ESI Compliance Update 2025: Impact of New Wage Definition under Code on Social Security 2020
The Employees’ State Insurance Corporation (ESIC) has issued an important circular clarifying changes in ESI compliance following the redefinition of “Wages” under the Code on Social Security, 2020. These changes come into effect from 21 November 2025 and have a direct impact on employee coverability and ESI contribution calculations.
Background: Labour Codes Implementation
With the pan-India implementation of four Labour Codes — including the Code on Social Security, 2020 — nearly 29 existing labour laws have been consolidated. As a result, employers must realign payroll structures and statutory compliances, particularly under the ESI Scheme.
New Definition of “Wages” under Code on Social Security, 2020
Included Components
- Basic Pay
- Dearness Allowance (DA)
- Retaining Allowance (if applicable)
Excluded Components
- Bonus not forming part of employment terms
- Employer’s contribution to PF or Pension
- House Rent Allowance (HRA)
- Conveyance and travelling allowance
- Overtime allowance
- Commission and gratuity
- Retrenchment compensation or retirement benefits
The 50% Rule – Key Compliance Trigger
If excluded allowances exceed 50% of the total remuneration, the excess amount will be treated as wages for ESI contribution purposes. This rule significantly expands ESI coverage, especially for employees with higher gross salaries.
Impact on ESI Coverage and Contribution
Earlier, employees earning more than ₹21,000 per month were largely outside the ESI ambit. Under the revised definition, salary structure matters more than gross salary. Many employees previously excluded may now become coverable.
| Scenario | Earlier (ESI Act) | After CoSS 2020 |
|---|---|---|
| High allowance salary | Often excluded | Covered if 50% limit exceeded |
| Gross salary above ₹21,000 | Not covered | May become covered |
| Contribution base | Limited | Expanded |
ESI Contribution Rate
The total ESI contribution remains 4% of wages, shared between employer and employee, but calculated on the revised wage definition.
SPREE–2025: One-Time Compliance Opportunity
ESIC has also reminded employers that the SPREE–2025 scheme ends on 31 December 2025. Employers registering eligible employees during this period will receive immunity from retrospective liabilities.
Employer Action Checklist
- Review salary structures and allowance breakups
- Recalculate wages as per CoSS 2020
- Identify newly coverable employees
- Update payroll and ESI records
- Register employees before 31 December 2025