Status of ESI Compliance under the Code on Social Security, 2020: An analytical Review

India is in the middle of a significant overhaul of its labour laws and at the heart of it is the Code on Social Security, 2020 (‘SS Code’) prescribing for statutory compliances for the welfare of employees. The SS Code seeks to consolidate and modernise India’s social security framework, subsuming key legislations including the Employees’ State Insurance Act, 1948 (‘ESI Act’). Following the notification of the Central Social Security Rules (‘SS Rules’) on 8 May 2026, the implementation of the SS Code has taken a meaningful step forward for companies having operations in more than one State (Governed by the SS Rules).

While the SS Rules have been notified, its provisions, specifically, relating to Employees’ State Insurance (‘ESI’) have not yet been fully operationalised due to the one-year transition period prescribed under the SS Code and absence of enabling notifications, regulations and schemes. 

Against this transitional backdrop, it becomes pertinent for employers to assess the implications of the SS Code on ESI compliance. Two issues, in particular, have gained prominence: 

1. Whether ESI contributions should now be computed based on the revised definition of ‘wages’ under the SS Code; and 
2. Whether employees earning above the current wage threshold of INR 21,000 continue to remain outside the scope of mandatory ESI coverage.

This article aims to analyse the interplay between the notified provisions of the SS Code, SS Rules and the continuing applicability of the ESI Act and its associated notifications, with a view to analysing the above issues.

Status of ESI Act and transitional provisions under the SS Code

The ESI Act was repealed pursuant to Notification S.O. 5319(E) dated 21 November 2025, read with Section 164(1) of the SS Code (‘November Notification’). However, the November Notification, read with Notification S.O. 5936(E) dated 19 December 2025, also brought into effect Section 164(2)(b) of the SS Code, which, inter alia, provides for a transitional framework in respect of ESI.

Section 164(2)(b) of the SS Code explicitly preserves the operation of the rules, regulations and schemes framed under the ESI Act for a period of one year from the date of commencement of the Code i.e., from 21 November 2025, to the extent they are not inconsistent with the provisions of the SS Code.

Further, Section 164(2)(c) of the SS Code provides that any exemption granted under a repealed enactment shall continue until it expires or it ceases to be in operation under the provisions of the SS Code or is superseded by any direction issued under the SS Code.

Therefore, even though the ESI Act has been repealed, the existing rules, regulations, and schemes under it continue to apply until the transition period of one year, i.e., 20 November 2026 (as long as they are not inconsistent with the SS Code). Any exemptions already granted under the ESI Act also continue until they expire or are specifically changed under the SS Code.

Further, Section 164(3) of the SS Code provides that the repeal of the ESI Act is subject to Section 6 of the General Clauses Act, 1897. In essence, this means that the repeal does not affect the prior operation of the ESI Act or any actions already taken thereunder, or any rights, obligations, or liabilities that have arisen under the ESI Act. Accordingly, these continue to remain valid even after the repeal, ensuring continuity during the transition to the SS Code.

The SS Code envisages the constitution of a Employees’ State Insurance Corporation (‘ESIC’) under Section 5 of the SS Code. It further stipulates that all employees in establishments covered by the relevant chapter must be insured in the manner prescribed by the Central Government. Under Section 24 of the SS Code, the Central Government is empowered, inter alia, to appoint the Director General or Financial Commissioner of the ESIC. However, there is no express notification evidencing such appointments having been made under the framework of the SS Code.

Under Section 29 of the SS Code, contributions are required to be made to the ESIC. However, Schedule I clarifies that such contributions become payable only from the date on which benefits under Chapter IV (pertaining to ESIC) are actually made available. This date is yet to be formally notified by the Central Government.

Accordingly, in the absence of a notification specifying both the commencement of benefits and the manner of contribution, these provisions remain inoperative and cannot be effectively implemented.

ESI contribution for existing registered employees: Revised wage definition

Rule 19 of the SS Rules prescribes that ESI contributions are to be calculated at 3.25% (employer’s contribution) of ‘wages.’ It further stipulates that in relation to persons with disabilities, the Central Government will reimburse the employers’ share for a period of three years from the date of commencement of contribution period. With the SS Rules now in force, and with the new wage definition having been notified on November 21, 2025, there is a strong case that the revised definition should now govern how contributions are computed.

The Ministry of Labour and Employment reinforced this position through Additional FAQs issued on 16 March 2026 (‘FAQs’), clarifying that the new wage definition applies from 21 November 2025.

That said, since Section 29 of the SS Code, which governs the actual payment of contributions, has not yet been brought into operation, there is a complication. Contributions under the SS Code can only become payable from the date on which ESI benefits are made available under the new framework, and that date has not yet been notified. This creates a degree of ambiguity, while the intent to apply the new wage definition seems clear, the precise legal foundation for doing so remains unsettled.

Exempted employees under ESI Act: Impact of new wages

Under the old ESI framework (Rule 50 of the Employees’ State Insurance (Central) Rules, 1950 (‘ESI Rules’)), employees whose monthly wages exceed INR 21,000 (INR 25,000 for persons with disabilities) are not required to make ESI contributions and fall outside mandatory ESI coverage. This threshold, set under the ESI Act read with ESI Rules, has not been revised.

The SS Code defines an ‘exempted employee’ as one whose wage falls within limits specified by the Central Government and who is not required to pay the employee’s contribution. Since no new notification has been issued under the SS Code altering this threshold, the INR 21,000 ceiling continues to apply. 

This position is further supported by the savings and transitional provisions under Sections 164(2)(b) and 164(2)(c) of the SS Code, which provide for the transitional period and the continued applicability of exemptions granted under the ESI Act. Additionally, this position has been clarified by the FAQs, which provides that the existing wage ceiling of INR 21,000 for ESI coverage continues to remain in force.

In the erstwhile regime, this threshold was determined as per gross wages and therefore, anyone earning more than INR 21,000 was not required to be registered. However, with the new wage definition, someone could be earning INR 42000 in gross terms, but wages can be INR 21000, thereby requiring registration under ESI. 

Although the FAQs suggest that the existing threshold continues alongside the new wage definition, it can be argued that such clarifications do not have binding legal force, particularly in light of the transitional framework under Section 164 of the SS Code.

As the threshold has not been changed, a view can be taken that gross wages as per the erstwhile regime need to be seen till the new ESIC scheme is rolled out. 

In this regard, it is relevant to note that the Central Government has notified INR 15,000 per month as the wage ceiling for the purposes of Chapter III (Employees’ Provident Fund) of the SS Code vide Notification S.O. 2702(E) dated May 29, 2026. In the absence of a corresponding notification under Chapter IV (ESIC) of the SS Code, the current position remains unclear, and a similar notification for ESI is awaited.

Conclusion

The notification of the SS Rules has undoubtedly moved the ESI framework closer to operationalisation under the new labour codes for companies with operations in more than one state operation. However, several aspects concerning the interaction between the SS Code, the SS Rules, and the yet-to-be-notified regulations and schemes continue to leave room for interpretational uncertainty. 

In this transitionary phase, particularly in relation to contributions, exemption and the application of the revised wage framework, employers may need to adopt a measured and closely monitored approach until greater legislative clarity emerges under the evolving labour law regime.

[The first and second authors are Executive Partner and Associate Partner, respectively, while third and fourth are Associates in Employment Law practice at Lakshmikumaran & Sridharan Attorneys.]