ESI contribution rate reduced to 4%, Rs 5000 crore to be saved annually

Last Updated at: Jan 10, 2020
ESI contribution rate reduced to 4%, Rs 5,000 crore to be saved annually

Key points

  • Rate of contribution reduced to 4% from 6.5%, effective from July 1, 2019
  • Expected to bring annual savings of Rs 5,000 crore
  • Would be beneficial for nearly 12.85 lakh employees

The Central government has announced a reduction in the rate of contributions by employers and employees towards Employee State Insurance scheme of 4% from the existing 6.5%, effective from July 1, 2019. Nearly 3.6 crore employees and 12.85 lakh employers are said to benefit from this move, which would bring annual savings of Rs 5,000 crore.

In a government press release, the Labour Ministry said, “The government has taken a historic decision to reduce the rate of contribution under the Employees’ State Insurance Act from 6.5% to 4% (employers’ contribution being reduced from 4.75% to 3.25% and employees’ contribution being reduced from 1.75% to 0.75%”.  

The ministry also said that the reduction will bring relief to workers and more workforce into the formal sector. In addition, it is expected to reduce the financial liability of establishments, thereby leading to ease of doing business.

The ESI Act provides medical, cash, maternity and other dependent benefits to employees funded by the contributions made by employers and employees. Employees earning up to Rs 21,000 are covered under ESI. The wage ceiling was increased to Rs 21,000 from Rs 15,000 in December 2016 with the aim to increase the formal workforce.

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According to the Labour Ministry data, 36 million employees were insured under the scheme 2018-19 with the total contribution being Rs 22, 279 crore.

A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.