ESI Act, 1948: Applicability, Benefits, and the 2026 Transition Deadline
Table of Contents
The ESI Act, 1948 was repealed with effect from 21 November 2025, folded into Chapter IV of the Code on Social Security, 2020. While this appears to be a seamless transition, operational complexities remain: a one-year savings clause keeps the old ESI rules, rates, and coverage limits running in parallel. That window closes on 20 November 2026, a deadline approaching rapidly, while replacement rules remain unnotified. This guide covers ESI applicability, contribution rates, wage limits, employee benefits, the 2026 transition deadline, compliance requirements, and what employers need to prepare for next.
Key Takeaways
- Understand the current legal status of the Act and why legacy provisions temporarily remain in force.
- Check your applicability threshold, the ₹21,000 wage ceiling, and who is exempt.
- Walk through the current contribution rates with a worked calculation.
- Identify key compliance deadlines, specifically 20 November 2026, and the regulatory implications thereafter.
- Track the pending proposal to raise this limit, still unnotified.
- Review the benefits your employees are entitled to, and the penalties for non-compliance.
What is the ESI Act, 1948?
The Employees’ State Insurance Act, 1948 (ESI Act) was the principal legislation governing health insurance and social security benefits for eligible employees in India. It provided medical care, sickness, maternity, disablement, and dependants’ benefits through the Employees’ State Insurance Corporation (ESIC).
With effect from 21 November 2025, the ESI Act was repealed, and its provisions were incorporated into Chapter IV of the Code on Social Security, 2020. During the transition period, existing ESI rules, schemes, and provisions continue to operate under the Code’s savings clause, subject to its requirements.
Who is Covered: Applicability and the Wage Ceiling
- Factories with 10 or more employees: Covered regardless of whether power is used, a long-standing applicability test under Section 28 that the new Code carries forward unchanged.
- Shops and commercial establishments: Also covered at 10 or more employees in most states, though Maharashtra and Chandigarh retain a higher 20-employee threshold for this category.
- The ₹21,000 wage ceiling: Employees earning up to ₹21,000 in gross monthly wages are covered; the ceiling rises to ₹25,000 for employees with disabilities.
- The ₹176 daily wage exemption: Employees earning ₹176 or less per day are exempt from the 0.75% contribution, though the employer still pays the full 3.25% on their behalf.
- Binary coverage threshold: Statutory coverage operates on an all-or-nothing basis rather than a tapered scale.
Contribution Rates and a Worked Calculation
| Contributor | Rate | Base |
|---|---|---|
| Employer | 3.25% | Gross wages (unchanged since 1 July 2019) |
| Employee | 0.75% | Gross wages (unchanged since 1 July 2019) |
| Combined | 4.00% | Gross wages |
For an employee earning ₹18,000 per month, the employee contributes ₹135, and the employer contributes ₹585, for a total contribution of ₹720 processed via monthly payroll deductions.
If wages cross ₹21,000 during a contribution period, contributions continue until that period ends.
The Section 164(2)(b) Transition: Why the Old Rules Still Apply
Section 164 repeals the ESI Act, 1948, but Section 164(2)(b) allows existing ESI rules, schemes, and regulations to continue for one year, provided they do not conflict with the new Code.
This transition period ends on 20 November 2026. Until then, existing contribution rates and wage ceilings continue to apply.
The Social Security (Central) Rules, 2026 also introduced Day-1 ESIC registration while retaining the existing contribution framework. This time-bound transition is similar to the way an exempted PF trust continues under the new social security framework while the new provisions take effect.
What has Already Changed: The Uniform Wage Definition
The ESI transition is not limited to the 2026 deadline. The new wage definition has already changed how employers need to determine wages for ESI contributions.
- Effective from 21 November 2025: The new wage definition already applies to ESI contributions.
- The 50% Cap Rule: If specified allowances exceed 50% of total remuneration, the excess amount is added back to compute wages for statutory contributions.
- What this means: Salary structures designed to keep wages below the ESI ceiling may now need reassessment.
- The ₹21,000 ceiling remains unchanged.
A Pending Change to Watch: The Proposed Ceiling Increase
The ₹21,000 ESI wage ceiling, effective since 1 January 2017, has not yet been revised.
Although proposals to raise the wage ceiling to ₹25,000 or ₹30,000 are under consideration, no official notification has been issued to date. Until then, employers should continue using ₹21,000 as the applicable ceiling.
Area-Based Coverage is Still Expanding
ESI coverage continues to expand by location under the new Code.
- Gujarat: From 1 October 2026, Section 29 coverage extends to 31 additional districts.
- 15 districts: ESI was previously not implemented.
- 16 districts: ESI was previously partially implemented.
Employers should regularly verify coverage at each establishment location rather than relying on prior coverage status.
Contribution and Benefit Periods
| Contribution Period | Corresponding Benefit Period |
|---|---|
| 1 April to 30 September | 1 January to 30 June of the next calendar year |
| 1 October to 31 March of the next calendar year | 1 July to 31 December of that next calendar year |
An employee’s eligibility for cash benefits in a given benefit period depends on the contributions actually paid during the corresponding earlier contribution period; consequently, non-payment or delays in contribution filings can inadvertently disallow employee benefit claims in subsequent periods.
