Retaining Allowance
The 50% Rule
To prevent salary structuring that minimizes contributions, the Code mandates:
- If allowances (HRA, overtime, bonus, etc.) exceed 50% of Gross Salary, the excess is added back to “Wages” for ESIC calculation.
Example:
- Gross Salary = ₹25,000
- Basic = ₹10,000
- Allowances = ₹15,000
Allowances exceed 50% of Gross (₹12,500).
Excess = ₹2,500 → added back to Basic.
So, Wages for ESIC calculation = ₹12,500.
Note: ESIC contributions are calculated on “Wages” under Section 2(88), not on CTC. CTC is an HR construct that includes employer liabilities and benefits, whereas statutory compliance is tied to Gross Salary and Wages.
2. Expanded Coverage: Who Is Included Now?
The Code has widened ESIC’s scope:
- Nationwide Implementation: ESIC now extends to all districts, removing the earlier “notified area” restriction.
- Gig & Platform Workers: For the first time, gig and platform workers are recognized under the Code. Their inclusion is being phased in through schemes financed by aggregators and the government via the Social Security Fund.
- Hazardous Occupations: Establishments engaged in hazardous work are covered even if they employ fewer than 10 workers.
3. Contribution Rates & Wage Ceilings (Current vs. Proposed)
| Feature | Current (Feb 2026) | Status |
| Wage Ceiling | ₹21,000 per month | Proposal to raise to ₹30,000 is under review in the 2026 Budget. Not yet law. |
| Employee Rate | 0.75% of Wages | No change. |
| Employer Rate | 3.25% of Wages | No change. |
| Exempted Limit | Employees earning ≤ ₹176 daily | Exempt from employee contribution. Employer contribution still applies. |
Employers should continue applying the ₹21,000 ceiling until an official notification confirms any change.
4. Benefit Enhancements: More Than Just Medical
The Code hasn’t just expanded coverage—it has deepened protection:
- Dependent Coverage: The definition of “family” now includes dependent parents-in-law and, in specific cases, grandparents.
- Unemployment Benefit: Through schemes like Atal BimitVyakti Kalyan Yojana, workers who lose jobs receive financial support directly into Aadhaar-linked bank accounts.
5. Compliance Strategy for 2026
- Audit Salary Structures: Ensure Basic + DA is at least 50% of Gross Salary.
- Digital Integration: Sync employee data with the Shram Suvidha portal, as inspections now rely on digital triggers under the Inspector-cum-Facilitator model.
- Internal Audit: Conduct quarterly reviews of payroll structures to ensure compliance.
- Policy Updates: Update HR manuals and employee communication to reflect new ESIC rules.
FREE – ESIC Compliance Checklist
- Salary Structure
- Basic + DA ≥ 50% of Gross Salary.
- Excess allowances added back to Wages.
- Coverage
- ESIC applies nationwide.
- Hazardous occupations covered even with <10 employees.
- Gig/platform workers phased in via Social Security Fund.
- Contributions
- Employee: 0.75% of Wages.
- Employer: 3.25% of Wages.
- Wage ceiling: ₹21,000 (proposal for ₹30,000 under review).
- Employees ≤ ₹176 daily wage exempt from employee contribution (employer share still payable).
- Benefits
- Expanded family definition: parents-in-law, grandparents (if dependent).
- Unemployment benefits via Aadhaar-linked accounts.
- Compliance Practices
- Sync data with Shram Suvidha portal.
- Train HR/payroll staff on new wage definition.
- Document compliance steps for audit readiness.
Disclaimer: This article is intended solely for educational and informational purposes. It does not constitute legal advice, statutory interpretation, or a substitute for professional consultation. The provisions of the Code on Social Security, 2020 and related ESIC notifications are subject to frequent amendments, clarifications, and judicial review. Employers and HR professionals are advised to verify the latest circulars, Gazette notifications, and scheme guidelines before implementing any payroll or compliance changes. For organization-specific structuring, please consult a certified Labour Law Consultant or Legal Practitioner. Reliance on this content without professional vetting may expose your establishment to compliance risks, penalties, or retrospective liabilities.