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India’s social security system is composed of several schemes and programs spread throughout a variety of laws and regulations including employment and labour laws. This section discusses the government-controlled social security system in India which largely comprise of employer obligations such as Pension Schemes, Health Insurance and Medical Benefit, Disability Benefit, Maternity Benefit, and Gratuity.
The section will briefly discuss various legislation (read compliances) to provide social security cover to employees including coverage, benefits, and application to foreign expatriates.
In India, the term “social security” is generally used in its broadest sense, to cover all types of measures, whether preventive, proactive, or protective. Social security is the protection given by society to its members against contingencies of modern life, such as sickness, unemployment, old age, disability, and industrial accidents. The term thus encompasses social insurance, social assistance, social protection, the social safety net, and other measures.
Social security has been recognized under the Constitution as a basic fundamental right of the citizens of India. Article 41 of the Constitution states that, “the State shall within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement and in other cases of undeserved want.”
The primary provisions of the various laws implementing India’s social security systems are discussed below, in the order of their enactment.
Employees may choose coverage under either the Employees’ Compensation Act or the Employees’ State Insurance Act (discussed immediately below), depending on which system will provide them greater benefits.
2. Employees’ State Insurance Act, 1948
The Employees’ State Insurance Act, 1948 (ESI Act) provides medical benefits to employees and unemployment insurance during their illness. The ESI Act also provides benefits to dependents. Employees may choose coverage under either this Act or the Employees Compensation Act where both Acts are applicable, depending on which system will provide them greater benefits.
Section 38 of the ESI Act makes it mandatory for all employees in factories and establishments covered under the said Act to be insured under the Act. An “establishment” is defined as any premises, other than the premises of a shop, in which any trade, business, manufacture, or any incidental work is carried on for profit and includes premises in which journalistic or printing work, banking, insurance, stocks, and shares, brokerage, or produce exchange is carried on. An “establishment” also includes premises used as theatres or cinemas or for any other public amusement to which the Factories Act, 1948, does not apply.
The ESI Act covers all employees—manual, clerical, or supervisory, and employees engaged by or through contractors—whose remuneration does not exceed 21,000 rupees a month. The definition of covered employees is broad enough to include administrative staff and persons engaged in purchase of raw materials or sale or distribution of products and related functions. The ESI Act also applies to the following:
*Note: The threshold for Coverage of establishments is still 20 employees in Maharashtra and Chandigarh.
Employees covered under the ESI Act and their dependents are entitled to the following benefits:
sickness; maternity; disability; dependents; funeral expenses.
Benefits are in the form of cash payments in the case of sickness, maternity, or employment injury, and in the form of a pension for dependents of workers who die of an employment-related injury.
Contributions are made both by the employer and the employee. All contributions paid under the ESI Act and all other money received on behalf of the Employees’ State Insurance Corporation (ESIC) is paid into the ESI Fund.
Under the ESI Act, contributions to the ESI Fund are made by the employer at the rate of 3.25 percent of the total wages paid to the employee, and by the employee at the rate of 0.75 percent of wages for every wage period. Contributions are paid into the ESI Fund.
Money in the ESI Fund is to be expended only for the following purposes:
The main objective of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act), applicable to all of India, is to ensure there is a compulsory provident fund, family pension fund, and deposit-linked insurance plan in factories and other establishments for the benefit of employees.
The EPF Act applies to factories that employ 20 or more persons and are engaged in the manufacture of items listed in Schedule I of the EPF Act. Apart from factories, the EPF Act also applies to other shops and establishments employing 20 or more persons, and also to those establishments that the central government may specify by notification in the Official Gazette. A factory or an establishment covered by the EPF Act must continue to comply with its provisions even if the number of workers falls below 20.
The Employees’ Provident Fund makes a payment to the employee at the time of his or her retirement or, in the case of the death of an employee before retirement, payment is made to members of the employee’s family of the amount the employee had accumulated in the Fund at the time of death. Employees also have right to withdraw the part of the fund for some emergency spending, subject to terms and conditions as prescribed.
