ESI applicability as per new Labour Codes

ESI applicability as per new Labour Codes

Blogs
December 01, 2025

ESI Applicability Update

India’s labour codes effective from 21 November 2025 introduce a uniform wage definition and a structured approach to remuneration. This shifts how establishments assess eligibility and compliance under social security frameworks such as ESI—particularly due to the 50% wage rule used for statutory computations.

Executive summary

Under the new wage definition approach, it is expected that more employees may come within ESI coverage without any revision to the existing threshold of ₹21,000, because wage computation is now framed around 50% of monthly gross wages in Part A, with exclusions and allowances structured across Parts B and C.

Key anchors

Effective date: 21 Nov 2025

ESI threshold: ₹21,000

Wage framework: Part A, B and C

Establishment strength: 10 or 20 (State-specific)

Old scenario before 21 November 2025

ESI Act, 1948 framework

The Employees State Insurance Corporation (ESIC), governed by the ESI Act, 1948, is a statutory body responsible for administering the Employees State Insurance (ESI) Scheme. The ESI Scheme is designed to extend medical and social protection benefits arising from sickness, disability, or workplace death to the insured person and dependent family members.

Establishment applicability

The ESI Act applies to offices, factories and establishments employing 10 or 20 persons depending on State applicability.

Employee eligibility threshold

Employee coverage was assessed using the monthly wage ceiling of ₹21,000 (and ₹25,000 for persons with disabilities).

The wage base for ESI eligibility typically included the basic and allowances sitting in the monthly salary structure, and contributions were computed on eligible wages as per prevailing rules.

New scenario after 21 November 2025

Wage definition shift

The above narrative was the existing scenario till 20 November 2025. With the implementation of the new labour codes on 21 November 2025, a new approach is expected to come into force depending on the speed of rule-making by the Central Government, which has been indicated as a 45-day timeline for issuing operational rules.

Under the revised wage definition across the Code on Wages and the Social Security Code, wage computation is structured with: Part A representing 50% of monthly gross wages, Part BPart C

Social security net may broaden without increasing the existing threshold of ₹21,000

It is felt by many that, due to the wage-definition shift, more employees beyond the earlier wage threshold may be drawn into ESI coverage for the first time. Key reasons commonly cited include:

Reason 1: 50% wage base interaction with the threshold

If an employee’s monthly gross is ₹42,000, then 50% wage base could be ₹21,000 and may align with the ESI threshold. Under the old approach, eligibility was typically assessed on gross wages, and such an employee would generally fall outside the threshold.

Reason 2: More employees inside the net at lower relative medical cost

With the eligibility lens moving towards a structured wage definition (Part A/B/C), the net may capture more employees who were earlier outside coverage, enabling access to ESI medical protections that can be more cost-effective than private healthcare.

Reason 3: Standardised wage definition and wider worker categories

The standardised wage definition is expected to influence inclusion of wider categories of workers, including gig, platform and unorganised sector workers, and similar implications may extend to provident fund schemes as well.

Reason 4: Mid-level and lower-level employees may see automatic coverage

Many mid-level and lower-level employees who were outside ESI coverage earlier due to gross wages above ₹21,000 may find coverage triggered under the new wage lens.

Reason 5: Employer compliance and processing obligations increase

This could increase employer compliance obligations and processing workload, with financial implications. For employees, it expands medical and social protection availability.

Reason 6: Government empowerment to expand sector coverage

The codes enable Government to include more industries from time to time, which is viewed as a notable development in recent decades.

ESIC circular updates highlighted (as shared)

ESIC issued a circular dated 28 November 2025 to its field and medical leadership noting that the Social Security Code, 2020 modifies definitions of dependent and family compared to the ESI Act, 1948, including widower and grandparent for dependent benefits, and including father-in-law and mother-in-law of a woman employee under the family definition for medical benefit.

Another ESIC communication instructed establishments to begin aligning wage computations with the revised wage definition. Many employers have also received SMS alerts directing wage calculation updates as per revised laws.

Payroll compliance readiness with Karma Global

Implementation support

Karma Global has already updated its payroll systems for the 50% rule. The necessity of being with Karma Global for Payroll Processing and Payroll Compliance offers:

Operational assurance

Guarantees timely and accurate salary processing and strengthens employee trust and satisfaction.

Risk and continuity

Minimizes the risk of legal penalties and compliance issues and supports consistent business growth and operational continuity.

Karma Global’s Payroll Compliance Services include

EPF and ESIC registration

Assisting in obtaining required EPF and ESI registration numbers.

Payroll processing

Managing payroll including tax deductions and salary disbursements.

Compliance filings

Preparation and submission of mandatory payroll-related documents.

Benefits administration

Managing Provident Fund, ESI and compensation claims for employees.

Payment and withdrawal management

Tracking contributions and settlements per statutory norms.

Regulatory updates

Keeping payroll aligned with evolving legal and statutory requirements.

Need help assessing ESI coverage impact and aligning payroll to the new wage definition?

For assistance, write to our team.

marketing@karmamgmt.com

Disclaimer: This page is an informational overview based on the content provided. Applicability and implementation may vary based on notified rules, establishment category and state-specific provisions.

ESI applicability as per new Labour Codes