ESI Benefits Employees Receive
Medical Benefit
Full medical care for the insured employee and dependent family members, with no ceiling tied to the contribution amount.
Sickness Benefit
70% of average daily wages for up to 91 days across two consecutive benefit periods, for certified illness.
Maternity Benefit
100% of average daily wages for 26 weeks, reduced to 12 weeks for a woman with two or more surviving children, in alignment with statutory maternity benefits provisions.
Disablement Benefit
Periodic payments for temporary or permanent disablement arising from employment injury, under Sections 34 through 37.
Dependants’ Benefit
Periodic payments to dependants where employment injury or occupational disease results in death.
Funeral Expenses
A fixed amount, currently up to ₹15,000, paid to whoever bears the funeral costs of an insured employee.
Unemployment Relief (Atal Beemit Vyakti Kalyan Yojana)
50% of average wages for up to 90 days, once in a lifetime, for an insured person who loses their job involuntarily, with at least 1 year of continuous employment and 78 contribution days in the preceding 12 months. The scheme was just extended to 30 June 2027, a recent extension that requires employer attention for compliance.
Registration and Filing
- Register the establishment: Complete registration on the ESIC portal within 15 days of applicability, incorporating Day-1 registration under the Social Security (Central) Rules, 2026.
- Enroll eligible employees: Generate an Insurance Number for each covered employee prior to their first wage disbursement.
- Deposit monthly contributions: Remit both employer and employee shares by the 15th of the following month.
- File half-yearly returns: Submit returns for each contribution period to reconcile employee coverage and total deposits.
Interest and Damages: Financial Consequences of Late ESI Payments
Late ESI payments can attract both interest and damages. The applicable charges increase with the length of the delay.
| Charge Type / Delay Period | Applicable Rate |
|---|---|
| Interest on unpaid contribution | 12% per annum |
| Delay up to 2 months | 5% per annum |
| Delay of 2–4 months | 10% per annum |
| Delay of 4–6 months | 15% per annum |
| Delay beyond 6 months | 25% per annum |
These charges are cumulative, significantly increasing the cost of delayed compliance.
Penalties for Non-Compliance
| Default | Consequence |
|---|---|
| Deducting the employee’s share but not depositing it | Imprisonment of 1 to 3 years, and a fine |
| Failing to pay the employer’s contribution | Imprisonment of at least 6 months, and a fine |
| A repeat offense after an earlier conviction | Imprisonment up to 2 years, with a further fine |
| False statement by an insured person to claim benefit | Imprisonment up to 6 months, fine up to ₹2,000, or both |
While criminal prosecution requires prior sanction and judicial proceedings before a Metropolitan Magistrate or higher court, interest and damages apply automatically from the date of default.
A Compliance Checklist for Employers
- Monitor the 20 November 2026 transition: Track official notifications regarding new ESI schemes or wage ceilings prior to the expiry of the statutory savings period.
- Review the wage base: Apply the 50% wage rule and check whether allowances need to be included in the ESI contribution base.
- Monitor coverage and registration: Check each establishment’s current ESI coverage and ensure new employees are registered from Day 1.
- Track employee attendance and wage changes: Continue contributions through the contribution period in which an employee’s wages exceed ₹21,000.
- Meet payment and filing deadlines: Deposit contributions by the 15th and reconcile half-yearly returns with actual payments.
- Monitor the wage ceiling: Continue using the ₹21,000 ceiling until an official notification provides otherwise.
- Check ABVKY (Atal Beemat Vyakti Kalyan Yojana) eligibility: Identify involuntarily unemployed workers and inform eligible staff of available statutory benefits.
Conclusion
The transition from the ESI Act to the Code on Social Security marks a move towards a more integrated social-security framework. For employers, the priority is no longer simply maintaining existing ESI compliance but ensuring that payroll systems, wage structures, employee coverage, and registrations are ready for the next phase.
As the 20 November 2026 transition deadline approaches, organizations that build flexibility into their payroll and compliance processes will be better positioned to respond to new schemes, notifications, and coverage requirements as they take effect.
factoHR can support this transition by keeping ESI calculations, wage rules, employee coverage, and statutory compliance aligned as the regulatory framework evolves.
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Frequently Asked Questions
Has the ESI Act, 1948 been Repealed?
Yes. The ESI Act was formally repealed with effect from 21 November 2025, and its provisions were subsumed under Chapter IV of the Code on Social Security, 2020.
Why do Legacy ESI Regulations Remain Operational Post-Repeal?
The Code includes a one-year savings provision that allows existing ESI rules, schemes, and related provisions to continue during the transition, provided they are consistent with the new Code.
What is the Current ESI Wage Ceiling?
The current wage ceiling is ₹21,000 per month, or ₹25,000 for employees with disabilities, subject to the applicable ESI provisions and notifications in force.
What are the Current ESI Contribution Rates?
The employer contributes 3.25%, and the employee contributes 0.75% of applicable wages, for a combined contribution rate of 4%.
Does the New 50% Wage Definition Affect ESI Contributions?
Yes. Where specified allowances exceed 50% of total remuneration, the excess is added back to wages for contribution purposes under the uniform wage definition.
What Happens when an Employee’s Salary Crosses the ESI Ceiling?
If an employee’s salary exceeds the wage ceiling during an ongoing contribution period, ESI contributions must continue until the end of that specific period.
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