ESI Applicability Redefined — What Employers Must Know After 21st November 2025
Labour Law · ESI Compliance
ESI Applicability Redefined — What Employers Must Know After 21st November 2025
What Has Changed and Why It Matters
Until 20th November 2025, ESI contributions were calculated on "Gross Wages" as defined under Section 2(22) of the ESI Act, 1948. The coverage threshold was ₹21,000 per month on gross salary. Employers routinely structured salary packages with a higher proportion of allowances — such as HRA, conveyance, and special allowances — to keep the gross figure below the ₹21,000 threshold or to reduce the ESI contribution base.
With the implementation of the Code on Social Security, 2020 (CoSS 2020) w.e.f. 21st November 2025, this practice is no longer sustainable. The definition of "wages" has been overhauled under Section 2(88) of the Code, and ESI contributions will now be calculated on this new, narrower definition of wages — commonly referred to as "Core Wages."
The ESIC formally communicated this change through its circular dated 10th December 2025, directing all employers to adopt the new wage definition immediately. The ESIC Regional Office, Mumbai further issued a directive dated 30th December 2025 advising all employers to register eligible employees and ensure timely contributions under the new framework.
The New Definition of Wages — Section 2(88) of CoSS 2020
Under the new definition, "wages" means all remuneration expressed in terms of money and includes only three components — Basic Pay, Dearness Allowance, and Retaining Allowance (if any). Everything else — including HRA, conveyance allowance, overtime, bonus, commission, employer PF contributions, gratuity, and retrenchment compensation — is explicitly excluded from the definition of wages.
However, the Code introduces a critical 50% rule that prevents employers from exploiting the exclusions to artificially suppress the wage base. If the total of all excluded allowances — items (a) to (i) under the exclusion list — exceeds 50% of the total remuneration, the excess amount above 50% shall be treated as wages and added back to the contribution base. This provision effectively sets a floor: Basic Pay must be at least 50% of total remuneration for the salary structure to remain outside the 50% rule's impact.
Practical Impact — How ESI Applicability Now Works
The coverage threshold of ₹21,000 per month remains unchanged. However, what changes fundamentally is the wage on which this threshold is applied. It is no longer gross salary — it is now Core Wages, meaning Basic Pay plus DA plus Retaining Allowance.
This creates two distinct scenarios for employers.
In the first scenario, where an employee's Basic Pay is ₹21,000 or more, the employee falls outside ESI coverage regardless of the total gross salary. In the second scenario, where the Basic Pay is below ₹21,000, ESI is applicable and contributions must be made on the Core Wages amount — subject to the 50% rule check described above.
Contribution Rates Remain the Same
The total ESI contribution rate of 4% of wages continues — 3.25% payable by the employer and 0.75% payable by the employee. What has changed is the base on which this 4% is calculated. For employees who now fall within ESI coverage due to the new wage definition, both employer and employee contributions will apply on the Core Wages amount.
What Employers Are Required to Do
Every employer must immediately review the salary structures of all employees and determine ESI applicability afresh under the new definition. Employees who were earlier excluded from ESI because their gross salary exceeded ₹21,000 may now fall within coverage if their Basic Pay is below ₹21,000. Such employees must be registered under the ESI Scheme without delay.
Employers must also ensure that payroll systems are updated to calculate ESI contributions on Core Wages rather than Gross Wages. Contributions must be deposited on time to ensure employees receive the social security benefits they are entitled to under the Code. Where an employer has multi-state operations, sub-code registrations must be completed in each state where coverable employees are present.
Key Takeaway for Employers
The shift from Gross Wages to Core Wages for ESI purposes is the most significant change in ESI compliance in decades. Employers who have salary structures with a low Basic component relative to total pay will find that a larger number of their employees now fall within ESI coverage. The 50% rule further ensures that artificially suppressed Basic pay cannot be used to circumvent the intent of the law.
Payroll structures, employee registrations, and contribution workings must all be revisited and aligned with Section 2(88) of the Code on Social Security, 2020 with immediate effect.