The EPF Act provides for payment of contribution from both, employees and employers. The employee must contribute 12 percent of basic wages plus dearness allowance (regional cost-of-living allowance); excluded from the calculation are other allowances and the cash value of any food concession. The employer must make an equal contribution. Contributions are subject to a wage ceiling of 15,000 rupees per month, beyond which limit, employers have discretion to match the contribution of employees. The employer must deposit the contributions with the Employees’ Provident Fund Organisation (EPFO) through online banking.
d. Application to Foreign Expatriates
Expatriates working in India are obligated to contribute toward the Indian Employees’ Provident Fund unless they fall within the category of an “excluded employee.”
i. Social security agreements
In order to facilitate the balance of social contributions made by foreign expatriates deployed in India and by Indian nationals working in countries outside India, the Government of India has signed and is in the process of signing Social Security Agreements (SSAs) with different countries. After an SSA is signed, it must then be ratified by the respective country in order to become effective.
The Government of India has imposed a limitation on the withdrawal of Provident Fund balances by foreign expatriates. Under this limitation, foreign expatriates are able to withdraw the accumulated Provident Fund balance only at the age of 58 years and not at the end of their employment in India. In certain circumstances, an earlier withdrawal may be possible, such as the following:
Further, pursuant to the ratification of SSAs by some of the countries, foreign expatriates from those countries are exempt from the age 58 limitation.
ii. Employees Provident Fund (Fourth Amendment), 2012
The circumstances and the mode by which the payment is made to international workers was amended by the Employees Provident Fund (Fourth Amendment), 2012. Prior to this amendment, the payment made to an international worker covered under an SSA signed by India and any other country was governed by the terms and conditions of that agreement. However, subsequent to the amendment, payment is made to the international worker on his or her ceasing to be an employee in an establishment covered by the EPF Act.
The 2012 amendment also provides that the amount due to the member is payable in the payee’s bank account directly or through the employer. Prior to the amendment, payment was required to be made as per the terms specified in the applicable SSA.
e. Employees Provident Fund (Fifth Amendment) 2014
The Employees Provident Fund (Fifth Amendment), 2014, addresses the issue of the delay in the settlement of claims with respect to inoperative accounts and came into force with retroactive effect from April 1, 2011.
The 2014 amendment provides that, if the settlement of a claim with respect to an inoperative account is delayed for more than 30 days from the date of receipt of the application for settlement of the claim, interest must be credited to the account for any delay in excess of 30 days.
The Payment of Gratuity Act, 1972, provides for payment of a gratuity, usually given to employees on retirement, resignation, or death while employed. The Act provides financial support to the employee at the time of retirement and to surviving members of the family in cases of death. This payment plays a significant role in India, where income levels generally are low. Payment of this gratuity is required of all employers to whom the Payment of Gratuity Act is applicable.
To ensure compliance, the employer is required to submit a notice of opening an establishment in the prescribed form to the controlling authority of the area, providing the name and address of the establishment, employer, nature of business, and so forth.
The Payment of Gratuity Act applies to every factory, mine, oilfield, plantation, railway company, shop, or establishment employing 10 or more persons on any day of the preceding 12 months, and to other establishments or classes of establishments where 10 or more persons are employed during the same period, when the central government has provided notice in the Official Gazette to the establishments of their coverage under the Act.
The Payment of Gratuity Act covers all employees, doing any kind of work, manual or otherwise, irrespective of wage level. The Act excludes any person who holds a post under the central government or a state government and who is covered under any other Act or by any rules providing for payment of a gratuity.
The gratuity is payable to an employee upon termination of employment after continuous service of at least five years, on superannuation (reaching the age of mandatory retirement as fixed in the terms of service or employment contract), upon retirement under other circumstances, upon resignation, or upon death or disablement due to accident or disease.