ESI Applicability Redefined — What Employers Must Know After 21st November 2025
What Has Changed and Why It Matters
Until 20th November 2025, ESI contributions were calculated on "Gross Wages" as defined under Section 2(22) of the ESI Act, 1948. The coverage threshold was ₹21,000 per month on gross salary. Employers routinely structured salary packages with a higher proportion of allowances — such as HRA, conveyance, and special allowances — to keep the gross figure below the ₹21,000 threshold or to reduce the ESI contribution base.
With the implementation of the Code on Social Security, 2020 (CoSS 2020) w.e.f. 21st November 2025, this practice is no longer sustainable. The definition of "wages" has been overhauled under Section 2(88) of the Code, and ESI contributions will now be calculated on this new, narrower definition of wages — commonly referred to as "Core Wages."
The ESIC formally communicated this change through its circular dated 10th December 2025, directing all employers to adopt the new wage definition immediately. The ESIC Regional Office, Mumbai further issued a directive dated 30th December 2025 advising all employers to register eligible employees and ensure timely contributions under the new framework.
The New Definition of Wages — Section 2(88) of CoSS 2020
Under the new definition, "wages" means all remuneration expressed in terms of money and includes only three components — Basic Pay, Dearness Allowance, and Retaining Allowance (if any). Everything else — including HRA, conveyance allowance, overtime, bonus, commission, employer PF contributions, gratuity, and retrenchment compensation — is explicitly excluded from the definition of wages.
However, the Code introduces a critical 50% rule that prevents employers from exploiting the exclusions to artificially suppress the wage base. If the total of all excluded allowances — items (a) to (i) under the exclusion list — exceeds 50% of the total remuneration, the excess amount above 50% shall be treated as wages and added back to the contribution base. This provision effectively sets a floor: Basic Pay must be at least 50% of total remuneration for the salary structure to remain outside the 50% rule's impact.
Practical Impact — How ESI Applicability Now Works
The coverage threshold of ₹21,000 per month remains unchanged. However, what changes fundamentally is the wage on which this threshold is applied. It is no longer gross salary — it is now Core Wages, meaning Basic Pay plus DA plus Retaining Allowance.
This creates two distinct scenarios for employers.
In the first scenario, where an employee's Basic Pay is ₹21,000 or more, the employee falls outside ESI coverage regardless of the total gross salary. In the second scenario, where the Basic Pay is below ₹21,000, ESI is applicable and contributions must be made on the Core Wages amount — subject to the 50% rule check described above.
Contribution Rates Remain the Same
The total ESI contribution rate of 4% of wages continues — 3.25% payable by the employer and 0.75% payable by the employee. What has changed is the base on which this 4% is calculated. For employees who now fall within ESI coverage due to the new wage definition, both employer and employee contributions will apply on the Core Wages amount.
What Employers Are Required to Do
Every employer must immediately review the salary structures of all employees and determine ESI applicability afresh under the new definition. Employees who were earlier excluded from ESI because their gross salary exceeded ₹21,000 may now fall within coverage if their Basic Pay is below ₹21,000. Such employees must be registered under the ESI Scheme without delay.
Employers must also ensure that payroll systems are updated to calculate ESI contributions on Core Wages rather than Gross Wages. Contributions must be deposited on time to ensure employees receive the social security benefits they are entitled to under the Code. Where an employer has multi-state operations, sub-code registrations must be completed in each state where coverable employees are present.
Key Takeaway for Employers
The shift from Gross Wages to Core Wages for ESI purposes is the most significant change in ESI compliance in decades. Employers who have salary structures with a low Basic component relative to total pay will find that a larger number of their employees now fall within ESI coverage. The 50% rule further ensures that artificially suppressed Basic pay cannot be used to circumvent the intent of the law.
Payroll structures, employee registrations, and contribution workings must all be revisited and aligned with Section 2(88) of the Code on Social Security, 2020 with immediate effect.
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