In the case of death or disablement, an employer is liable to pay the gratuity to the legal heirs/nominees of the deceased employee even if the employee had not completed five years of service.
The employer is required to ensure that the amount of the gratuity to be paid is accurately ascertained. The gratuity is calculated at the rate of 15 days’ worth of wages (i.e., basic pay plus dearness allowance) for each completed year of service or part thereof in excess of six months. The 15 days’ worth of salary is calculated by dividing the salary earned in the final period by 26 days (not 30 days), then multiplying by 15, and then multiplying by the number of years.
The employer must arrange to pay the amount of the gratuity within 30 days from the date it becomes payable, failing which the employer is required to pay the gratuity along with interest from the date it was payable to the date on which it is paid, calculated at the rate specified by the central government.
In order to ensure guaranteed payment of the gratuity, the Payment of Gratuity Act provides for compulsory insurance of the liability. As a result, the cost of this benefit to employers is reduced. In addition, in the event of an employee’s death, irrespective of the length of service, the Act provides for insuring the gratuity from the time of death to what would have been the employee’s normal retirement age, subject to an overall ceiling of two million rupees.
The Employees’ Deposit-Linked Insurance System, 1976, applies to the employees of all factories and other establishments subject to Section 6C(1) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
On the death, while employed, of an employee who is a member of the Employees’ Provident Fund, the claimant will be paid an additional amount equal to the average balance in the Provident Fund account of the deceased during the preceding 12 months, restricted to a maximum amount of 100,000 rupees.
Employees are not required to contribute to the insurance fund. Employers are required to contribute at the rate of 0.5 percent subject to a ceiling of 15,000 rupees of the pay of each employee who is a Provident Fund member. The central government also contributes to the Fund an amount equivalent to one-half of the amount of the employer’s contribution.
Private and public pension systems are established for various employees in India under the Employees’ Pension System, 1995. The implementing agency for each system is different, but most of the systems are essentially similar in the way they operate.
The Employees’ Pension System, 1995, applies to employees of all factories and other establishments to which the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, applies.
The Employees’ Pension System, 1995, provides benefits in the form of monthly retirement pensions, disability pensions, widows’ pensions, children’s pensions, and orphans’ pensions. In some cases, the pension may be paid in installments, called an “uncommuted pension”; in others, it may be paid in a lump sum, called a “commuted pension” (i.e., a pension with a right of commutation). Nominee pensions are also allowed.
Generally, an employee is eligible to receive a monthly retirement pension at the age of 58. However, pursuant to an amendment issued on April 25, 2016 by the Ministry of Labour and Employment, the employee may defer receipt of a retirement until the age of 60. In this case, the employee will be entitled to interest at the rate of 4 percent for every completed year after age 58.
Employers make contributions equal to 8.33 percent of each employee’s pay (i.e., the basic wages plus dearness allowance and retention allowances, if any) subject to a ceiling of 15,000 rupees. As an exception, the central government contributes to the pension system for its employees at the rate of 1.16 percent of each employee’s pay.
In February 2003, Parliament passed the Interim Pension Fund Regulatory and Development Authority Bill, which paved the way for establishing the Pension Fund Regulatory and Development Authority (PFRDA), a statutory regulatory body to undertake promotional, developmental, and regulatory functions with respect to the pension sector. The Interim Bill was meant to be in place until the final PFRDA system was approved and implemented. In September 2013, Parliament enacted the Pension Fund Regulatory and Development Authority Act, 2013, and notified the PFRDA on February 1, 2014. Thereafter, the Act became a permanent piece of legislation, which replaced the Interim Bill of 2003.
The PFRDA enables the introduction of new pension plans and offers a menu of investment choices. The PFRDA regulates the New Pension System (NPS), as amended by the central government from time to time. The PFRDA also prescribes guidelines with respect to the number of providers, standards of practice, investment criteria, and capital requirements for pension fund managers. In addition, the PFRDA has been empowered to curb fraudulent and unfair practices in pension funds in order to protect the interests of plan participants.
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